William Poole

English

Research Papers in Economics

FEDERAL RESERVE BANK OF ST. LOUIS REVIEW JULY/AUGUST 2007 207
President’s Message
William Poole
New Keynesian monetary policy model estimated
using U.K. data.
Whether the monetary transmission mecha-
nism in the New Keynesian framework is realistic
or not, this framework has become very popular,
in my opinion, because it gives sound policy
advice—“Stabilize the price level!” During the
1970s, the old Keynesian model fell out of favor,
partly because it gave bad policy advice. So it is
somewhat ironic that the New Keynesian model
is so popular partly because it has developed a
theory to support an old monetarist policy
position.
Although the New Keynesian model recom-
mends stabilizing the price level, most of the
research is done in models where the central bank
has a short-run inflation target and also reacts to
deviations of output from potential. In theory, the
optimal policy within this class of Taylor rules
implies substantial volatility in long-term infla-
tion and bond yields. In practice, there is convinc-
ing evidence that most of the volatility in the
long-term bond market comes from uncertainty
about the future inflation rate.
Understanding how monetary policy strategies
are related to bond-market outcomes is important
for resolving such policy debates as whether the
Fed should have an explicit inflation target or
whether it should have a systematic response to
fluctuations in asset prices. In the next two days,
we hope to make some progress in understanding
what general equilibrium analysis has brought to
the monetary policymaker and in filling in some
more of the gaps between theory and practice.
W
elcome to the Thirty-First Annual
Policy Conference sponsored by
the Federal Reserve Bank of St.
Louis. There is an interesting
combination of advocacy and science in mone-
tary policy research. Here in St. Louis we have
advocated a policy of price stability since this
conference series began. We have also sought to
promote research to understand what the Fed
should do as well as how what it does affects
the economy. Our support for price stability pre-
dates any mathematical model that would help us
to understand why it is a good policy. The
advocacy of price stability comes from knowl-
edge of history—bad things seem to happen
every time and in every place that inflation gets
out of hand. It also comes from an old idea that
markets work better if prices give clear signals
about relative economic values.
The history of monetary macroeconomic
research is the interaction of those who try to
model what policymakers actually do with those
who use such models to explain how the central
bank might do even better. The reigning paradigm
among monetary policy advisors today is the
New Keynesian model, which combines general
equilibrium modeling principles with the nominal
frictions that are thought to determine the mone-
tary transmission mechanism. Today, the Federal
Reserve, the European Central Bank, and other
central banks around the world hold conferences
that study some aspect of this new consensus.
Indeed, our first paper today is an example of a
William Poole is the president of the Federal Reserve Bank of St. Louis.
Federal Reserve Bank of St. Louis Review, July/August 2007, 89(4), p. 207.
© 2007, The Federal Reserve Bank of St. Louis. Articles may be reprinted, reproduced, published, distributed, displayed, and transmitted in
their entirety if copyright notice, author name(s), and full citation are included. Abstracts, synopses, and other derivative works may be made
only with prior written permission of the Federal Reserve Bank of St. Louis.208 JULY/AUGUST 2007 FEDERAL RESERVE BANK OF ST. LOUIS REVIEW

President's message

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President's message

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