YouSaid · the spoken record

Emi Nakamura

lines on the record: 30
first: 2025-08-29
most recent: 2025-08-29
sittings or episodes: 1
sources: podcast

Every line below is reproduced as it was said and linked to the record it came from. Nothing here is summarised or generated. Directory · Search · Corrections

“So, I think you're right that there's kind of a false dichotomy between talking about demand shocks and things like supply constraints, you know, like the ports and”
2025-08-29 · Odd Lots · Emi Nakamura on Central Bank Credibility and the Taylor Rule · IDENTIFIED FROM THE TRANSCRIPT · source
“Times you may want to use forward guidance in other ways and the response of the Fed to the Great Recession is an example of that.”
2025-08-29 · Odd Lots · Emi Nakamura on Central Bank Credibility and the Taylor Rule · IDENTIFIED FROM THE TRANSCRIPT · source
“The economy. And in some of those episodes, you might actually want to very explicitly use forward guidance. So for example, during the Great Recession, that was a period when there was some of the most explicit usage of forward guidance to talk about the timing of how long the Fed was going to keep interest rates at zero. And that was a very powerful tool in terms of affecting longer-term interest rates. It's very easy to see that in the data. And that's the kind of thing where, you know, it's not about going away from reputation, which it's true that core idea is that you want markets to absolutely be confident that the central bank is going to respond aggressively to any sense of de-anchoring of inflation expectations. And that is very important.”
2025-08-29 · Odd Lots · Emi Nakamura on Central Bank Credibility and the Taylor Rule · IDENTIFIED FROM THE TRANSCRIPT · source
“Absolutely. I mean, I think that technocratic rules like the Taylor rule, they absolutely have a place in the canon of monetary policy. And perhaps one could even argue that they should be the default in response to many kinds of inflationary episodes because there are many kinds of inflationary episodes like those associated with excessive demand and overheating economy. And also, even worse, just sort of self-fulfilling worries about inflation that spiral off into really serious inflationary episodes. So in response to all of those kinds of episodes, maybe a very good idea for people to be able to expect that central banks are going to respond aggressively along the lines of something like the Taylor rule. And there's a sense in which you might want to think about going beyond the Taylor rule as something that you don't do all the time, but that you recognize has to happen some of the time when you have a strong sense that a different kind of shock is hitting.”
2025-08-29 · Odd Lots · Emi Nakamura on Central Bank Credibility and the Taylor Rule · IDENTIFIED FROM THE TRANSCRIPT · source
“Then you get more or less what they did. And what happened in terms of why many people think that the policy was too dovish in the 1970s has a lot to do whether you think those measures of the output gap were reasonable. And, you know, the current estimates according to the Fed are much less sort of dovish than they were at the time. But it highlights the fact that even when you want to create a rule, which is sort of very technocratic, it doesn't give you any wiggle room. That's not entirely true because something like the output gap is not something that you can just read off a statistic like inflation, actually you can. And so as a consequence, you know, it really matters what judgment you take about where you are relative to the economy's potential.”
2025-08-29 · Odd Lots · Emi Nakamura on Central Bank Credibility and the Taylor Rule · IDENTIFIED FROM THE TRANSCRIPT · source
“The 1970s is very interesting because one of the things we point out in our paper is that the predictions and the prescriptions of the Taylor rule are, of course, only as good as the inputs you put into them. And one of the things that some of the academic literatures pointed out is that you don't necessarily want to use the data that we have today on something like the output gap. Because views about the output gap, that is, you know, how overheating is the economy, have changed over time. And in particular, in the 1970s, the Federal Reserve was pretty optimistic about the potential output of the US economy. And for that reason, its judgment about the output gap was pretty negative. And this helps to explain through the lens of the Taylor rule why they had pretty dovish monetary policy in the 1970s. So actually, if you take the real-time data on what the Fed said it thought, the output gap was at the time along with inflation.”
2025-08-29 · Odd Lots · Emi Nakamura on Central Bank Credibility and the Taylor Rule · IDENTIFIED FROM THE TRANSCRIPT · source
“You know, sort of a public reaction to inflation. But at the same time, it didn't happen everywhere. Just like you said and could only happen in the context of political protection for the central bank, central bank independence. And perhaps in some ways it's just sort of a remarkable thing that it ever did happen and that we've seen this long period of low inflation in many of these countries.”
2025-08-29 · Odd Lots · Emi Nakamura on Central Bank Credibility and the Taylor Rule · IDENTIFIED FROM THE TRANSCRIPT · source
“I think clearly the politics is very important. I guess I would point to two things. One is those difficult decades of the 1970s and 1980s, which occurred in many countries around the world and where people in these countries realized how much they hated inflation. We got a little bit of a taste of this during the COVID inflation. Inflation just is incredibly unpopular. And it was for this reason that it was possible in the United States to appoint Paul Volcker as chairman of the Fed, even though it was known before he was appointed what he was going to do, that he was going to raise interest rates aggressively, that this was going to be painful. And so that's a remarkable thing, that it was actually possible to make this appointment. But of course, similar things actually happened in other countries as well. There were similar appointments of aggressive central bankers that controlled inflation. So I think part of this did come out of”
2025-08-29 · Odd Lots · Emi Nakamura on Central Bank Credibility and the Taylor Rule · IDENTIFIED FROM THE TRANSCRIPT · source
“So, there have been a number of recent academic papers on this. It's not the focus of our paper, but I think that the overall message of those papers is that you do want to look through sort of the initial impact of the tariffs, but you don't want to look through sort of second round effects. So to the extent that you start to see an effect in terms of longer run inflation expectations becoming unhinged and so on, that's the part of the inflation that the central bank would want to be responding aggressively to.”
2025-08-29 · Odd Lots · Emi Nakamura on Central Bank Credibility and the Taylor Rule · IDENTIFIED FROM THE TRANSCRIPT · source
“Right, exactly. But in contrast for Latin American students, they get in immediately because it's just part of how they grew up, right? And I think that that distinction has probably blurred at least a little bit, right? Because now people have gone through a few years where it mattered to pay a little bit of attention to inflation. And so my guess is that if we start to see inflation again, it's going to be a much more rapid transition to where people will start to ask whether this is going to last longer, whether now that we've seen two inflationary episodes in the recent past, whether this is sort of the new normal. I think it's important not to forget how hard won those expectations of low inflation were for the Federal Reserve and many other countries. It's certainly something that can dissipate.”
2025-08-29 · Odd Lots · Emi Nakamura on Central Bank Credibility and the Taylor Rule · IDENTIFIED FROM THE TRANSCRIPT · source
“I would think almost definitely yes. Remember that going into the COVID inflation, you know, regular people hadn't seen significant amounts of inflation for years. It just wasn't really part of the mindset of anyone. You know, when you saw, for example, unions in wage negotiations or other contexts, things where inflation should have been relevant. It was sort of striking that it just wasn't on anyone's mind. And it even took a while after the inflation started for people to even think about this because it had become so much of a non-issue for so many years. That it was just not part of the mental frame of Americans. I see this very much when I teach students because for American students, typically I have to do a lot of work to just explain the difference, for example, between a nominal interest rate and a real interest rate.”
2025-08-29 · Odd Lots · Emi Nakamura on Central Bank Credibility and the Taylor Rule · IDENTIFIED FROM THE TRANSCRIPT · source
“That has that power. It has the ability to affect the economy, not just through what it does with the Fed funds rate, but also through its words and impact on the bond market through that channel, we'll actually want to use both. And so that's another advantage of not being bound by these kinds of constraints.”
2025-08-29 · Odd Lots · Emi Nakamura on Central Bank Credibility and the Taylor Rule · IDENTIFIED FROM THE TRANSCRIPT · source
“And then I guess the third thing I would mention is that in theory, the central bank actually wants to use a combination not only of current interest rate movements, but also of forward guidance. So this is one of the big innovations in monetary policy over recent decades. We think about forward guidance a lot in the context of the zero lower bound, when you can't do anything with Fed funds rate. And so it's all about forward guidance. But actually, forward guidance is a much, much more general phenomenon. It's really whenever the central bank is calling its shots about what it's going to do with interest rates, even over the next year. So this was hugely important during the COVID inflationary surge because the Fed started talking about raising interest rates and longer-term bond yields started rising pretty rapidly in late 2021, substantially before the Fed funds rate actually started to rise rapidly. And in the theory, a central bank”
2025-08-29 · Odd Lots · Emi Nakamura on Central Bank Credibility and the Taylor Rule · IDENTIFIED FROM THE TRANSCRIPT · source
“Probably you're going to have to have really negative inflation in some sectors of the economy, and you're going to have to have a big recession. And potentially, you know, the other issue is that there's a lot of evidence suggesting that monetary policy has pretty delayed effects. So another concern, and as I said, you know, in this episode, professional forecasters and the Fed both thought that the inflation would be more transitory than it actually was. But another concern is if you think that the shocks that are causing the inflation are sort of going to dissipate on their own, and you think that monetary policy has going to take some time to have an effect, then one of the concerns is that by the time the monetary policy actually has a large effect, then some of these shocks are going to dissipate.”
2025-08-29 · Odd Lots · Emi Nakamura on Central Bank Credibility and the Taylor Rule · IDENTIFIED FROM THE TRANSCRIPT · source
“Absolutely. Well, you get closer to optimal monetary policy. So in the models, you know, the basic idea is, for example, if you have one of these cost push shocks where there's a shock that is going directly to inflation because of increases in costs or bottlenecks of various types, or you have a shock during COVID to people's demand for goods versus services, if you raise the interest rate dramatically, like the Taylor rule might have predicted you raise the interest rate to 10%. So what's going to have to happen to get inflation down to zero in the short run? Well, maybe you're going to have to have a big recession. You're going to have to have one part of the economy completely collapse.”
2025-08-29 · Odd Lots · Emi Nakamura on Central Bank Credibility and the Taylor Rule · IDENTIFIED FROM THE TRANSCRIPT · source
“Right. So we're not including every country. So there are some countries which are outliers in terms of their response, in terms of their inflation. But I think one of the things you have to recognize is that in the world as a whole, there has been quite a remarkable sort of triumph of central banks over inflation. So back in the 1970s and 1980s, almost every country was like what we see in the early risers today. So none of these countries had”
2025-08-29 · Odd Lots · Emi Nakamura on Central Bank Credibility and the Taylor Rule · IDENTIFIED FROM THE TRANSCRIPT · source
“That probably felt they had to respond very aggressively to the COVID inflation also had much more checkered inflation histories. They had much higher average inflation over the past three decades previous to COVID. And so I think a natural interpretation of these facts is that for these countries, they did not feel that they had the inflation-fighting credibility of the central banks in the United States or in Japan or in the euro area. They did not feel that they had the kind of strongly anchored inflation expectations that these countries could benefit from. And so for these countries, it really probably was not an option to think that they could look through the inflation and yet keep inflation expectations anchored, but yet that is actually what happened in the United States and several other of these late riser countries.”
2025-08-29 · Odd Lots · Emi Nakamura on Central Bank Credibility and the Taylor Rule · IDENTIFIED FROM THE TRANSCRIPT · source
“The late riser countries would have suffered from the fact that they relate to the game in raising interest rates with having higher inflation than the early risers who responded very aggressively. And in fact, we find the opposite. So the early risers did respond very aggressively to the COVID inflation, but they actually saw inflation rise by a lot more during this episode. So then we asked the question, well, what could explain that? That seems sort of backwards. You know, you have these countries that seem to have responded very aggressively with interest rates, and yet they saw the larger and more persistent inflationary surges. But then what we see is that those same countries are countries that have much more checkered inflation histories. So you asked about reputation. Well, a very simple way to ask about the reputation of a central bank for controlling inflation is just to look at average inflation in the recent decades. And so we look at average inflation over the previous three decades and we see that the early riser countries, the ones”
2025-08-29 · Odd Lots · Emi Nakamura on Central Bank Credibility and the Taylor Rule · IDENTIFIED FROM THE TRANSCRIPT · source
“Right. So when we look at other central banks, one of the things we point out is that there was a huge amount of variation in terms of how different central banks reacted to the COVID inflation. So we've been talking about the United States and similarly countries like Japan, the UK, the Euro area. These countries all raised interest rates very gradually and by very moderate amounts relative to the size of the inflation increases they were facing. And so they all took a lot of flack for raising interest rates too slowly for being behind the curve, for not raising interest rates enough. And these are the countries we refer to in our paper as late risers because they were a little late to the game, right? But there were other countries in the world that we refer to as early risers who raised interest rates a lot more aggressively and a lot earlier. And the interesting observation you might have thought that these countries would have suffered from the fact”
2025-08-29 · Odd Lots · Emi Nakamura on Central Bank Credibility and the Taylor Rule · IDENTIFIED FROM THE TRANSCRIPT · source
“And that is typically exactly what the Federal Reserve is trying to achieve. So, I mean, obviously the Fed appropriately and private sector forecasters took a lot of flack for saying that inflation was going to be very transitory when inflation was significantly more persistent. That said, inflation did come down very quickly. And there hasn't been a recession. And that is remarkable. And not only has there not been a recession, and not only did inflation come down very quickly, but longer-term inflation expectations really did not become unhinged despite this historic increase in inflation. You haven't seen large increases in longer-term bond yields. So this is all pretty remarkable. And I would think that if things go well over the next five years, that in the longer span of history, this is going to look like a big success.”
2025-08-29 · Odd Lots · Emi Nakamura on Central Bank Credibility and the Taylor Rule · IDENTIFIED FROM THE TRANSCRIPT · source
“I think in so we don't know what's going to happen. Yeah, of course, going forward. But I think in the long span of history, if you look at what happened over the past five years, I think this is going to look like a soft landing.”
2025-08-29 · Odd Lots · Emi Nakamura on Central Bank Credibility and the Taylor Rule · IDENTIFIED FROM THE TRANSCRIPT · source
“It's close to zero, sometimes it's even negative. So really, a lot of things can happen when you deviate only from this view of inflation is coming from an overheating economy.”
2025-08-29 · Odd Lots · Emi Nakamura on Central Bank Credibility and the Taylor Rule · IDENTIFIED FROM THE TRANSCRIPT · source
“And actually, optimal monetary policy theory implies you might even be want to be more aggressive than the Taylor rule. But in contrast, when you have shocks to inflation that don't come directly from an overheating economy, but also come from other sources of increases in costs, so the supply shocks that people talked about during the COVID inflation period, then these same models can imply very different predictions. They can imply that you don't want to raise interest rates nearly so much in response to inflation associated with these kinds of shocks. So in our paper, what we do is we use a very standard monetary model and we simulate data from this model where we assume that the monetary policy is actually exactly optimal. So the central bank is really doing the right thing. And then we run regressions. Where we try to estimate what would you get for the Taylor role in this context? And then the interesting observation is that you find that actually a lot of times the coefficient on inflation is less than one.”
2025-08-29 · Odd Lots · Emi Nakamura on Central Bank Credibility and the Taylor Rule · IDENTIFIED FROM THE TRANSCRIPT · source
“The arguments there that if you find a specific number, the ideas that. Use a sort of simple formula, and then you immediately jump into action. So on that note, one of the key things about the Taylor rule is that it suggests Rates need to rise by more than one for one with inflation to properly offset inflation. Like you have to go in very, very strong. You found in your paper that that's not always the case. Exactly. So even beyond the idea that you want to raise interest rates more than one for one, so it's the coefficients 1.5 in the Taylor rule, but there's the idea even beyond that of the Taylor principle, which is exactly what you described, that you want to not only raise interest rates, nominal interest rates with inflation, but you want to raise real interest rates. And if you want to raise real interest rates, then you have to”
2025-08-29 · Odd Lots · Emi Nakamura on Central Bank Credibility and the Taylor Rule · IDENTIFIED FROM THE TRANSCRIPT · source
“Exactly, because the 1970s are also one of the time periods in history, which is best known for political pressure on the Fed. And so in the context of that kind of political pressure, one of the things you want to think about doing is giving people a very simple observable metric for how you adjust interest rates. But then, of course, by several decades later, the Fed's reputation had changed pretty dramatically. We had seen decades of low and stable inflation. And the Fed and other central banks around the world had really developed a very strong inflation fighting reputation. And so then the question arises, is the same kind of tying your hands approach appropriate, even in the context of shocks like what we saw after COVID? And so this is the sense in which I think this is a time in which we want to ask these questions. It reminds me very much of the Psalm rule.”
2025-08-29 · Odd Lots · Emi Nakamura on Central Bank Credibility and the Taylor Rule · IDENTIFIED FROM THE TRANSCRIPT · source
“Is saying that when you have those kinds of reputational challenges, sometimes you kind of need to tie yourself to a mask and say, we are not going to...”
2025-08-29 · Odd Lots · Emi Nakamura on Central Bank Credibility and the Taylor Rule · IDENTIFIED FROM THE TRANSCRIPT · source
“So, the tension that you're describing is exactly what motivated us to write this paper because it's interesting how a framework like this, which is so simple and so powerful. In terms of describing monetary policy and does say some things that are very true about what monetary policy should do in terms of leaning against inflation, leaning against an overheading overheating economy can end up becoming maybe more than even the author intended as a prescriptive rule. And one of the things that we want to remind people of is the historical context for when John Taylor's paper was written. So it was written in 1993. This was a period when the Fed was coming off some very difficult years for monetary policy. So the 1970s and 1980s were very difficult years for monetary policy. Inflation had been very high in the late 1970s and early 1980s. The feds' reputation was to say the least limited as an inflation fighter. Inflation expectations were not nearly as anchored as they are today. So it was a very different time. And I think some of the context for John Taylor's paper.”
2025-08-29 · Odd Lots · Emi Nakamura on Central Bank Credibility and the Taylor Rule · IDENTIFIED FROM THE TRANSCRIPT · source
“Paper, you know, it was mostly descriptive paper, but he did point out that this was a time period. The time period he studied was actually only six years. It was from 1987 to 1992, but he pointed out that this was a time period a lot of people thought of as representing good monetary policy. So while the paper was mostly descriptive, he did say, you know, well, maybe this is a guide to good monetary policy too. And that's a theme that a lot of people have picked up on since then, and we thought it was important to sort of reinvestigate that theme.”
2025-08-29 · Odd Lots · Emi Nakamura on Central Bank Credibility and the Taylor Rule · IDENTIFIED FROM THE TRANSCRIPT · source
“Why we wrote about the Taylor Wolf. Well, as I said, the Taylor rule has achieved this incredibly dominant status within not only the academic literature and monetary policy, but also within the policy community. And yet, when I teach students, one of the things that somewhat uncomfortable is that the Taylor rule doesn't fit all that well over the past 20 years. So it fit pretty well during the greenspan period and all the way until about 2008 in the United States, but it hasn't fit very well since then. First of all, there was the zero lower bound period when interest rates were just at zero. But it also didn't predict very well either the timing or the magnitude of the liftoff from zero interest rates. So given that 20 years is starting to be a long time, the question is, should we still view this as the benchmark for describing monetary policy? And then there's this second question about how to think about good monetary policy. So when John Taylor wrote his original”
2025-08-29 · Odd Lots · Emi Nakamura on Central Bank Credibility and the Taylor Rule · IDENTIFIED FROM THE TRANSCRIPT · source
“Well, in nineteen ninety three, John Taylor wrote a paper in which he showed that the behavior of the Federal Reserve could be described by this remarkably simple rule as a function of inflation and what people call the output gap, which is sort of a measure of how overheated the economy is. And this was very surprising to people because people typically think of what the Federal Reserve and other central banks do as incredibly complicated. And so the surprise was that you could actually describe it by something very simple. And since that time when John Taylor wrote his original paper in 1993, the Taylor rule has achieved more or less mythical status within economics and the policymaking world. The original paper was mostly descriptive. Like I said, it was pointing out that the behavior of the Fed, which seemed complicated, could actually be described by something really simple. But since then, it's really become a guide for prescriptive monetary policy. And when central banks deviate from”
2025-08-29 · Odd Lots · Emi Nakamura on Central Bank Credibility and the Taylor Rule · IDENTIFIED FROM THE TRANSCRIPT · source