The 2019 Annual Conference, the 50th in MMF history, took place in LSE on Wednesday 4th – Friday 6th September. This report comes from the Society’s President, Paul Mizen.1
As the title reveals, 2019 was the 50th anniversary of the founding of the Money Macro and Finance Research Group. Its origins lie in the Money Study Group, founded by Harry Johnson at the LSE in 1969, and so 50 years later it was appropriate to convene the anniversary conference at the LSE. We received a warm welcome from LSE Director Minouche Shafik, a former Deputy Governor of the Bank of England. In keeping with the occasion, this conference was longer and larger than previous conferences, running over three days with six keynote speakers and 200 delegates drawn from academic and policy institutions across the world. The local organisers Ricardo Reis and Gianluca Benigno deserve special thanks for their hard work in drawing the event together. With financial support from the ESRC, the MMF was able to make the conference accessible to non-academic researchers from the Bank of England, HM Treasury, the Office for National Statistics, the Office for Budget Responsibility and from NIESR.
Amid so many papers being presented it is difficult to select the highlights, but the keynotes and a special history session deserve mention among many high quality papers. The first keynote by Philip Lane, ECB Chief Economist, focused appropriately enough on the Phillips Curve. Philip provided a review of the ECB’s policy actions since 2013 — discussing the effects of unconventional policies such as forward guidance, asset purchase programmes, targeted liquidity programmes and negative interest rate policies. He concluded that these schemes had all proven their effectiveness by bringing about a decline in unemployment and an increase inflation, which had previously been well below target. The Phillips Curve is a much used relationship in structural models, used for analysis of policy scenarios, and reduced form models, which quantify the effects of slack on price and wage inflation. Despite flattening in recent years, the Phillips Curve is alive and well, and still critically important to understand trade-offs in policymaking decisions.
The second keynote of the day — the Charles Goodhart lecture — was given by Don Kohn from the Brookings Institution, who is a current member of the Bank of England Financial Policy Committee (FPC). His focus was on stress tests as an instrument of financial policy. By requiring banks to meet minimum criteria to continue in business even under stress conditions, the FPC ensures that our banking system is robust. Don showed that stress tests countered the tendency for banks’ risk calculations to fail to keep up with rising risks in good times and to draw heavily on capital in bad times, improved risk management (capital planning) and influenced the availability and cost of credit. While the FPC doesn’t have the same historical academic support from models and policy rules as monetary policy does (and here lies a challenge to academics to provide this support), it has made our financial system stronger since the 2008 crisis. It anticipates the effects of large shocks such as Brexit and trade wars that could shock the financial system, but it has still to face it’s biggest challenge — a full real economy recession — before we can conclude stress tests and counter cyclical capital buffers fully protect the financial system from shocks in bad times as well as good.
From crisis to recession
Mark Gertler from NYU took up a macroeconomic theme, also connected with events since the financial crisis. His objective was to explain the channels of financial distress in the Great Recession. He identified two channels: the household balance sheet shock as borrowers entered negative equity and faced rising debt-to-income ratios; and bank distress compounded by rising credit spreads and high leverage, which led them to pull back on lending. Both channels were linked through the mortgage market. Using a new set of techniques, Mark showed that time series dimensions of the crisis allow identification of shocks to the financial system and house prices through timing restrictions, and these explain a lot of the dynamics of the Great Recession. While cross sectional differences in house prices identify the regional variations that reinforce the dynamics at the local level. Taken together they provide a powerful explanation of the effects of the crisis leading to the Great Recession.
Alan Blinder of Princeton University asked what has changed for policy makers in 50 years, comparing the viewpoint of the chairman of the US Federal Reserve in 1969 with the views of Jerome Powell today. He showed that goals of policy have changed from Friedman money growth rules to inflation targets, but they are more similar than different, and academics have taken a significant role in shaping the development of central bank goals. Similarly, the instruments have changed a great deal as operations using the short-term interest rate have given way to unconventional policies in recent years. Again, academics have had a huge influence on the debate. On modelling approaches to the economy, there has been a divergence of paths taken, as academics abandoned the structural models of the late 1960s and 1970s in the light of the Lucas critique, while central banks continued to use these models for policy purposes. In communication policy, central banks have evolved from not seeking to explain policy to using communication to influence the expectations of inflation in particular, especially in the light of academic research since the mid-1990s. It is probably fair to say that there is a symbiotic relationship between academics and central bankers that has been reflected in the MMF over the last 50 years.
Incorporating the financial sector
Monika Piazzesi from Stanford, sought to explain a New Keynesian (NK) model with a new twist that reflects some of the lessons we have learned since the financial crisis. The absence of a financial sector in these models prior to the crisis led some central bankers to say they were abandoned by the models at their time of need. Monika’s model introduces banking and current central bank operating systems such as the corridor system or the floor system to ensure these models more accurately reflect the interaction between the policy and the financial sector and especially the disconnect between policy rates and lending rates. Far from money being irrelevant (as it was in the NK models) it now takes centre stage. The connections between policy makers and the economy now operate through a linkage that reflects interest rate pass through by the banking system, and short term interest rates on loans/deposits combine the influence of policy rates and a convenience yield. Central banks have a lever on short rates through their actions that affect the convenience yield as well as the policy rate.
Looking back — and forward
The final keynote — the Harry Johnson Lecture — was given by Maurice Obstfeld from UC Berkeley. He provided a masterful review of the case for flexible exchanges rates starting with Harry Johnson’s perspective and working through ten different perspectives proposed by many distinguished international economists in the fifty years since 1969. While Harry Johnson was correct in many respects about the importance of flexible exchange rates, conditions have evolved in ways that he could hardly have imagined. The changes reflect the degree of wage rigidity, pricing to market, the global financial cycle and changes to conditions in international trade among many others. Maury was able to show that the flexible exchange rate, while not a panacea, gives an extra degree of freedom in international economics, and on this point Harry Johnson was right.
We were given a fascinating tour of the 50 years of the Money Study Group and the MMF by Alec Chrystal and Forrest Capie, with reminiscences by Michael Parkin, Marcus Miller and Charles Goodhart all of whom were present at the start. This archive will be available on the MMF website in due course. The year 2019 marks the 50th Anniversary, and the handover of the Presidency of the MMF from Charles Goodhart to Sir Dave Ramsden, and it is appropriate to thank Charles and Dave for their inputs (past, present and future). It also marks the start of a new chapter of the MMF as a Society that is working towards charitable status. Few of us will be around in 2069, but we hope that this will lay the foundations for the MMF to continue its work as the largest dedicated money-macro network in the UK for years to come.
Slides from many of the presentations will appear on the MMF website (https://www.mmf.ac.uk/) in due course. Next year’s conference will be held in Cambridge, 1-3 September.
1. Professor of Monetary Economics, University of Nottingham