Greenspan Lesson is Policy Accommodation Works, Poloz Says
Bank of Canada Governor Stephen Poloz said history shows major technology advances -- like the current digitalization of the global economy -- need to be accommodated by monetary policy, in part to help people who are negatively impacted by change.
In a paper about the implications for monetary policy of the “Fourth Industrial Revolution,” Poloz argued lessons can be drawn from the way Alan Greenspan, former chairman of the U.S. Federal Reserve, managed policy in the 1990s, when he correctly spotted productivity benefits of the last technological revolution and held back on rate hikes.
“The prescription for monetary policy over the longer term is likely to be very much like that of the Greenspan era,” Poloz said in the paper, which formed the basis of remarks at a conference Thursday organized by the San Francisco Fed. “While inflation remains subdued, we should allow growth to run, for this is a good way of providing upside potential to those negatively affected by the new technology.”
The hidden productivity argument has been a recurring theme for Poloz, including in his speech last year at Jackson Hole in Wyoming. The idea is that technological change has the potential to boost capacity more than is immediately obvious, and thus should be supported by monetary policy. It’s part of an even longer list of arguments Poloz has made over time to caution against thwarting expansions with overly high rates.
The lessons learned from that period “point to the need to allow the supply-led economic expansion to run with accommodative monetary policies, using inflation targets to anchor monetary policy, while deploying macroprudential tools to guard against the buildup of imbalances in the financial system,” according to Poloz’s paper.
Poloz doesn’t specify how those lessons factor into the current debate at the Bank of Canada -- which is focused on whether to cut rates, rather than hike -- other than to say productivity gains from technological change may be offset by the trade war and de-globalization.
He also acknowledged that his description of optimal monetary policy in the face of technological change is “clearly an oversimplification” that doesn’t account for uncertainties faced by central banks in real time. There are also financial stability matters to consider if interest rates are too low.
Still, the current technological leap should be expected to produce the same effect on potential output growth as past revolutions, but only faster, Poloz said.
“We think it’s going on right now and, as I said, it’s a huge problem of uncertainty so we don’t assume,” said Poloz, in response to audience questions, adding there are signs in the labor market it may already be having an impact. This includes a recent pick up in wage inflation -- according to most measures -- to above 4%, according to Poloz.
“We’ve got to wait to see it and, in the meantime, you act as if it could be happening,” he said.
Poloz’s 14-page “Staff Discussion Paper” examined the past three technological revolutions to identify lessons for policy makers. In each case, he argues, there were critical commonalities: labor market disruptions, falling inflation, financial crises and stock market crashes. At the same time, it can take a while for the data to capture supply shocks, which may lead forecasters to underestimate growth.
While technological leaps eventually raise trend growth rates, “there is obviously a potential role for macro policies, both monetary and fiscal, in facilitating the transition,” he said.
Policy makers learned the lesson during the last revolution -- the electronics and information technology boom that peaked in the 1990s that didn’t produce a depression because central bankers responded with easy money conditions, according to Poloz. However, low interest rates eventually created the conditions for the last financial crisis, and policy makers are learning from that too.
Macroeconomic and regulatory policies have evolved “through history, from non-existent to passive, to active, to active plus the addition of new tools, collectively called macroprudential policies,” he said.
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