Structural change and monetary policy: Federal Reserve Bank of San Francisco March 3-4, 2000

Economic Review - Federal Reserve Bank of San Francisco, 2001 by Rudebusch, Glenn D

Federal Reserve Bank of San Francisco March 3 -4, 2000

Reprinted from FRBSF Economic Letter 2000-13, April 28, 2000.

This Economic Letter summarizes the papers presented at the conference "Structural Change and Monetary Policy" held in San Francisco on March 3-4, 2000, under the joint sponsorship of the Federal Reserve Bank of San Francisco and Stanford University's Stanford Institute for Economic Policy Research.

Pronouncements about the "new economy" in the U.S. are made with such frequency that they may soon become tiresome and trite. From an economist's perspective, however, the discussion about recent changes in the structure of the economy is just starting to get interesting, as enough data finally are becoming available to begin a reasoned debate about what is happening and why. Indeed, from an economist's point of view, almost all of the heavy lifting in terms of analysis and explanation regarding the new economy remains to be done.

The six papers presented at this conference provide some first steps in defining the recent changes in the U.S. economy and in describing the appropriate behavior of monetary policy in the face of such changes. The papers are listed at the end and are available-along with comments by discussants and the keynote speech by Federal Reserve Board Governor Laurence Meyer-- at http://www.frbsf.org/economics/conferences/000303/ agenda.html.

Two papers focus on documenting recent changes in the structure of the U.S. economy. One paper examines the apparent moderation in business cycles since the early 1980s. The authors find a distinct decline in the volatility of real output growth and provide some evidence to suggest that this change reflects a behavioral adjustment on the part of durable goods producers to keep better control of their inventories. The other paper focuses on what is the most acclaimed attribute of the new economy: the remarkable rise in productivity growth since 1995. The authors show that both the growing use of information technology in businesses and the gains in the efficiency of producing computers and semiconductors have made substantial contributions to the recent surge in productivity growth. A separate panel discussion by Chad Jones and John Taylor, both of Stanford University, and Mark Watson of Princeton University also considers some of the recent changes in trend and cycle.

Three of the conference papers explore how monetary policy should operate during periods of structural change-particularly when the degree of this change is unknown. Thus, the key question investigated is how monetary policymakers should take into account uncertainty about potential output or the level of the natural rate of unemployment. One of these papers provides an interesting episodic analysis that is calibrated to the mid-1970s productivity slowdown and to the mid-1990s productivity speedup. The other papers provide a general theoretical analysis of optimal policy under data uncertainty. Governor Meyer's keynote speech focuses on how such research can be applied to the conduct of monetary policy on a practical level.

Finally, one paper examines the implications of structural change for the behavior of agents in the economy. It tries to elucidate how businesses and consumers may change their behavior in response to shifts in the policy regime.

Output fluctuations in the United States: What has changed since the early 1980s?

The McConnell and Perez Quiros paper analyzes quarterly movements in real output and its broad components since the early 1950s. The paper identifies a large and statistically significant decline in the volatility of U.S. real GDP growth that took place in the early 1980s. Indeed, the standard deviation of output fluctuations during the earlier period (1953-1983) is about twice as large as during the more recent one (1984-1999).

Of particular interest is the source of this decline in volatility. It may reflect good luck in the latter period (for example, fewer oil price shocks and other disturbances), or improved monetary policymaking (as suggested in Judd and Rudebusch 1998 and the conference panel discussion by John Taylor), or a structural change in the economy (say, a shift to a more stable service-oriented economy). Of course, a combination of these factors also may be at work. To shed some light on this issue, the authors disaggregate output into nondurable goods, durable goods, services, and structures, and find that shifts in the shares of these components-and particularly the growth in the importance of the service sector-do not appear able to explain the decline in volatility. Instead, the authors note that much of the decline in overall volatility can be attributed to smoother durable goods production. Furthermore, there is evidence of a change in the behavior of durable goods inventories but not durable goods sales. Thus, the authors suggest that a change in the management of durable goods inventories, perhaps including the just-in-time techniques and tight control made possible by computers, may have played an important role in the reduction in overall output volatility. The resurgence of growth in the late 1990s: