Concluding Panel Discussion:
Macroeconomic Policy
and Central Banking
Introductory Remarks
Yasuhiro Maehara
Hitotsubashi University
In Session 1, we discussed incentive problems for monetary policy committees at
central banks. Based on those discussions, I would like to suggest three broad topics
for the panel discussion: transparency, continuity, and coordination.
The first topic, transparency, touches upon a variety of incentive problems thatcommittee members face when conducting monetary policy: For example, why does
the degree of transparency in monetary policy differ from committee to committee?
What are the incentives crucial in determining the degree of disclosure, regarding
the content of the minutes of monetary policy meetings and economic forecasts ofcommittee members?
The second topic, continuity, deals with the intertemporal question of decision
making: For example, can a committee make a credible commitment to the futureinterest rate policy? Can current committee members make a collective decision thatbinds the decisions of future committee members?
The third topic, coordination, is related to the effectiveness of monetary policy
management by a committee: For example, can a committee coordinate with otherpolicymakers better than other forms of decision making? Should a committee decideto coordinate with other policymakers by majority voting? Who should represent theview of a committee when coordinating with other policymakers?

MONETARY AND ECONOMIC STUDIES (SPECIAL EDITION)/OCTOBER 2005
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233

Panelists’ Remarks
Wolfgang Schill*
European Central Bank

I. Introduction
I am very grateful for having been invited onto this panel and for being able tocontribute to the discussion about the role of decision-making structures in central
banks for the transparency of monetary policy, the publication of central bank forecasts,
and the commitment to future policy action and policy coordination. I was also pleasedby the stimulating paper by Fujiki (2005) and the comments by the discussants.
In fact, these issues have drawn quite a degree of attention in policymaking circles,
as well as in the academic debate. The more traditional literature on comparing
central banks from an institutional perspective1 is now complemented by theoreticalwork on the impact of “committee structures”2 as well as experimental work.3 There
are also some empirical studies, mostly but not exclusively on the United States, oncommittee behavior and how the publication of minutes and voting records may
affect market expectations.4
Yet there still seems to be no general framework that would allow any firmcomparative conclusions to be drawn on what precise impact committee structures
might have. The broad range of institutions and practices has so far only beenroughly classified, as for example, by the prominent typology proposed by Blinder and
Wyplosz (2004), referring to committees working in an “individualistic,” “genuinely
collegial,” or “autocratically collegial” mode. In addition, practices themselves are stillin the process of being refined by central banks.
Against this background, let me approach the issues by elaborating on how theEuropean Central Bank (ECB) has responded to these challenges, thereby offering
a number of preliminary remarks on how the structure of the ECB’s Governing Council
could factor in.

II. Transparency
While it was said that “not long ago, secrecy was the byword in central banking
circles,”5 nowadays transparency is the “rule of the game.” At the same time, one would
like to stress that transparency serves two main purposes: achieving accountability
and improving the understanding of monetary policy and central bank decisions in* I would like to thank Otmar Issing and Rolf Strauch for comments and valuable input. The views expressed by theauthor do not necessarily reflect those of the European Central Bank.
1. As a recent example, see Lybek and Morris (2004).
2. See Fujiki (2005), which provides extensive references to the related literature.
3. See Blinder and Morgan (2000) and Lombardelli, Proudman, and Talbot (2005).
4. See, for example, Chappell, McGregor, and Havrilesky (1997), Chappell, McGregor, and Vermilyea (2005), andGerlach-Kristen (2004).
5. Giles Keating covers the text of Blinder et al. (2001).

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Concluding Panel Discussion

markets and the public at large. This in turn reflects the fact that any modern central
bank must operate in a complex and persistently changing environment, where theformation of expectations is crucial for the success of monetary policy.
Two types of transparency may be distinguished, serving the same purposes in acomplementary fashion. First and foremost, transparency requires that the central
bank be clear about its mandate and the approach taken to fulfill it. This may becalled “strategic transparency.” The ECB has done so by means of a monetary policy
strategy that includes the quantification of the objective of price stability and thespecification of a framework for its internal analysis and external communication.
Second, transparency implies ongoing responsiveness to underpin this “strategictransparency.” This may also be called “recurrent transparency.” The ECB’s practicein this respect is to engage in a regular and comprehensive “real-time communication” about the assessment of the economy and the related explanations of monetary
policy decisions.
Let me elaborate a bit further on the ECB’s approach to “recurrent transparency,”
taking into account the academic and policy debate about the release of minutes andvoting records of committee meetings. Three questions are typically addressed in thiscontext: (1) what is the most informative instrument contributing to “optimal” transparency; (2) how to provide good incentives for good monetary policymaking; and(3) how to balance the release of information against the costs of agreement.6
As regards the first aspect (i.e., selecting the most informative instrument), the
ECB has chosen to publish an elaborate Introductory Statement and hold a press
conference immediately following the Governing Council meeting in which themonetary policy decision is taken as a primary instrument to inform the public about
the decision. In the press conference, the President and the Vice-President explain thedecision and the underlying analysis to the public. This “real-time” information to
the public avoids the delay usually associated with the publication of official minutes,
which are often released only after some weeks. Additional in-depth explanation isthen provided later on in regular publications, such as the Monthly Bulletin.
Linking this approach to the discussion on committee structures, one could makeuse of the ECB’s Governing Council having been termed a “genuinely collegialcommittee,”7 implying the assumption that decisions are typically taken by consensus.
One could then argue that the ECB’s approach in providing “real-time information”
about the consensus view is more informative than the release of official minutes andvoting records.8 As a decision is the result of collective deliberation and more than thesum of individual members’ views, what ultimately matters for the general public isthe collective responsibility of the decision-making body and its success in fulfillingits mandate. Or in other words: the understanding of the collective rationale is at thecore of understanding the monetary policy decisions of a “collegial committee.”
When thinking about the second aspect—the provision of good incentives
for good policymaking—one may stress the following features from a European
perspective. First, the ECB’s Governing Council is not a pure “technical committee
6. See, among others, the controversy between Buiter (1999) and Issing (1999), as well as Blinder et al. (2001).
7. Blinder and Wyplosz (2004).
8. See Issing (2005).

235

of experts” but rather has clear elements of a “federal committee,” with the selection
mechanism following both an expert and a regional pattern.9 Second, this composition reflects the particular historical and institutional context within which the
ECB operates. Third, the ECB is still a fairly new institution operating to maintain
price stability for the euro area as a whole. Against this background, it has been
pointed out that any information on how individual Governing Council membersargue and vote would be seen and interpreted through national lenses. One reason
for this perspective is that there is no single European language and hence, forexample, no European press. Any attempt to make individual policymakers personally accountable by publishing implicit or explicit information about their voting
behaviors would therefore entail the risk that more importance is attached to theorigin of individual opinions than to the relevance of the economic argument for the
euro area as a whole.10
These arguments may also help to explain why the standard argument thatcollegial committees may be more prone to publishing minutes than individual
central bank governors or “autocratic committees”11 does not apply to the ECB.
Despite the fact that the costs of agreeing on a policy statement may be fairly high incollegial committees, the ECB’s Governing Council has been able to maintain its
practice of issuing a jointly agreed comprehensive Introductory Statement immediately following the meeting in which the monetary policy decision is taken. This may
also be interpreted as a consequence of the “costs of not agreeing” in the context of a
newly founded monetary union and the union-wide (“federal”) mandate of theGoverning Council as compared to a more “technical committee” in which members
may be perceived to primarily have individual responsibilities.
In conclusion, all these elements may help to explain why the ECB adopted
its own approach to transparency. “From the beginning, it placed a premium on
speaking with one voice and consensus in decision making, while spelling out theunderlying arguments clearly and consistently.”12

III. Forecasts
The ECB publishes quarterly projections immediately after the press conference
following the Governing Council meeting where they were discussed. The Juneand December projections are produced by the Eurosystem staff involving the ECB
and the national central banks of the euro area, while the March and September
projections involve ECB staff only. Importantly, all these are staff projections only,
providing an input to the Governing Council decision. More specifically, theGoverning Council does not claim ownership of these projections and also does notinterfere in the forecasting process. The entire projections are based on the joint workof expert staff.
9. See, for example, Hefeker (2003).
10. See Issing (2005).
11. Blinder and Wyplosz (2004).
12. Issing (2005).

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Concluding Panel Discussion

Accordingly, the Governing Council is not committed to any policy reaction tothese projections. In this respect, the ECB strategy differs from other models such as
inflation targeting. Since the role of the forecast is much more important in the caseof direct inflation targeting, individual committee members in central banks following this approach may attach more political importance to the outcome and mightwish to emphasize more the differences in views among committee members.13

IV. Commitment and Continuity
In the case of the ECB’s Governing Council, the rules foresaw that the period forwhich the first members of the Executive Board had been nominated would be staggered, and subsequently should always be eight years. Succession of national central
bank governors is regulated by national law, which must be in line with the standards
defined in the Maastricht Treaty for the European System of Central Banks (ESCB).
But this does not result in a clear time pattern of succession in the Governing
Council. The overlapping of office holding periods, in addition to a well-definedmandate and strategy, seems to imply that the Governing Council has a high degreeof credibility in terms of maintaining its broad policy orientation and establishedpolicy principles over time, while the precise monetary policy stance would always be
adjusted in light of the outlook for price stability over the medium term.
The ECB does not provide any explicit policy bias in its public statements using
fixed formulas. However, guidance to the market is given by the structural clarification of the objective and strategy of monetary policy, and by being explicit on
the recurrent assessment of economic and monetary conditions and future prospects
for price stability. From both elements, market participants infer the future policy
stance. Econometric evidence suggests that the monetary policy of the ECB has
been predictable.14
When discussing the practice of “biases” or temporary commitments to a policy
course, it does not seem advisable to make unconditional statements given the uncertainty
of future developments. Even if a central bank indicates its future policy stance more
explicitly than is the practice of the ECB, it would typically always reserve the rightto revise its policy course in light of newly upcoming information. In both cases, theclarification of the monetary policy strategy, including a quantification of the inflation
objective over the medium term, acts as an additional commitment device.
All in all, the appointment procedures and the structural clarification of theobjective and the strategy of monetary policy imply that the Governing Council has
a high degree of credibility in terms of maintaining its broad policy orientation overtime, while the conditionality of any assessment as concerns the actual monetary
policy stance allows new information to be taken into account as it becomes available.

13. See Mishkin (2004). For a practical account of the role of forecasting in an inflation targeting regime see,for example, a recent speech by Bank of England Deputy Governor Rachel Lomax (Lomax [2005]).
14. See Perez-Quiros and Sicilia (2002) and Ehrmann and Fratzscher (2005).

237

V. Cooperation and Relation to the Fiscal Authorities
The ECB’s interaction with national governments differs from that of other central
banks, since the decision making in the case of monetary policy in the euro area
is centralized, but fiscal and structural policies are under the responsibility of thegovernments in the 12 euro area countries. Fiscal policy is subject to the European
fiscal framework and structural policies are part of the Broad Economic Policy
Guidelines and the so-called Lisbon Strategy.
The European institutional arrangements may be seen as establishing a frameworkof implicit coordination where monetary policy, on the one hand, and fiscal andstructural policies, on the other, are governed by clear primary objectives. If each party
follows its primary objective, macroeconomic policy would be consistent over time,
resulting in sustainable economic growth, low inflation, and sound budgetary positions.
Clear mandates and rules allow the institutions involved to form expectations as to the
future policy course without the need for explicit and discretionary coordination.
Accordingly, the ECB does not engage in an “ex ante coordination of economic
policy” to achieve a specific policy mix. In general, attempts at macroeconomic
fine-tuning, including fiscal policies, have been rather disappointing and often
proved to be counterproductive due to implementation lags and the impossibilityof subsequently reversing policy measures. However, there is a regular exchange of
information on policies, among others in the context of several European committees, the Eurogroup, involving Ministers of Finance and the ECB President,
testimonies at the European Parliament and regular meetings involving Social
Partners (“macroeconomic dialogue”). For this exchange of information, the committee structure of the Governing Council is helpful, since it generates all theinformation available on the country level, such as on fiscal and structural matters.

VI. Concluding Remarks
The ECB has adopted its own approach to transparency. From the beginning, it has
placed a premium on speaking with one voice and consensus in decision making.
It seems that some links can be established between the specific committee structureof the ECB’s Governing Council and its own approach to transparency. It also
appears consistent with deemphasizing the merits of publishing official minutes orvoting records.
The Governing Council does not face any actual or perceived trade-offs in termsof publishing forecasts and policy commitment. The preparation of projections,which are published quarterly, is delegated to expert staff. Drawing policy conclusions is the privilege of the Governing Council, whereby projections are an importantbut not exclusive input.
The institutional design of the Governing Council as well as the formalized
monetary policy strategy imply that the committee is able to stick to its previously
decided broad policy orientation and principles, while also being in a position toreact to new information in a consistent way.

238 MONETARY AND ECONOMIC STUDIES (SPECIAL EDITION)/OCTOBER 2005

Concluding Panel Discussion

Cooperation with other policymakers is governed by the Treaty on European
Union. It takes the form of regular exchanges of views among independent actors
within a well-defined institutional framework. For this exchange of views, thecommittee structure of the Governing Council is helpful, since it generates all theinformation available on the country level.

References

Blinder, A., C. Goodhart, P. Hildebrand, D. Lipton, and C. Wyplosz, “How Do Central Banks Talk?”
Geneva Report on the World Economy, 3, Geneva: International Center for Monetary andBanking Studies, 2001.
———, and J. Morgan, “Are Two Heads Better than One?: An Experimental Analysis of Group vs.
Individual Decisionmaking,” NBER Working Paper No. 7909, National Bureau of Economic
Research, 2000.
———, and C. Wyplosz, “Central Bank Talk: Committee Structure and Communication Policy,”
mimeo, Princeton University, 2004.
Buiter, W., “Alice in Euroland,” Journal of Common Market Studies, 37 (2), 1999, pp. 181–209.
Chappell, H., R. R. McGregor, and T. Havrilesky, “Monetary Policy Preferences of Individual FOMC
Members: A Content Analysis of the Memoranda of Discussion,” Review of Economics andStatistics, 79, 1997, pp. 454–460.
———, ———, and T. A. Vermilyea, Committee Decisions on Monetary Policy: Evidence fromHistorical Records of the Federal Open Market Committee, Cambridge, Massachusetts: MIT
Press, 2005.
Ehrmann, M., and M. Fratzscher, “Communication and Decision-Making by Central Bank Committees:
Different Strategies, Same Effectiveness?” ECB Working Paper No. 488, European Central
Bank, 2005.
Fujiki, H., “The Monetary Policy Committee and the Incentive Problem: A Selective Survey,” Monetaryand Economic Studies, 23 (S-1), Institute for Monetary and Economic Studies, Bank of Japan,
2005, pp. 37–82 (this issue).
Gerlach-Kristen, P., “Is the MPC’s Voting Record Informative about Future UK Monetary Policy?”
Scandinavian Journal of Economics, 106 (2), 2004, pp. 299–313.
Hefeker, C., “Federal Monetary Policy,” Scandinavian Journal of Economics, 105 (4), 2003, pp. 643–659.
Issing, O., “The Eurosystem: Transparent and Accountable or ‘Willem in Euroland,’” Journal of
Common Market Studies, 37 (3), 1999, pp. 503–519.
———, “Communication, Transparency, Accountability: Monetary Policy in the Twenty-First
Century,” Review, Federal Reserve Bank of St. Louis, March/April, 2005.
Lomax, R., “Inflation Targeting in Practice: Models, Forecasts and Hunches,” speech delivered at the59th International Atlantic Economic Conference in London, March 12, 2005.
Lombardelli, C., J. Proudman, and J. Talbot, “Committees vs. Individuals: An Experimental Analysisof Monetary Policy Decision-Making,” International Journal of Central Banking, 1 (1), 2005,
pp. 181–205.
Lybek, T., and J. Morris, “Central Bank Governance: A Survey of Boards and Management,” IMF
Working Paper No. 226, International Monetary Fund, 2004.
Mishkin, F., “Can Central Bank Transparency Go Too Far?” NBER Working Paper No. 10829,
National Bureau of Economic Research, 2004.
Perez-Quiros, G., and J. Sicilia, “Is the European Central Bank (and the United States Federal Reserve)
Predictable?” ECB Working Paper No. 192, European Central Bank, 2002.

239

Janet L. Yellen
Federal Reserve Bank of San Francisco
It is a pleasure to take part in this conference. I thank the Bank of Japan for inviting
me to share my views on incentive problems in monetary policy committees at
central banks.
I thought I would organize my remarks around two issues discussed in the paper
by Fujiki (2005) and in the sessions—transparency and continuity—and do so in thecontext of two recent issues confronting the Federal Open Market Committee(FOMC): (1) its recent decision to expedite the release of the minutes of its meetings; and (2) its recent discussion regarding the adoption of a numerical definition ofprice stability.
Over the past decade, the FOMC has continually reassessed the costs and benefitsof various steps toward greater transparency and made several significant increases inpolicy communication and openness. In February 1994, just months before I becamea Federal Reserve Governor, the FOMC started to explicitly announce changes in thefederal funds rate target. Later that year, the FOMC added descriptions of the stateof the economy and the rationale for the policy action to the post-meeting press
release. In January 2000, the FOMC introduced a statement describing the “balanceof risks” to the outlook, and in March 2002 began releasing the votes of individualcommittee members and the preferred policy choices of any dissenters. In August
2003, the FOMC added explicit forward-looking language concerning future policy
into its statement. Finally, in December 2004, it decided to release the minutes of its
meetings with only a three-week delay. Previously, the minutes were made publicwith a five- to eight-week lag, just after the subsequent meeting and were, hence, lessrelevant to policy.
This decision to speed up the release of the minutes occurred several months afterI returned to the FOMC table as President of the Federal Reserve Bank of San
Francisco. I think it illustrates some of the important issues relating to transparency
in monetary policy committees.
In considering whether to expedite the release of the minutes, potential costs werecertainly recognized. Financial markets could misinterpret and overreact to the minutes. Greater emphasis on the minutes might also lead to less productive discussions
at the meetings, because even speculative and off-the-cuff commentary would soon
be out in the open and, hence, discouraged. On the benefit side, however, expedited
release of the FOMC minutes provides more timely information to the public about
the rationale for monetary policy actions and a more nuanced explanation of thereasons for the Committee’s decisions. Such a move toward greater transparency facilitates accountability, which is essential for unelected central bankers in a democraticsociety, and might make monetary policy more effective by helping to align financial
market expectations with policy objectives.15
One impact of expedited release of the minutes is that it results in the earlier
airing of differences of opinion among members. A more subtle issue is whether the
15. See Swanson (2004).

240 MONETARY AND ECONOMIC STUDIES (SPECIAL EDITION)/OCTOBER 2005

Concluding Panel Discussion

exposure of such differences might affect the degree of collegiality. This issue isimportant because, in my view, cooperation is critical to the FOMC’s success. My
sense is that members are highly motivated to cooperate in seeking, finding, andarticulating a committee consensus and their ability to do so enhances the credibility,
legitimacy, and likely effectiveness of monetary policy. In fact, I think FOMC
members behave far less individualistically and strategically than assumed in some of
the models summarized in Fujiki (2005). I do not find this terribly surprising.
Sociologists find that, in group situations, individuals are typically motivated to build
on common ground to resolve differences of opinion and attain agreement.16 Without
such a sense of group solidarity, a 19-member committee like the FOMC could findit so time-consuming as to be practically infeasible to craft even a short, post-meetingstatement commanding majority agreement. Such sociological reasoning might also
explain why FOMC dissents are so rare.
The jury is still out on whether the earlier exposure of differences of opinion willaffect the sense of collegiality in the FOMC. Earlier release of the minutes affords
greater flexibility for members to express their personal views publicly, for example inspeeches, without creating undue market confusion. My guess is that this will make iteasier, not harder, to attain consensus, but time will tell.
A second issue relating to communication and transparency that the FOMC
discussed in February 2005 is whether to adopt an explicit, numerical price-related
objective for monetary policy. The Committee decided to hold off for now, but I am
sure that, along with other issues in monetary policy communication, this topic will
be on the table again in the future.
The Federal Reserve Act gives the FOMC a dual mandate—to pursue maximum
sustainable employment and price stability—but does not define either objective.
My personal view is that the quantification of the long-run price-stability objective
could offer several benefits. In terms of Committee operations, it could help to focus
and clarify our own discussions. It could also help to anchor the public’s long-term
inflation expectations from being pushed too far up or down. That is, a numericallong-run inflation objective may help avoid both destabilizing inflation scares andpernicious price deflations. Indeed, a credible inflation objective could enhance theflexibility of monetary policy to respond to the real effects of adverse shocks.
As with any move toward greater transparency, there are potential drawbacks.
A main concern is the possibility that the enunciation of an inflation objective will
be perceived as or result in a downweighting of the FOMC’s maximum employment
mandate. To guard against miscommunication, the nature of this objective would
have to be very clearly stated as a long-run goal only, with the path for attaining it
dependent on the implications for other Fed objectives, especially employment andfinancial stability.
The adoption of an inflation objective also raises issues related to the continuity of
FOMC behavior. The price stability mandate is overarching because it is includedin the Federal Reserve Act. But the interpretation of that mandate is left up to
the Committee. Since one FOMC cannot bind future FOMCs, the potential for
16. See Haslam (2004).

241discontinuity could be large if individual views on the appropriate numerical objective
were to change significantly over time or as a result of changes in the membership.
With respect to the likely stability of individual views over time, the evolution of
my own thinking on this topic is perhaps instructive. When I was a Federal Reserve
Governor, the FOMC discussed a numerical objective for inflation at its July 1996
meeting. At that meeting, there was some consensus among the participants, including
myself, for a 2 percent long-run objective for consumer price index (CPI) inflation.
From an economic standpoint, I believe the choice of an inflation objective should
depend on an evaluation of the costs and benefits of very low inflation. Since then, there
have been several important economic developments relevant to this choice. I argued
in 1996 that the inflation objective should contain a cushion sufficient to grease thewheels of the labor market. The potential negative impact of downward nominal wage
rigidity on real economic performance diminishes, however, with productivity growth,which raises average wage growth. As it turns out, high productivity growth in the
United States during the past decade has made downward wage rigidity a non-issue,
suggesting that a lower inflation buffer is sufficient. But, for me, this shift has been
offset by the experience of very low inflation in the United States and deflation herein Japan, which has heightened my concern relating to the zero lower bound on thepolicy interest rate. Other relevant economic factors include the magnitude of theneutral real funds rate, the degree of macroeconomic volatility, and methodologicalchanges affecting measurement biases.
Taking all of these factors into account, I find myself still pretty comfortable with
the numerical objective I had recommended almost a decade ago. More specifically,
I would now favor a 1.5 percent numerical objective for inflation as measured using
the core personal consumption expenditures (PCE) price index which, given the
recent average differences in measurement bias, corresponds to a 2 percent objective
for the core CPI. If the stability of my own views on the appropriate numerical inflation objective is representative, it seems likely that the FOMC’s numerical inflation
objective would probably change fairly little over time due to economic factors.
The numerical inflation objective could also potentially evolve with changes in themembership of the FOMC, assuming some divergence in views among members.
In fact, however, a number of Committee members have individually opined on
this topic and the actual differences of opinion turn out to be rather small. I would
characterize a long-run inflation objective centered on 1.5 percent for core PCE
inflation as a “modal” view. Even if there were more significant differences of opinion,an advantage of a monetary policy committee is that a slow, continuous transition of
new members is apt to produce greater continuity than might occur with a single
central banker, where the replacement of the Governor could result in discrete policy
shifts. In addition, the “sociological” considerations I discussed earlier, which foster
cooperation and consensus, could encourage new members to support the goals
endorsed by the prior committee. In practice, then, I think there would be ample
continuity in the FOMC’s inflation target.
Continuity is an especially important issue facing the FOMC now, as Chairman
Greenspan’s term as a Federal Reserve Governor comes to an end. The Chairman
changes infrequently—we have had only two in the past quarter-century. But one of

242 MONETARY AND ECONOMIC STUDIES (SPECIAL EDITION)/OCTOBER 2005

Concluding Panel Discussion

the strengths of the FOMC is the broad experience of its members and staff. During
the transition to a new Chairman, this should help ensure continuity.
To conclude, I would like to stress that there are no final answers, and thattransparency and continuity are important issues which we face on the FOMC at
almost every meeting.

References

Fujiki, Hiroshi, “The Monetary Policy Committee and the Incentive Problem: A Selective Survey,”
Monetary and Economic Studies, 23 (S-1), Institute for Monetary and Economic Studies, Bankof Japan, 2005, pp. 37–82 (this issue).
Haslam, S. Alexander, Psycholog y in Organizations: The Social Identity Approach, 2nd Edition, London:
Sage Publications, 2004.
Swanson, Eric, “Federal Reserve Transparency and Financial Market Forecasts of Short-Term Interest
Rates,” Finance and Economics Discussion Paper No. 2004-6, Federal Reserve Board, 2004.

Masaaki Shirakawa
Bank of JapanMy best contribution to this panel would be to reflect on our unique experience underthe quantitative easing framework adopted by the Bank of Japan (BOJ) at the Monetary
Policy Meeting (MPM) on March 19, 2001. This policy framework raises a numberof interesting issues concerning incentives faced by policymakers, which is the topic of
our conference. I will begin by explaining the quantitative easing framework and thenmove on to the transparency and continuity of monetary policy. The views expressed
here are mine and do not necessarily reflect the official views of the BOJ.

I. Quantitative Easing Framework
Under the framework, the BOJ embarked upon providing ample liquidity and committed itself to maintaining it until inflation as measured by the core consumer priceindex (CPI) was stably zero or positive. Excess reserves now amount to 6 percent inrelation to GDP. The framework is unique among central banks in that it gears the
future course of monetary policy to actual inflation, in contrast to the establishedpractice of gearing monetary policy to expected inflation.
Since the core CPI is still in slightly negative territory, the BOJ is determined
more than ever to maintain quantitative easing, in line with the commitment.
Looking at the historical records of the core CPI inflation rate, which currently
shapes the course of monetary policy by the BOJ, we can observe three periods when
it was around zero or slightly negative (Figure 1). Most interesting are the first
period, in the late 1980s, and the third period, from 1998 to the present. The late1980s were of course the peak years of the Japanese bubble economy.
Though I would not dare to say that we are facing a similar threat today, thisexperience reminds me that stable prices do not necessarily guarantee optimal policy.

243

Figure 1 The Core CPI Inflation Rate around Zero or Slightly Negative in ThreeTime Periods
Year-to-year change, percent
4

3

2

1

0

–1

–2
1983

85

87

89

91

93

95

97

99

2001

03

05

Note: CPI (general, excluding fresh food).

Our commitment is a leap of faith in that actual CPI dictates monetary policy and
we disregard other information unless the CPI inflation rate becomes positive on asustainable basis. I believe that a traditional central bank would want to retain someflexibility and would hesitate to make such a commitment.
Of course, the BOJ is not necessarily unique among central banks in seeking
to influence expectations. Our friends at the Federal Reserve are well known for
influencing expectations. However, the forward-looking language of the Federal Open
Market Committee (FOMC) concerning future monetary policy is more flexible
compared to our commitment. The FOMC has never used actual numbers in its
shaping of expectations.
Why has the BOJ made a commitment anchored on actual CPI numbers?
The decision reflects its determination to formulate effective monetary policy evenas it faces the zero lower bound on nominal interest rates. If market participants
regard such a promise as a binding commitment, they should expect that the zerointerest rate environment would be maintained over a considerable period—longer
than that expected under a Taylor rule regime. This should result in lower levels of
medium- to long-term interest rates (Figure 2).
Corporate profitability in Japan, defined as the ratio of profit to sales, now
stands at a level higher than that seen during the bubble years. Even so, the BOJ is
maintaining the zero interest rate environment. This is because we still believe it
important to maintain economic stimulus arising from the effect of the BOJ’s
commitment on medium-term interest rates, that is, the duration effect.

244 MONETARY AND ECONOMIC STUDIES (SPECIAL EDITION)/OCTOBER 2005

Concluding Panel Discussion

Figure 2 The Zero Rate Commitment and Its Effect of Flattening the Yield Curve

R t (T )A case without the commitment
following a Taylor rule

A case withthe commitment
0
Maturity (T )II. Transparency and Continuity
Having explained the quantitative easing policy framework, I will now pick up three
threads for discussion on transparency and continuity in turn.
The first is the time consistency or inconsistency of the commitment. Here, I havea rather ambivalent view. While I believe that the commitment has been effective, I am
also inclined to offer some caution against overemphasizing the effectiveness of expectations management by central banks. For example, can the BOJ strengthen the effectof its commitment if it commits to maintaining a zero interest rate environment until
we see 10 years of 4 percent inflation as measured by the CPI? I believe the answer is
no. This is because nobody would believe such a commitment. Private economic
agents would regard a decade of 4 percent CPI inflation as undesirable, and would
consider that a responsible central bank has no incentive to maintain such a policy after
deflation is overcome. Once the economy escapes from a deflationary environment,
the original bold commitment might no longer be the most appropriate framework.
Paul Krugman once said, “central banks must ‘credibly promise to be irresponsible’
in a liquidity trap,” but it is difficult to remain an irresponsible central bank forever.
Any institution makes decisions that bind its own future actions to some extent, but it
seems that business firms are not faced with the same type of inconsistency issues ascentral bank monetary policy.
Let me now turn to my second thread: to what extent could present members ofa central bank’s policy board constrain the decisions of future members? In the caseof the BOJ, Policy Board members serve five-year terms, and consequently, theaverage remaining term is two and a half years. Interestingly, the average length ofservice of incumbent members in the case of the BOJ is 2.35 years, which is a little
short compared to overseas counterparts (Table 1). As a result, members who took
part in the original decision to introduce quantitative easing in 2001 are no longer on
the Policy Board. In theory, members who did not take part in the original decision245

Table 1 Term of Central Bank Board Members
BOJ

Statutory term
(years)5

Average lengthof service ofincumbent
members(years)

2.35

Fed
14
(Board members)

ECB
8(Board members)

BOE
5(Governor, two
deputy governors)

5(Fed presidents)

No fewer than 5(national central
bank governors)

3(two executive
directors, four
external members)

6.74

4.90

3.63

Note: As of May 9, 2005.

may consider that the current commitment is not appropriate. At the same time, they
may nevertheless be inclined to go along, considering the potential weakening ofcredibility when the commitment is not maintained. The issue, obviously, does arise
when responsibility of monetary policy is vested only in the Governor. Nevertheless,the concern may be accentuated at a central bank committee consisting of memberswith staggered terms, as it becomes relevant each time there is a change in members.
On the other hand, stronger continuity may be achieved by a committee if each newmember weighs the costs associated with the weakening of credibility against theappropriateness of upholding the commitment.
The third thread involves the dissemination of the views of the committee.
Admittedly, it is a challenge to merge individual opinions of committee members
into a collective outlook of the committee. On the other hand, any attempt todisseminate views as they are would lead to confusion and unwarranted market
volatility. Reflecting the intricacy of this process, central banks around the world
have developed various styles for disclosing their outlook on the economy and prices.
The disclosure or non-disclosure of minutes, or the editorial policy pertaining tominutes, is an important influence over the incentives of members of a committee.
If minutes are not disclosed, the anonymity of decision making in a collective body
could work against the potential advantages of a committee arising from its diversity.
On the other hand, it is often pointed out that disclosure of minutes or inappropriate
editorial policy for minutes could stifle spontaneous discussion at committee meetings. Its advantage lies in communicating the range of views within the committee,
but with a risk of masking the central message.
In this regard, our experience under quantitative easing offers a good example. The
BOJ has adopted a variety of untested measures in fighting deflation, for example, thezero interest rate policy, quantitative easing, and the commitment to maintain easing.
In each case, there existed no consensus on whether or how untested measures would
be effective at the conceptual level within the Policy Board or among a broad community of economists. Our spirit was to try these measures given the severity of economic
conditions. Consequently, some differences in views among members of the Policy
Board were to be expected. Looking at the minutes of the BOJ’s MPMs, you will find

246 MONETARY AND ECONOMIC STUDIES (SPECIAL EDITION)/OCTOBER 2005

Concluding Panel Discussion

Table 2 Voting Records since April 1998

Number of meetings in total (A)
Number of non-unanimous meetings (B)Ratio of non-unanimous meetings (B/A; percent)
Average dissenting-vote ratio per meeting (percent)

BOJ
119
68
57.1
10.2

Fed
60
11
18.3
2.0

BOE
86
56
65.1
13.8

Note: As of May 9, 2005.

a detailed description of the various policy options under the quantitative easing
framework. In contrast, tools of monetary policy under deflation have received a rather
succinct treatment in the minutes of the FOMC.17
Blinder and Wyplosz (2004) categorized central bank policy committees into
three stereotypes: autocratically collegial, genuinely collegial, and individualistic. As
the typical central bank in each category, they list the Fed, the European Central
Bank, and the Bank of England (BOE).
While I have yet to ask Blinder and Wyplosz the category in which they would place
the BOJ, the BOJ might fit their definition of an individualistic committee in termsof the details of the published minutes and voting records such as the ratio of nonunanimous meetings or dissenting votes. For example, the ratio of non-unanimous
meetings or dissenting votes in the case of the BOJ is almost comparable to that of
the BOE (Table 2). The BOJ has sometimes been criticized for undermining theeffects of the quantitative easing policy by disclosing skeptical views of Policy Board
members. However, the full argument should be put into the perspective of the overall
environment surrounding monetary policy as well as the nature of the committee.
Under the weight of nonperforming loans, the functioning of the Japanese financial
system was impaired, and the zero bound of nominal interest rates was a real constraint.
When conventional monetary transmission mechanisms were weakened as such, it was
perfectly reasonable to find divergent views on untested policy options, and it was not
appropriate to suppress the state of such a debate in view of transparency. At any
rate, we must strike the right balance between presenting a faithful snapshot of thedeliberations of the Policy Board and conveying a coherent view. Otherwise, we may
lose credibility eventually.

III. Conclusion
To conclude, I would like to emphasize that the institutional design of conducting
monetary policy is quite important. Economists often talk about what is the desirable
monetary policy, but we should discuss in more detail how we could deploy suchpolicy and what are the necessary institutional underpinnings. It is true that there isno one right answer. The most appropriate regime would depend on the economic
17. According to the minutes of the FOMC in June 2003, “the members discussed the advantages and disadvantagesof various approaches” and “The members did not see the need at this time to reach a consensus on the desirabilityof any specific nontraditional approach to the implementation of monetary policy.”

247

and social environment surrounding a central bank, including its founding law. The
BOJ has made the best commitment from its viewpoint, taking into account thecomplex factors that I have described. So far, new members of the Policy Board havemade it known that they would honor the existing commitment. At the same time,
the BOJ has made various refinements in its communications policy, including thestyle of Policy Board minutes and reports on the Bank’s semiannual outlook.
As a final remark, I would like to draw your attention to the human aspect aswell. The motivation or utility of Policy Board members and the central bank’s staff
hinges on the satisfaction derived from the sense of contribution to better central
bank policy decisions. In this regard, the institutional design that maximizes such
satisfaction also remains an important real-world consideration.

Reference

Blinder, Alan S., and Charles Wyplosz, “Central Bank Talk: Committee Structure and Communication
Policy,” mimeo, Princeton University, 2004.

Comments
Bennett T. McCallum
Carnegie Mellon University
In his panel remarks, Wolfgang Schill commented briefly on the relation of theEuropean Central Bank (ECB) to the fiscal authorities of the 12 euro area countries,
stating that there is an exchange of views but no explicit coordination. He says,“If each party follows its [own] primary objective, macroeconomic policy would beconsistent over time,” thereby permitting good results. Generally speaking, I thinkthat it is quite right to avoid explicit coordination among monetary and fiscal policymakers. Indeed, such coordination would in my opinion be inconsistent with aproper understanding of central bank independence.
In saying this, I do not mean to express general approval of the European Union’s
fiscal guidelines, about which there has been so much discussion. My rather uninformed impression is that these guidelines may be somewhat too strict. They aredesigned in large part to protect the ECB from pressures to finance national budget
deficits, and that is a worthwhile objective, but a central bank should have the upper
hand in any case since it has control of the monetary base while fiscal authorities do
not have full control over fiscal deficits.
There is a related matter that I would like briefly to comment on. I have readrecently in the press—probably in the Financial Times —about the contention of a few
economists that administrative procedures of the ECB may be serving to diminish
interest rate spreads among the government bonds issued by various euro area nations.
These procedures have to do with national government debt used as collateral for loans
involved in open market operations. I am not sure about the details or whether it isactually possible for these procedures to have substantial effects on euro zone interest

248 MONETARY AND ECONOMIC STUDIES (SPECIAL EDITION)/OCTOBER 2005

Concluding Panel Discussion

rate differentials, except for very short-term securities. But it certainly does seemthat if one country is running large deficits, it would be desirable for its long-termborrowing rates to rise, because of risk premia, relative to those of the other euro area
countries. Such effects would tend to provide better incentives—which is the focus
of our conference—toward fiscal responsibility. So I hope that the ECB’s procedures
are not working to compress these differentials.
I found Janet Yellen’s remarks to be a very nice statement including nothing explicit
that I wish to argue with. I would, nevertheless, like to comment critically on one episodethat she mentions regarding an attempt by the Federal Open Market Committee(FOMC) at transparency. That is the episode that began in August 2003 in which, as
she states, “The FOMC added explicit forward-looking language concerning future
policy into its statement.” My complaint about this is that the Fed’s language served tosuggest that it intended to keep the federal funds rate at some particular numericallevel—I think it was 1 percent—for several months into the future.
Now, if a central bank is conducting policy in a systematic rule-like fashion, it
would be useful for it to give the public information regarding its policy rule or, more
likely, its objectives and its model. (By the latter, I do not mean giving the publicformal equations, but rather conveying the bank’s understanding of how theeconomy works, which is what a model is.) But a statement about keeping the federal
funds rate at a specific level—rather than a statement about behavior of the rate
conditional upon future conditions—seems to be inconsistent with rule-based policymaking. Furthermore, such statements are inconsistent with optimal discretionary(i.e., period by period) policymaking, for that is a scheme in which the central
bank reoptimizes in each period, unconstrained by anything that has happened in
the past. In short, I consider the episode in question not to have reflected genuine
transparency, but instead an attempt to “manage expectations” by a process that one
might call mere persuasion.
Masaaki Shirakawa’s emphasis on the commitment by the Bank of Japan (BOJ)
to provide ample liquidity is very welcome. Also, I would note that what he has
described is somewhat more rule-like than the Fed episode that was just mentioned,
since it makes behavior contingent upon consumer price index inflation outcomes in
the future. By some striking coincidence, however, today’s Asian Wall Street Journal(May 31, 2005) has a front-page article suggesting the possibility of a relaxation of the
BOJ’s quantitative easing framework. In addition, today’s Financial Times devotes anentire page to the same possibility and whether such a relaxation would or would not
be a bad idea.
In this regard, I am confident that Shirakawa has the same understanding as I do,
namely, that in a zero lower bound (ZLB) situation, monetary policy can provide
demand stimulus only by (1) shifting upward expectations of future inflation rates orby (2) open market purchase of assets that are not perfect substitutes for base money.
It is not clear to me that the provision of banking system liquidity does anything inthe second respect, so it must be helpful primarily via its influence on expectations.
Thus, it would appear that BOJ actions that result in Wall Street Journal or Financial
Times articles, suggesting a possible premature ending of the attempt to escape the
ZLB situation, would not be desirable.

249

Maurice Obstfeld
University of California at Berkeley
We have been privileged to hear three excellent presentations from representatives ofthe major central banks on the environment in which they operate and the current
issues that they confront. I would like to offer my own perspectives on some of thepoints that have been made this afternoon.
Central bank decision making takes place within a broad scientific, political, andsocial context. That context is the ultimate determinant of the incentives that central
bankers face. A most basic consideration is the set of goals that the central bank aims
to achieve. How does the monetary authority see its tasks? At one time, the primary
goal might have been to preserve convertibility with respect to gold; at another time,at least for some central banks, it might have been full employment. For a dwindlingset of central banks, the overriding goal is to fix an exchange rate.
Price stability is a goal to which most modern central banks subscribe, although they
may pursue it through alternative strategies and instruments. But different central
banks may have additional goals, and different institutional means for attaining them.
Take financial stability. Some central banks have prudential responsibilities, others do
not, and even if they do not, the bank may still have a role as a crisis manager throughits lender of last resort function or in some other way.
Another key institutional feature of the central bank is its independence of theother organs of the state. There can be de facto or de jure independence, and goalversus instrument independence. Although central bank charters generally spell out aset of economic desiderata to be pursued, true goal independence is the bank’s ability
to set a very specific goal such as a quantitative inflation target or target range. Thisability, and the way in which the central bank uses it, may be an important element
in its operational success and also in its relations with the ambient political authorities
that ultimately determine the central bank’s powers. Is the bank accountable to thepolitical authority, and in what ways? Are its powers perceived as legitimate by the
public? How are appointments to the central bank’s board made? We have discussed
several of these issues already at this conference—their resolution is critical to the
incentives of the central banker and his or her success in meeting ultimate goals.
A fundamental factor governing the incentives of a central bank is that the institutional framework, whatever it is, and whether it is the result of custom, of explicit
legislation, or of the interpretation of legislation by some judiciary authority, is neverimmutable. Many central banks realize that they can enhance their bargaining
situation within the state by adopting a political advocacy role and a role in educating
the public. The activities of the central bank and its long-term success go far beyond
the rules for voting and the specific decisions on whether to raise or lower interest rates.
Over the years, Germany’s Bundesbank set the standard for educating the public on thevirtues of price stability—and this success made it a most formidable actor in theGerman economy’s governance, and in the negotiations over the shape of the European
single-currency regime.
Central banks and central bankers typically do not restrict their public pronouncements to purely monetary issues. Often they point out dangers arising from the actions

250 MONETARY AND ECONOMIC STUDIES (SPECIAL EDITION)/OCTOBER 2005

Concluding Panel Discussionof fiscal or regulatory authorities. When Alan Greenspan testifies before the U.S.
Congress, he takes a broad perspective in part to inform the public. This is not to denythat the explanation of central bank decisions is absolutely central, and both Masaaki
Shirakawa’s and Janet L. Yellen’s presentations have focused on the evolution ofthat process of communication. The “spin” put on various decisions, the governors’
speeches, the minutes, the publications—all of these play multiple roles in guiding
market expectations, enhancing transparency, maintaining a sense of accountability,
and avoiding political pitfalls.
For central banks, a very important constituency is the financial markets. Posen(1996) very nicely linked the independence of central banks to financial-sector
support for price stability. The central bank’s communications and relations withthe financial sector therefore are particularly important. Of course, the threat that
financial markets will react can be a significant disciplining factor on certain
decisions by the politicians—such as the appointment of a new central bank head.
The potential for a financial-market veto on political decisions is another reason why
central banks find it in their interest to maintain close communication with thefinancial sector.
All these issues have become much more important in today’s world of fiat currencies: necessarily, fiat currencies involve a much greater discretionary element than
do non-fiat standards. We tend to forget how recent this development is. I would date
the generalized pure fiat currency system to 1968, the year the two-tier gold market wasestablished and the link between the private gold market and the U.S. dollar was abolished within the Bretton Woods system. Until then, core countries had generally beenon some sort of commodity currency standard. I believe the inflationary experience ofthe 1970s reflected in part a process of learning within this very new world.
As a result both of policy experience and of scientific progress, we have come to
new insights and ideas about managing a fiat standard. While these have so far
seemed to work fairly well, there are still important issues and surprises. I think thedeflation in Japan has been one of those surprises of the fiat standard. Unlike thedeflation of the Great Depression or previous eras, it is not linked to any attempt tostabilize the price of a commodity such as gold.
Bennett T. McCallum has mentioned the problem of fiscal and monetary coordination, as has Wolfgang Schill. I see this interdependence as creating a very basic
tension that informs almost every aspect of central bank decision making. The
central bank is of course an agent of the state, and its revenues and capital ultimately
belong to the Treasury. It operates in the government debt market. Its decisions
on inflation and nominal interest rates set the trade-offs within the government
budget constraint. Early on, central banks played a special role in government debt
placement and servicing.
Conversely, the fiscal authority may determine the central bank’s budget andcapital appropriation, as well as the central bank’s governing personnel and even its
role. For example, the Bank of England lost its supervisory function when it gained
instrument independence in 1997. Even the exchange rate is generally within theauthority of the state, not the central bank, creating a potential contradiction of any
statutory independence.

251The fiscal-monetary relationship thus is a very intimate one. In a world of fiat
currencies, in addition, the differentiated role of the central bank is highlighted. Fiatcurrency is a pure central bank liability. It is an arbitrary unit. The central banknowadays is not responsible in any sense for backing it with a commodity or tangible
asset stock. Once, much currency was backed by gold. Nowadays the main asset ofthe central bank is its credibility. Credibility has always been important, of course,
but it is particularly critical in a world of fiat money where the equilibrium value ofmoney derives from a social equilibrium (a bubble in fact) based on expectations thatmoney will have value in the future.
It might enhance central bank credibility if all government debt were indexed tothe price level. While the central bank may have sole responsibility for monetary
policy, as long as governments issue nominal debt there will remain a fundamental
interconnection and potential conflict with the fiscal branch. If we have learned
anything from the fiscal theory of the price level, it is that one can conceive ofsituations in which fiscal policy, not monetary policy, determines the level of prices.
In such cases, the price level adjusts to allow the government’s budget constraint tohold. I do not think that these are realistic situations, but the result does caution us
about the limits of central bank independence in certain political environments.
Having all government debt indexed to prices would negate this possibility.
If we look at Japan today, conflict between the incentives of monetary and fiscal
policymakers is evident. Coincidentally, the Financial Times’ intensive coverage of
the Bank of Japan (BOJ) in today’s issue (May 31, 2005) includes the article “Bankand Government Show Signs of Tension.” Tension arises from a number of channels.
One consistent concern in the formulation of the BOJ’s policy has been an understandable reluctance to be seen as bankrolling the fiscal branch even in an indirect
way. Supporting this reluctance is the consideration that the BOJ’s independence israther recent. Indeed, independence was in some sense established at the expense of
the Ministry of Finance, which was perceived to have mismanaged the economy
through much of the 1990s. Another channel of interdependence, accentuated by thehigh current level of Japan’s public debt, is that a rise in interest rates would sharply
worsen the public-sector interest burden.
One way the BOJ could improve its accountability and credibility—as well as
position itself to avoid pressures from the fiscal branch—is to adopt a quantitative
definition of price stability. I do not intend such a definition to be necessarily acommitment to a particular inflation target; rather, it would be an indicative,
quantitative criterion of success in maintaining price stability over the medium term.
I also believe the approach would also prevent a relapse into the deflationary problemsof the last few years.
Yellen has just made a convincing case for a quantitative target for U.S. inflation.
Schill has indicated clearly that the European Central Bank (ECB) is very comfortable with what he calls “strategic transparency,” or the quantification of the objectiveof price stability. The challenge for the BOJ is to define exactly what it means byprice stability, and to communicate that to markets in a clear and convincing way. It
need not go as far as Krugman’s (1998) suggestion that the BOJ make a commitment
to behaving “irresponsibly.” But a modestly positive upper bound on inflation would

252 MONETARY AND ECONOMIC STUDIES (SPECIAL EDITION)/OCTOBER 2005

Concluding Panel Discussion

be most useful. Yellen suggested 2 percent per year, roughly corresponding to the
ECB’s position, but the bound could be lower. What is necessary is a statement thatsome moderate inflation—say, up to 1.5 percent per year—is acceptable within the
BOJ’s statutory mandate to seek “price stability.”
The BOJ is now at a critical juncture, characterized by considerable market andpress confusion in interpreting changes in quantitative monetary targets. It argues thatthese changes are purely “technical,” but some interpret them as a signal of impending
policy changes that might be deflationary. The contradictory conjectures that are being
reported in the press are prima facie evidence of a lack of transparency and credibility.
At one time BOJ officials argued, I think with some force, that to make a commitment
to a high inflation target (such as 4 percent per year) might damage credibility ifthat target could not be met. With the economy now approaching zero inflation frombelow and possibly breaking through it, however, it is hard to make a similar caseagainst an explicit definition of price stability allowing for moderate positive inflation.
It is important to reassure the markets that there will not be an abrupt policy reversal,
as happened in 2000.
Looking at the figures presented by Shirakawa, I find it understandable why
Japan’s policymakers might be nervous. If one looks at the end of the bubble period,
price-level inflation seems to be quiescent, although it is accompanied by significant
asset price inflation. Then inflation jumps up to exceed 3 percent in a very shortamount of time. One certainly needs to consider latent inflationary pressures. But I
would argue that today’s environment is different, and that the risks of a contraction far outweigh the risks of moving up even to 3 percent inflation for a shortperiod of time.
In the time that remains for this afternoon’s discussion, I would very much favor
returning to the contrasting views we have heard on the merits of a quantitative
definition of price stability.

References

Krugman, Paul R., “It’s Baaack: Japan’s Slump and the Return of the Liquidity Trap,” Brookings Papers
on Economic Activity, 2, 1998, pp. 137–187.
Posen, Adam S., “Is Central Bank Independence (and Low Inflation) the Result of Effective Financial
Opposition to Inflation?” in Ben S. Bernanke and Julio J. Rotemberg, eds. NBER Macroeconomics
Annual 1995, Cambridge, Massachusetts: MIT Press for the National Bureau of Economic
Research, 1996.

General Discussion
I. Discussion among Panelists
In response to the comments by Bennett T. McCallum and Maurice Obstfeld,
Wolfgang Schill agreed on the benefits of quantifying price stability over the medium

253term, noting that it would help to anchor inflation expectations and to discipline
policymaking. As for coordination among fiscal and monetary policymakers, he drew
the attention of the participants to the fact that no European “state” or “government”
existed, which added a complication to the conduct of monetary policy by theEuropean Central Bank (ECB). In response to McCallum’s discussion about interest
rates on government securities in Europe, Schill explained the collateral system of the
ECB’s open market operations. Specifically, he stated that the ECB accepted government bonds as collateral on the basis of their market prices, and thus bonds issued bycountries with lower risk premiums were accepted at higher prices and vice versa. Schillemphasized that the ECB trusted the market and did not want to take over the role
played by the market.
Janet L. Yellen agreed with McCallum that, in general, monetary policy commitments should not be unconditional and stressed that the forward-looking languagein the statement of the Federal Open Market Committee (FOMC) after June 30,
2004 specifically included the conditional language: “policy accommodation can beremoved at a pace that is likely to be measured. Nonetheless, the committee will
respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability.” She then looked back to the situation as of August 2003, when
the Federal Reserve introduced the forward-looking language to which McCallum
referred.18 In her view, the August 12, 2003 statement was a logical response on
the part of the FOMC to the overreaction of long-term interest rates at that time,
which seemed to be caused by a misunderstanding of the Fed’s likely policy path byfinancial markets. Furthermore, Yellen interpreted the Fed’s accommodative policy atthat time as systematic behavior described well by a “modified version” of the Taylor
rule. She said that several papers suggested that when the inflation rate falls to a very
low level, the optimal response is to follow a nonlinear rule which deviates from the
Taylor rule by holding the interest rate at a very low level for longer than would beconsistent with the normal Taylor rule. The August statement captured the Fed’s
intent to behave in this manner, namely, to err on the side of ease.
In response to the discussion on the recent monetary policy of the Bank of Japan(BOJ), Masaaki Shirakawa explained, in detail, the Monetary Policy Meeting decision
on May 20, 2005 to allow the balance of current accounts temporarily to fall shortof the target of around 30 to 35 trillion yen. He said that as the Japanese financial
system had regained its stability, the liquidity demand of financial institutions
weakened visibly. Against this background, he contended that maintaining a certain
level of current accounts and a proper functioning of the market had become a delicate
balancing act. Thus, the recent decision was intended to strike the right balance byintroducing some flexibility into the open market operations. He emphasized that thisamendment did not signal any significant shift in Japanese monetary policy: indeed,
the BOJ was committed to maintaining the current framework of quantitative easing
until the annual inflation rate, as measured by the core consumer price index (CPI),
became zero percent or higher on a sustainable basis. Concerning the quantification
18. The FOMC statement released on August 12, 2003 included the following forward-looking sentence: “The FOMC
believes that policy accommodation can be maintained for a considerable period.”

254 MONETARY AND ECONOMIC STUDIES (SPECIAL EDITION)/OCTOBER 2005

Concluding Panel Discussionof price stability, Shirakawa noted that two prominent Fed officials made different
interpretations on recent U.S. monetary policy: one said the Fed was practicing
implicit inflation targeting, while the other said that Fed was not practicing inflation
targeting in any meaningful sense of that term, and remarked that it was not necessarily clear what the adoption of inflation targeting meant exactly, and there seemed to
be no consensus about its precise definition. As an example, he took the ECB, which
is often categorized as one of the inflation-targeting central banks, despite its official
statement that it has not adopted such a policy. Moreover, he doubted that justannouncing a numerical inflation objective would increase transparency in Japan,
which was characterized by a zero interest rate. He stressed that the trajectory ofshort-term interest rates was more important than the level of the long-run inflation
objective in the formation of the expectations of financial market participants.

II. General Discussion among Participants
A. Inflation Targeting as a Means of Increasing Transparency
Jeromin Zettelmeyer (International Monetary Fund) asked why the three major
central banks—the BOJ, the Fed, and the ECB—seemed more reluctant to adopt
explicit inflation targeting than the central banks of small industrial countries. In
response to Zettelmeyer, Marvin Goodfriend (Federal Reserve Bank of Richmond)
maintained that the ECB had virtually adopted inflation targeting because it had aprice stability objective that was rather explicit and legislatively coherent with theMaastricht Treaty. In addition, Goodfriend interpreted the Fed as implicitly adopting
inflation targeting in the light of its actual behavior over the last decade. Agreeing
with Goodfriend, George Pickering (Bank of Canada) commented that there was nota great difference between the ECB and the Fed and others: he said that announcing
a specific numerical target was certainly useful, but its value appeared marginal
because two banks had already achieved very stable prices.
McCallum tried to answer Zettelmeyer’s question from a historical perspective:
the ECB followed the tradition of the Bundesbank, which described its policy
strategy as monetary targeting rather than inflation targeting. For the Fed, there
seemed to be a political danger that a discussion of legislating for inflation targetingwith the U.S. Congress could lead to an undesirable change in the Federal ReserveAct. McCallum stated that there seemed to be two reasons why the BOJ did not
introduce inflation targeting. First, when inflation targeting became popular, theBOJ already had an outstanding record of preventing inflation over many years.
Second, the zero lower bound situation twisted the inflation-targeting debate insignificantly confusing ways. McCallum concluded that, in all three cases, the successof the central banks either currently or in the past had led to a somewhat anomalous
situation compared with other countries.
Yellen agreed with Goodfriend that the Fed had already adopted inflation targeting
implicitly. In addition, she concurred with McCallum that there was certainly a reluctance in the United States to move to explicit inflation targeting for political reasons.
She said that, for example, if one tried to define price stability explicitly in the Federal

255

Reserve Act, a complicated discussion about defining maximum employment would
also likely arise. Nevertheless, she remarked that there were advantages from moving
to explicit targeting. She proposed that to do so, the FOMC could simply quantify
the long-run inflation objective it considers most appropriate to attain the Federal
Reserve Act’s dual goals of price stability and maximum employment. This would
not necessarily require Congressional involvement to change the Federal Reserve Act.
Schill explained the historical background against which the ECB officially denied
adopting inflation targeting as its monetary policy strategy. Specifically, he statedthat ECB’s comprehensive framework of monetary policy was very different fromthe “old-fashioned” view of inflation targeting, which required the central bankmechanically to hit the stated goal at a certain point in the future. The ECB staff
thought that such a framework would never work in the euro area because they
did not have a detailed understanding of the transmission mechanism. However,
Schill had the impression that the terminology of “inflation targeting” had changed
over time. In contrast to the old-fashioned view, the current definition of inflation
targeting seemed to include virtually all central banks that aimed at somethingcalled price stability. He said that such a change of definition made the discussion on
inflation targeting difficult and confusing.
B. The Desirable Target Rate of Inflation
Shigenori Shiratsuka (Bank of Japan) asked about the implications for the numericalinflation target of the time-varying upward biases in a price index. In particular, he
noted that the upward bias in the U.S. CPI had been declining since the publicationof the Boskin Report in 1996. He said that, given the time-varying nature of the
upward biases in the CPI, it was unclear whether a central bank gained any advantage
from just announcing a numerical target. Shirakawa agreed with Shiratsuka that thebias varied over time and that one could not easily subtract the upward bias fromthe observed inflation rate. Shirakawa also pointed to the fact that there was no
discernible difference between Japan and other industrial countries in terms of both
depth and duration of downturn following the bursting of the IT bubble and CPI
deflation had not accelerated. Shirakawa said that Japan’s experience showed the needfor reconsidering the standard argument for inflation buffers.
Eiji Hirano (Bank of Japan) questioned why the ECB adopted as the definition ofprice stability the inflation rate’s being “close to, but below, 2 percent,” instead of using“2 percent plus or minus 1 percent,” for example. Further, he suggested a need toconsider the policy implications of the recent apparent unresponsiveness of domestic
prices to forcing variables, such as the output gap and input prices. Wolfgang W. Fritsch(Deutsche Bundesbank) answered Hirano’s question as follows. The Bundesbank had
a long tradition of defining price stability as price increases within a range of 1 percent
to 1.5 percent, which captured the long-term improvement of quality of goods andshould not be considered as inflation. When the ECB was established, its Governing
Council went along with this understanding. However, when the ECB considered therisks of deflation a few years ago, it added a safety margin for a zero lower bound, which
resulted in the current definition. Agreeing with Fritsch, Schill added that the reason
why the ECB did not adopt the plus-or-minus range as the definition of price stability

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Concluding Panel Discussion

was that such a range might add more uncertainty, which could counteract its efforts
to anchor inflation expectations over the medium or long term.
Erdem Başçi (Central Bank of the Republic of Turkey) discussed inflation targetingfor emerging market countries, particularly in Europe. Specifically, he suggested thattwo features arising from the high degree of openness in these countries should betaken into account in considering the appropriate definition of price stability: first, theBalassa-Samuelson effect, and second, the high pass-through rate due to dollarization.
C. The Current Situation of Japanese Monetary Policy
In response to McCallum’s comment, Toshihiko Fukui (Bank of Japan) said that the
BOJ would continue the current easy monetary policy until the CPI would registerzero percent or higher in a stable manner. Fukui added that in continuing the policy,
the BOJ should be skillful enough not to kill the nascent revival of the function ofinterest rates in the short-term money markets or the autonomous interbank transactions in these days. Keimei Kaizuka (Chuo University) remarked that the BOJ’s
recent modification of its policy statement was just a technical matter and should not
be emphasized too much.
Kazumasa Iwata (Bank of Japan) commented on McCallum’s view that even when
the short-term interest rate was zero, monetary policy could stimulate the economy byopen market purchases of assets that were not perfect substitutes for the monetary base.
Iwata explained that the maturity of the BOJ’s open market operations had increased
substantially over time as the BOJ raised the target of current balances. Iwata agreed
with Obstfeld on the importance of clarifying a numerical objective for inflation. In
particular, he said that a quantitative inflation target would contribute to anchoring
the price level for the Japanese economy under a zero interest rate environment.
In response to Shirakawa’s discussion of inflation targeting, Pickering contended
that if the BOJ announced a numerical inflation target, there was no risk that people
would want the BOJ to hit the target all the time. In terms of the experience of
the Bank of Canada, he explained that inflation targeting allowed the inflation rate
to fluctuate around a medium-term target in response to various supply shocks.
Obstfeld remarked that there was no contradiction between the quantitative specification of price stability and guiding market expectations about future short-term
interest rates. He recommended that the BOJ be more explicit about the definition ofprice stability as a way of improving communications. Shirakawa began his rejoinder
by stating that the Bank of Japan Law clearly states that the primary objective of
the BOJ was price stability in the conduct of monetary policy. He then argued that
if the very core of inflation targeting was the recognition of price stability as an
objective of monetary policy, the BOJ had already adopted inflation targeting.
However, one of the important conditions for the central bank to adopt explicit
inflation targeting was that people correctly understood that the target acted solely
as a long-run goal and that people respected the way a central bank operated an
inflation targeting, as Yellen emphasized in her panel speech. In addition, he statedthat it did not seem appropriate to adopt inflation targeting at this stage because,
under the zero interest rate environment, the BOJ lacked credible instruments toattain the stated inflation objective.

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D. Expectations Management and the Limits of Transparency
Hyun Song Shin (London School of Economics) argued for caution in using transparency as a way of making monetary policy more effective. As the paper he had
presented in Session 3 made clear, market prices had a dual role, acting as a signalof the fundamentals, as well as representing the terms of trade between states andacross time. Shin noted that central banks often tried to make their future intentionstransparent to affect the terms of trade. However, he said that such a policy intervention might impair the signaling role of prices, on which central banks relied to obtain
information about the underlying fundamentals. Thus, there was certainly a tension
between affecting prices on the one hand and learning from prices on the other hand.
Schill summarized Shin’s comment as the possibility that statements and/or commitments by central banks strongly influenced long-term interest rates, thereby
distorting the pricing of bond markets. In contrast, he said, the ECB’s clarification of
the definition of price stability helped the market find the right price by reducing therisk premium arising from inflation uncertainty. In this sense, Schill emphasized that
the ECB’s definition of price stability did not aim at influencing high-frequency
movements in long-term interest rates. Rather, it should be considered as a structural factor reducing the volatility of the expected inflation rate. He explainedthat there was indeed survey evidence suggesting that the expected inflation rate
was stable at around 2 percent in the euro area. Shirakawa agreed with Shin’s
point that the transparency in itself was important, but if the central bank increasedtransparency too far to affect the market price directly, there might be a risk of
suppressing the market signal.
Pickering remarked that, in principle, central banks should be as transparent asthey could be about the strategies and objectives. At the same time, he took noticeof a limit to transparency with regard to the prediction of policy rates: there was a
problem if central banks provided too much information, because financial markets
and the press sometimes dissected the messages from central banks too finely.
Charles L. Evans (Federal Reserve Bank of Chicago) remarked that there existed atleast three forms of communication that were not mutually exclusive: (1) stating a
numerical inflation objective; (2) stating a policy rule; and (3) stating the expected,
conditional path of the policy instrument over the future. Evans questioned why
central banks did not adopt the third form of communication. Shirakawa responded
that it was not easy to integrate the various expected paths of the board members intoa single path given their diversified views. Schill added that central bank staff did nothave sufficient knowledge about the transmission mechanism to announce a precise
interest rate path.
Goodfriend pointed out that an ad hoc announcement—for example, anannouncement by the central bank that a further increase or decrease in inflation
was unwelcome—could not substitute for an explicit inflation target range as acommunication device. According to the rational expectations theory, he interpreted
such a discretionary announcement as essentially equivalent to unsystematic or
random policy.

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E. Monetary Policy and the Exchange Rate Policy of the ECB
Fritsch commented on the relationship between monetary policy and exchange rate
policy for the euro area. He maintained that, in general, it was desirable that both
policies be under the control of a single independent central bank. However, theMaastricht Treaty provided the possibility of a return to a global fixed exchange rate
system. This possibility seemed to be potentially harmful to the ECB’s independence,
as Obstfeld had suggested in his comment. However, Fritsch emphasized that theEuropean governments could only decide to join such a system with the consent of
the ECB. Furthermore, he stressed that under the current floating regime the ECB
was solely responsible for possible exchange market interventions and hence its
independence was not an issue. Obstfeld responded that the safeguards mentioned
by Fritsch were not spelled out explicitly in the Maastricht Treaty and that thispotential problem had been papered over by a separate understanding outside of
the treaty itself.

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