The Institute for Monetary and Economic Studies (IMES) at the Bank of Japan recorded three conversations on central banks, research, and monetary policy in which I participated, together with Athanasios Orphanides (my fellow Honorary Adviser to the IMES) and Deputy Governor Masazumi Watakabe.
On February 27th, I posted a link to the first of the three conversations which covered "Interactions between Central Banks and the Academic Community." The second of the three discussions, which focused on "Art and Science in the Conduct of Monetary Policy" is now available at https://www.imes.boj.or.jp/en/newsletter/nl202302E1_s2_r.html
In this conversation, I stressed that "...monetary policymaking must be based on firm science, but in the application, it's not a cookbook process where you just follow the directions..." The global financial crisis, COVID, and the war in Ukraine are examples of situations in which central banks found themselves facing new and unexpected challenges, and I concluded that "The implications of all those things are uncertain at the time and there is no model that would tell you exactly what you should do. In such cases, you need good people with good judgement."
Athanasios pointed out that, while I had started out by talking about science, I ended up by emphasizing judgement. He went on to argue that "...good public policy must be based on solid analytical foundations and measurement." He concluded that "...judgement is required in the situation when there is not enough data nor information to give clear evidence. In that situation, the policymaker by necessity must combine available pieces of information with his or her personal experience and knowledge and come to a good conclusion."
Dealing with uncertainty requires judgement. Deputy Governor Watakabe suggested an "...analogy is between science and technology, rather than between art and science." He noted that just as engineers have to design systems that are robust in the face of uncertainty, economists at central banks must do the same. "Central bank economists are expected to be good engineers."
From there, our conversation moved on to discuss the role of expectations and the types of data central banks need as they seek to understand the economy and design policies.
The third conversation in the trialogue deals with "The Role of Central Bank Research in Communications" and will be featured in a future post.
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