ThePCEasReferenceIndexforanInflationObjectiveat.pdfVIP

MacroeconomicMacroeconomic AdvisersAdvisers TheThe PCEPCE asas ReferenceReference IndexIndex forfor anan InflationInflation ObjectiveObjective atat thethe FedFed Laurence H. Meyer Macroeconomic Advisers, LLC November 3, 2006 November 2006 ? Macroeconomic Advisers, LLC 1 PCE Price Index and the Fed’s Inflation Objective ? Two roles for measures of inflation at the Fed ? The vision and details of an explicit objective ? Criteria for selecting an inflation measure ? Core vs headline as focus of monetary policymaking ? Some key issues relative to CPI and PCE: – Imputes prices – Revisions – Public familiarity November 2006 ? Macroeconomic Advisers, LLC 2 Two Roles for Inflation Measures at the Fed ? Monitoring inflation performance – Want the best measure of “true” inflation (“welfare costs”) – Want to trust high frequency as well as year-over-year data – Can look at a variety of different measures ? Setting an implicit or explicit inflation objective – Need to identify a single index as principal focus – Who is focus of communication strategy (markets or public/Congress)? – Understandable to public (not too manipulated) ? Specialization and division of labor – BEA is about measurement and FOMC is about monetary policy ? BEA is about measuring nominal, real GDP, not about COL index – A role for interaction: a Fed wish list for the PCE ? November 2006 ? Macroeconomic Advisers, LLC 3 Debate about an Inflation Objective at the Fed ? The “vision” of an explicit inflation objective – A medium or long-term objective within context of dual mandate – Differentiated from rhetoric (practice?) abroad with IT regimes ? Hierarchical mandate vs dual mandate ? Explicit vs implicit dual mandates – Wide range of views: full fledged IT