Bank of Japan IMES Special Trialogue

To mark the 40th anniversary of the Institute for Monetary and Economic Studies (IMES) at the Bank of Japan, I participated in a discussion with Athanasios Orphanides (my fellow Honorary Adviser to the IMES), and Deputy Governor Masazumi Wakatabe that touched on three questions: 1) Interactions between central banks and the academic community; 2) Art versus science in the conduct of monetary policy; and 3) The role of central bank research for communications.

The first of these discussions is now available at https://www.imes.boj.or.jp/index.html?lang=en&page=7&id=#07&src=.\en\newsletter\nl202302E1_r.html. In it, Athanasios and I review the evolving relationship between academics and central bank economics, focusing on the U.S. experience. In my comments, I noted how much this relationship has changed since I began my professional career almost 50 years ago. In the 1970 and 80s, standard models stressed that policy surprises were what mattered for the real economy. Any systematic, predictable monetary policy was irrelevant for business cycle behavior. These models were not well posed to offer guidance on how systematic monetary policy could contribute to stabilizing the real economy. That changed with the adoption of the new Keynesian model, which provided a common framework for academic and central bank researchers to contribute to policy-relevant issues.

In his comments, Athanasios stressed that “…research is essential for understanding what has gone wrong in the past. Sometimes it takes decades to understand why some major economic disasters happened and research is what guides us to improve policy.” He used the Great Depression as an example, noting that it took two decades after the publication of Milton Friedman and Anna Schwartz’s Monetary History of the United States before it was recognized in the profession as the best explanation and understanding of what had gone wrong with Federal Reserve policy during the Great Depression.

Incidentally, Milton Friedman and James Tobin were the first two Honorary Advisers to the IMES. I stepped down as an Honorary Adviser in December; Markus Brunnermeier of Princeton University took on the role in January. A complete list of all the Honorary Advisers since 1982 can be found at the Institute's web site at https://www.imes.boj.or.jp/en_about.html