Fed's Plosser at odds with policy approach favored by Yellen | Reuters
Philadelphia Fed President Charles Plosser said in a speech he is skeptical of so-called "optimal control" approaches to monetary policy in which mathematical models are used to predict when things like unemployment and economic growth will return to more normal levels.
Plosser said he is "skeptical" on "optimal control exercises that are derived from specific models" and not on a variety of models.
"A robust, systematic approach to policy, which is transparent and minimizes the degree to which data mismeasurement and model uncertainty affect policy, is the most promising approach to the uncertainties facing policymakers in real time," he said.
http://d.hatena.ne.jp/d1021/20140103#1388746443
http://d.hatena.ne.jp/d1021/20131125#1385375977
http://d.hatena.ne.jp/d1021/20131114#1384425489
What Is Optimal Control? - Business Insider
One item in particular has become the center of attention for those trying to figure out how a Yellen Fed will be different: the "optimal control" approach to monetary policymaking, as outlined by Yellen in a series of speeches last year.
Michael Feroli, chief U.S. economist at JPMorgan, sums up the idea succinctly in a recent report: "This approach starts with a forecast for the economy, and then solves a large-scale macroeconomic model to find the path of the funds rate that minimizes the deviation of inflation and unemployment from their respective targets."
Under the optimal control approach, the central bank would then use a model to calculate the optimal path of short-term interest rates in order to hit these targets. As long as unemployment is further away from the target level than inflation, then monetary policymakers would keep interest rates low in an attempt to correct this, even if it means inflation runs slightly above target for a while.
Yellen illustrated the concept in a November 2012 speech. Here's the paragraph explaining how it would work, with relevant charts shown below:
To derive a path for the federal funds rate consistent with the Committee’s enunciated longer-run goals and balanced approach, I assume that monetary policy aims to minimize the deviations of inflation from 2 percent and the deviations of the unemployment rate from 6 percent, with equal weight on both objectives. In computing the best, or "optimal policy," path for the federal funds rate to achieve these objectives, I will assume that the public fully anticipates that the FOMC will follow this optimal plan and is able to assess its effect on the economy.
The blue lines with triangles labeled “Optimal policy” show the resulting paths. The optimal policy to implement this “balanced approach” to minimizing deviations from the inflation and unemployment goals involves keeping the federal funds rate close to zero until early 2016, about two quarters longer than in the illustrative baseline, and keeping the federal funds rate below the baseline path through 2018. This highly accommodative policy path generates a faster reduction in unemployment than in the baseline, while inflation slightly overshoots the Committee’s 2 percent objective for several years.
"While optimal control exercises can be informative, such analyses hinge on the selection of a specific macroeconomic model as well as a set of simplifying assumptions that may be quite unrealistic," said Yellen herself in an April 2012 speech. "I therefore consider it imprudent to place too much weight on the policy prescriptions obtained from these methods, so I simultaneously consider other approaches for gauging the appropriate stance of monetary policy."
Optimal control - Wikipedia, the free encyclopedia
optimal controlの意味 - 英和辞典 Weblio辞書
最適制御 とは - コトバンク
Optimal - Definition and More from the Free Merriam-Webster Dictionary
