In the report, Stehn and Hatzius devise a model to test whether an increased focus on wage inflation would lead to better Fed policy outcomes.
Their findings: the wage growth focus could help the Fed steer clear of policy mistakes in the future.Target unemployment and the rest will take care of itself. Adapted from "Look after unemployment," JM Keynes said, "and the budget will look after itself." — J. M. Keynes
Employment and wage growth are lagging indicators. They can therefore remain depressed long after recessions are officially over based on leading indicators and persist through much of the "recovery" period.
Looking at employment and wages, the US has been in a depression for over five years with no end it sight.
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Goldman Sachs Chief Economist Jan Hatzius Argues The Fed Should Target Wage Growth Instead Of Inflation
Matthew Boesler
10 comments:
The Fed has no mechanisms for targeting wage growth - none.
The Fed works its magic through forward guidance and expectations this creates rather than just the present interest rate it sets. The advice here is to declare that the Fed is now looking at wage growth rather than the price level (PPI, CPI) in setting the interest rate. As long as wage growth is either stable r declining, the rate will be set wrt that rather than the previously used measures of inflation.
"While such a policy is not perfect — because the wage inflation process, too, is subject to uncertainty — the error band around the paths for the funds rate and unemployment rate is lowered significantly and more so than in the case of increased focus on price inflation," they write.
"The intuition is simple: because the wage inflation process is more stable than the price inflation process in our estimated model, the former provides a better cross check of labor market slack and thus there is a stronger case for Fed officials to focus on"
I was going to ask the question that Dan referred to and answered.
What policy mechanism does a central bank have to specifically influence wages?
For that matter what does the central bank have in it's policy choices to alter inflation rates?
The Fed does three things and also has emergency powers:
1. Chief financial regulator
2. Provides a liquid payments system
3. Sets the FFR and discount rates
There is no direct connection of any of these with the economy although there are beliefs that the amount of reserves and the interest rate are independent variables affecting dependent variables in the real economy. However, the effect of central banks is chiefly financial in so far as they act directly. These financial effects have consequential effects in the real economy, e.g., through mortgage rates that affect the housing sector.
The Fed also has emergency powers, which were just demonstrated, although the Fed chose not to use its power to set rates through price along the yield curve, but it can do that.
I would say that virtually all the power the central bank has is preventive rather than constructive. Through regulation and oversight it can maintain a fair and stable market along with trust. Through the payments system it can prevent liquidity crises from overwhelming the financial sector. Through interest rate policy it can influence the demand for credit by affecting price.
But how this translates specifically under different conditions is controversial. I'm certainly no expert in this, but it doesn't seem to me that there are any functions of independent and dependent variables involved here that lead to conducing conclusively that the cb action can have any specific result on economic performance, although it can and does on finance through the three factors mentioned above. But even here, the cb is chiefly aiming for stability rather than to manage by provoking change in a desired direction.
I do think after witnessing recent events that the cb has a pretty powerful magic wand at its disposal in "guidance" but this mostly affects finance and asset markets rather than the real economy.
I conclude that Warren Mosler has the right advice in saying that the rate should be set to zero and unlimited liquidity provided to solvent members. Which means that the cb function can just be absorbed into the Treasury function in managing the currency.
I think the misleading part of the article is the use of the term "target". It's one thing to argue that some wage growth variable should be a key variable, or even the key variable, in the Fed's reaction function. But it's a bit strange to describe this as "targeting" wage growth.
For example, suppose the Fed decided to use global temperature variables as the key input to its reaction function. That would dictate a very specific monetary policy. But the Fed clearly has no tools for targeting global temperature reduction. It would be better to say that the Fed was adopting a monetary policy rule which is responsive to or guided by global temperatures, but not that it is targeting those temperatures.
Does anyone know where the Hatzius and Stehn report can be located? I browsed a bit on the net, but none of the people who wrote about it posted a link.
Usually these reports are only available to subscribers. I would expect the same of GS reports like this.
I'm fairly sure the Bank of England keeps an eye on wage increases, though probably they pay more attention to price increases.
If Hatzius actually said this then it's a total fail. He's got zero credibility.
Right then if they ever see fast wage growth they will raise and keep raising interest rates until the wage growth subsides...
??????
"Right then if they ever see fast wage growth they will raise and keep raising interest rates until the wage growth subsides…"
This is what they do under NAIRU now.
CBs watch both wages and prices, but talk more about prices. However, the hidden agenda, as Bill Mitchell says, is really wage growth IAW NAIRU.
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