Twelfth Annual Conference on Macroeconomics

Article excerpt

The NBER's Twelfth Annual Conference on Macroeconomics was held in Cambridge on April 4 and 5. The conference organizers, Ben S. Bernanke of Princeton University and Julio J. Rotemberg of MIT, put together this program:

Marvin Goodfriend, Federal Reserve Bank of Richmond, and Robert King, NBER and University of Virginia, "The New Neoclassical Synthesis and the Role of Monetary Policy."

Discussants: Ellen McGrattan, Federal Reserve Bank of Minneapolis, and Olivier J. Blanchard, NBER and MIT Julio J. Rotemberg, and Michael Woodford, NBER and Princeton University, "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy"

Discussants: Jeffrey Fuhrer, Federal Reserve Bank of Boston, and Bennett T. McCallum, NBER and Carnegie-Mellon University

Peter Klenow and Andres Rodriguez, University of Chicago, "The Neoclassical Revival in Growth Economics: Has it Gone too Far?"

Discussants: Charles Jones, Stanford University, and N. Gregory Mankiw, NBER and Harvard University Michael Gavin, Inter-American Development Bank, and Roberto Perotti, Columbia University "Fiscal Policy in Latin America" Discussants: Torsten Persson and Aaron Tornell, NBER and Harvard University

Martin S. Feldstein, NBER and Harvard University, and Andrew Samwick, NBER and Dartmouth College, "The Economics of Prefunding Social Security and Medicare Benefits."

Discussants: Rao Aiyagari, Federal Reserve Bank of Minneapolis, and Laurence J. Kotlikoff, NBER and Boston University

Christopher Carroll, NBER and Johns Hopkins University, and Wendy Dunn, Johns Hopkins University, "Unemployment Expectations, Jumping (S,s) Triggers, and Household Balance Sheets"

Discussants: Simons Gilchrist, Boston University, and Angus Deaton, NBER and Princeton University

The Neoclassical Synthesis of the 1960s was based on three sometimes conflicting principles of macroeconomics: that practical policy advice was an essential end; that short-run price stickiness was central to economic fluctuations; and that models should be based on optimization. Macroeconomics now is moving toward a New Neoclassical Synthesis, which Goodfriend and King describe. They find that the New Neoclassical Synthesis rationalizes an activist monetary policy: a simple system of inflation targets. Under this neutral monetary policy, real quantities evolve as suggested in the literature on real business cycles. The authors use the new synthesis to address several issues that must be resolved in order to make this inflation targeting regime practical, including: the response to oil shocks; the choice of price index; the design of a mandate; and the required structure of variations in short-term nominal interest rates when these are the monetary authority's instrument.

Rotemberg and Woodford consider a simple model of output, interest rate, and inflation determination in the United States, and use it to evaluate alternative rules by which the Fed may set interest rates. The model is derived from optimizing behavior under rational expectations, both on the part of the purchasers of goods (who choose quantities to purchase given the expected path of real interest rates) and on the part of the sellers of goods (who set prices on the basis of the expected evolution of demand). The authors find that the monetary policy rule that most reduces the variability of inflation (and is best on this account) requires highly variable interest rates, which in turn is possible only in the case of a high average inflation rate. …