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| Olivier Coibion |
Loungani: Congratulations on your selection as an
IMF Fellow. Is this your first stint at a policy institution?
Coibion: Thanks, I’m thrilled to be here! I worked for a year at the CEA [U.S. Council
of Economic Advisers] in 2000-01. It gave me an enduring sense of how economic
theory and empirical methods can help address policy questions and make a
difference in people’s lives. And because I happened to be there during the
transition from the Clinton to the Bush administration, it was fascinating to
see the change in style and personalities—and in the dress code. The suits got
much more sober and I even had to start wearing a tie once the Bush
administration was in place.
Loungani: Dress is casual at the IMF over the
summer. You see the suits out in full force in the fall. What will you work on
during your year here?
Coibion: I’ll continue some of my work on
inequality. One project will look at links between inequality and financial
crises, which folks at the IMF have also studied. I’ve also been studying the
impact of monetary policy on inequality—who gains, who loses when the Fed
changes its policy. This gets debated in policy circles a lot but not much in
academia. Ron Paul says that expansionary monetary policies, or debasing the
currency as he always puts it, raises income inequality; people on the left
like Jamie Galbraith say the opposite.
Loungani: What do you find?
Coibion: We find that expansionary monetary policy
has typically reduced U.S. inequality in the short run. This suggests that when
the central bank can’t cut interest rates any more—when rates hit the so-called
‘zero lower bound’, as is the case at present—inequality will be higher than it
would be otherwise. To avoid these additional increases in inequality at a time
of crisis, the government should use other tools, such as targeted fiscal
policies. I hope to do some more work on this while I’m here. More generally,
I’ll be studying how best to sequence fiscal and monetary policies when the
multipliers—the impacts of the policies on the economy—associated with each may
vary with the state of the economy.
Loungani: Do you think the Fed has done enough to
promote recovery?
Coibion: I think the zero lower bound [on interest
rates] has certainly limited the size of their response. They would be lowering
rates further if they could. But as the IMF’s latest review of the U.S. economy
noted, the Fed still has a few options to further support economic activity,
given the weak state of labor markets and given the significant downside risks that still exist.
Loungani: Do you think that to avoid hitting the
zero lower bound in the future, central banks should raise the target rate of
inflation?
Coibion: No, I don’t. A higher inflation rate also
has economic costs. So raising the target inflation rate will confer the
benefit that we’ll be less likely to hit the zero lower bound. But such
episodes are rare. So the high benefits conferred on rare occasions have to be
balanced against the small but frequent costs of having higher inflation. In
some work I’ve done, it turns out that the costs consistently outweigh the
benefits for inflation rates above 2%. So rather than raise the target rate of
inflation to deal with future episodes like the Great Recession, I’d prefer the
more aggressive use of temporary policies designed for precisely this kind of
episode, such as additional quantitative easing or fiscal policy.
**
Olivier Coibion--Recent Publications:
- The Optimal Inflation Rate
in New Keynesian Models: Should Central Banks Raise their Inflation
Targets in Light of the ZLB?” (with Yuriy Gorodnichenko and Johannes Wieland), forthcoming in Review
of Economic Studies.
- “Why are target interest rate
changes so persistent?” (with Yuriy Gorodnichenko), forthcoming in American
Economic Journal: Macroeconomics.
- “What Can Survey Forecasts Tell Us About
Informational Rigidities?” (with Yuriy Gorodnichenko), 2012, Journal of Political Economy 120(1), 116-159.
- “One for Some or One for
All? Taylor Rules and Interregional Heterogeneity” (with Daniel
Goldstein), 2012, Journal of Money
Credit and Banking 44(2:3), 401-432.
- “Are the Effects of Monetary
Policy Shocks Big or Small?” 2012, American Economic Journal: Macroeconomics 4(2), 1-32.
- “Strategic Complementarity
among Heterogeneous Price-Setters in an Estimated DSGE Model” (with Yuriy Gorodnichenko), 2011, The Review of
Economics and Statistics 93(3), 920-940.
- “Monetary Policy, Trend
Inflation, and the Great Moderation: An Alternative Interpretation” (with Yuriy Gorodnichenko), 2011, The American
Economic Review 101(1), 341-370.
