1IMES Newsletter
November 2016

The Institute for MonetaryandEconomicStudies(IMES) was founded in 1982
as an internal organ of theBankofJapan,
incommemorationoftheBank’scentennial.
TheIMES conducts a wide rangeof studies on the theoretical,
institutional, and historicalaspects of monetary andeconomic issues. It also
gathers
monetaryandeconomic
researchandprovides it to the public.

Highlights of This Issue
1.3rd BOC-BOJ Joint
Workshop
2. Interview with Professor
Marvin Goodfriend,
Honorary Adviser
The IMES Newsletter aims
to publicly announce theIMES’ activities and themajor events held by theIMES on a timely basis.

1. 3rd BOC-BOJ Joint Workshop
The Institute for Monetary and Economic Studies (IMES) of the Bankof Japan (BOJ) and the Bank of Canada (BOC) jointly held the 3rd
BOC-BOJ Joint Workshop, titled “Challenges to Central Bank
Policies for Price Stability and Financial Stability,” on September
30, 2016 at the BOJ Head Office in Tokyo.
The conference was attended byabout 50 participants fromacademia, the BOC, and the BOJ.
They discussed a wide range ofissues related to central bankpolicies for price stability andfinancial stability.
The conference began with theopening remarks delivered by
BOJ Governor Haruhiko Kuroda.
He mentioned two points related
to central banking policies: (1)the interaction between policy
analysis and policy action is a
BOJ Governor Haruhiko Kuroda
basis for better policy making;delivers his opening remarks.
and (2) even today central banks
are being faced with a number of challenges in fulfilling their given
mandates and central bankers are, admittedly, not omnipotent. For
these two reasons, he emphasized the importance of opportunities tomeet for discussion and to exchange views and wisdom with eachother.
IMES Newsletter November 2016

2

In the keynote speech, Professor Lawrence
H. Summers (Harvard University) argued thattraditional central banking paradigms had
already become obsolete. He also mentioned
a need to partially reconsider his secularstagnation hypothesis1. He closed his lecturewith the implications of the new anduntraditional central banking paradigms formonetary and fiscal policy.
1. The hypothesis is that chronically negative
natural interest rates and the zero lower boundconstraint on the nominal interest rate are thepotential causes of the dismal economic growth or
financial stability problems in industrial
economies.

At the first invited lecture, Professor
Gianluca Benigno (London School ofEconomics) proposed a model for the secularstagnation hypothesis. He then set forth thepolicy options for leading the economy out ofsecular stagnation.
At the second invited lecture, Professor
Marvin Goodfriend (Carnegie Mellon
University, Honorary Adviser at the IMES)
presented his paper, “Review of the
Riksbank’s Monetary Policy 2010-2015,”

Professor Gianluca Benigno (London School ofEconomics) delivers his invited lecture,“Stagnation Traps.”

Professor Lawrence H. SummersUniversity) delivers the keynote speech.

(Harvardco-authored by Professor Mervyn King (NewYork University and the London School
Economics, the former Governor of the Bank ofEngland). He discussed the challenges to theconduct of monetary policy and themanagement of a central bank through theanalyses on monetary policy conducted by theSwedish Riksbank, the oldest central bank in
the world.

Professor Marvin Goodfriend (Carnegie Mellon
University, Honorary Adviser at the IMES) delivers
his invited lecture, “Review of the Riksbank’s
Monetary Policy 2010-2015.”
IMES Newsletter November 2016

3In the subsequent sessions, economists
from academia, the BOC, and the BOJ
presented and discussed four papers whichanalyze the effects of unconventional policies
such as negative interest policy andquantitative easing.

Masayuki Inui (Bank of Japan, left) presents hispaper, “The Power of Unconventional Monetary
Policy in a Liquidity Trap.” Yaz Terajima (Bank ofCanada, right) discussed the paper.

Jing Yang (Bank of Canada, left) presents her paper,“The Portfolio Balance Channel of Unconventional
Monetary Policy: Evidence from Mutual Funds.”
Professor Junko Koeda (Waseda University, right)
discussed the paper.

Yoichi Ueno (Bank of Japan, left) presents hispaper, “Term Structure Models with Negative
Interest Rates.” Gregory Bauer (Bank of Canada,right) discussed the paper.

José Dorich (Bank of Canada, left) presents hispaper, “Could a Higher Inflation Target Enhance
Macroeconomic Stability?” Ryo Kato (Bank ofJapan, right) discussed the paper.

IMES Newsletter November 2016

4

2. Interview with Professor Marvin Goodfriend, Honorary Adviser
Since being established in 1982, leading academic economists such as Nobel Prize winners Milton
Friedman and James Tobin have served as Honorary Advisers at the IMES（Please see page 6 for alist of successive Honorary Advisers）. Honorary Advisers advise the Director-General of theIMES on the institute's research activities and information exchange vis-a-vis academic circles.
Shigenori Shiratsuka, Director-General at the IMES, interviewed Professor Marvin Goodfriend,
who has been an Honorary Adviser since 2011, about the value of the Honorary Adviser System at
the IMES, the role of the IMES, and his opinion on unconventional policies which have beengetting normal in advanced countries.

Shiratsuka: Based on your six years ofexperience as an Honorary Adviser, what do
you think about the IMES’ Honorary Adviser
System?
Goodfriend: I have enormously enjoyed theactivities as an Honorary Adviser. It has beena tremendous opportunity for me. As aforerunner, the BOJ faced many challenges
such as difficulty creating inflation withinterest rate policy constrained at the zerobound. They were unthinkable until we
actually experienced them and they spreadaround the world. It is very important for
central bankers, myself included, to look atthe past, at home and abroad, to appreciate thescope for surprising developments in thepresent and the future.
Central banks should be prepared and not
be presumptuous about the future to provide
the nation with stable purchasing power ofmoney, that is, price stability.
Considering the value of the system fromyour viewpoint, I think your practice of
having two honorary advisers, one on theMonetarist side and one on the Keynesianside, works well. The differences of theinterpretation of monetary and financial
history and differing modeling preferences
deserve to be represented to the BOJ.
Shiratsuka: What do you think about the roleof the IMES?
IMES Newsletter November 2016

5Goodfriend: In order to understand central
banking, we need a foundation in the basic
theory of money, monetary policy, andmacroeconomics. It is absolutely essential tohave a coherent framework for thinking about
monetary policy and one that puts pricestability at the core, because price stability is
the unique responsibility of any central bank.
Andmonetary
policystabilizes
unemployment mainly by stabilizing thepurchasing power of money. So I think that
research and development of models ofmonetary policy is indispensable for modern
central banking. I should say in addition thathighly technical research is not necessarily
everything. There is no substitute forsomeone who has been in central banking fora long time and can provide modelers with aseasoned understanding of how models canbe made most useful for policy makers.
Shiratsuka: Of the economists youmentioned, which type would be moresuitable for central banking policy, an
economist who does more technical,
research-based work and uses mathematicalmodels, or an economist who is able to serveas an effective intermediary between
researchers and policy makers?
Goodfriend: Everybody is necessary. The
business of central banking requires bothtypes. There is no substitute for using
mathematical models to be coherent when
thinking about central banking policies. For
this reason, those people who know how tohandle them are very valuable.
On the other hand, there is a tendency for
those who work only with models to see theirmodels as reality, which may make modelers
less useful to policy makers than otherwise.

Marvin Goodfriend
 Present Position
The Friends of Allan H. Meltzer Professor
Professor of Economics, Tepper School ofBusiness, Carnegie Mellon University
 Education
Ph.D. (1980), Brown University
 Selected Previous Positions
Senior Vice President and Policy Adviser,
Federal Reserve Bank of Richmond (1999-2005)
Chief Monetary Policy Adviser, Federal
Reserve Bank of Richmond, regularly attending
the Federal Open Market Committee meetings(1993-2005)
Senior Vice President and Director of Research,
Federal Reserve Bank of Richmond (1993-1999)
Associate Director of Research, Federal
Reserve Bank of Richmond (1990-1992)
Vice President, Federal Reserve Bank ofRichmond (1984-1990)
Visiting Economist, Federal Reserve Board(1982-1983)
Therefore, a central bank needs a mature staff
with a wide range of skills to advise modelers
and make the most of research for policy
making. If both types of economists efficiently
work as a team, a central bank can consume thelatest results in academics intelligently anddeliver the best practical analyses to policy
makers.
IMES Newsletter November 2016

6Shiratsuka: Lastly, could you give me
your opinion on unconventional
policies which have been new normalinmostadvancedcountries.
Specifically, what should be the first
option when facing the zero bound?
Goodfriend: There are basically threeoptions.
Thebestoption
isunencumbering interest rate policy
which completely overcomes the zero
lower bound. The other options areraising the level of the inflation target
and balance sheet policy. But raising
the inflation target will not free youfrom the zero interest bound for sure.
The last option is to rely on balance
sheet policy such as quantitativeeasing, but that policy produces someside effects which might jeopardize
central bank independence.

Successive Honorary Advisers
James Tobin(Yale University)

Milton Friedman(Stanford University）

Stanley Fischer(Massachusetts Institute ofTechnology)

Allan H. Meltzer(Carnegie Mellon University)

John B. Taylor(Stanford University)

Kenneth Rogoff(Harvard University)

Maurice Obstfeld(University of California,Berkeley)

Bennett McCallum(Carnegie Mellon University)

Mark Gertler

Marvin Goodfriend

In the far future, central banks(New York University)(Carnegie Mellon University)
should target a low rate of inflation,
Note: Their affiliations are as of the time of their terms.
shrink their balance sheets, andposition themselves to unencumber
interest rate policy to make short rates
shouldShiratsuka：Thank you very much for yournegative temporally from time to timeinsightful thoughts on many issues.
against recession and deflation.
IMES Newsletter November 2016
Do not reprint or reproduce without permission.
All correspondence about this issue should be sent toInstitute for Monetary and Economic Studies (IMES), Bank of Japan
2-1-1, Nihonbashi-Hongokucho, Chuo-ku, Tokyo 103-8660, Japan
Phone: +81-3-3279-1111
Fax: +81-3-3510-1265
E-mail: imes.journals-info@boj.or.jp
URL: http://www.imes.boj.or.jp/english/index.html
See the next page for recent publications from the IMES.
IMES Newsletter November 2016

7Recent Publications from the IMES

IMES Discussion Paper SeriesNo. 2016-E-13“Market Liquidity and Systemic Risk in Government Bond Markets: A NetworkAnalysis and Agent-Based Model Approach” by Toshiyuki Sakiyama and Tetsuya
Yamada, Oct. 2016

No. 2016-E-12“Quantitative Easing and Liquidity in the Japanese Government Bond Market” byKentaro Iwatsubo and Tomoki Taishi, Oct. 2016

No. 2016-E-11“Durations at the Zero Lower Bound” by Richard Dennis, Aug. 2016

No. 2016-E-10“Sustainable International Monetary Policy Cooperation” by Ippei Fujiwara, TimothyKam, and Takeki Sunakawa, Aug. 2016

No. 2016-E-9“Simultaneous Estimation of Cost of Equity and Expected Earnings of Individual Firms
with the Residual Income Model” by Tetsuya Adachi, Takashi Asano, and Tatsushi
Okuda, Aug. 2016

No. 2016-E-8“Choice of Collateral Asset and the Cross-Border Effect of Automatic Stays” byHiroshi Fujiki and Charles M. Kahn, Jul. 2016

No. 2016-E-7“The Intraday Market Liquidity of Japanese Government Bond Futures” by Naoshi
Tsuchida, Toshiaki Watanabe, and Toshinao Yoshiba, Jul. 2016

No. 2016-E-6“Money Illusion Matters for Consumption-Saving Decision-Making: An Experimental
Investigation” by Yasufumi Gemma, Apr. 2016

No. 2016-E-5“Optimal Inflation Rate in a Life-Cycle Economy” by Takemasa Oda, Apr. 2016

Monetary and Economic Studies Vol.34 / November 2016
“Simultaneous Estimation of Cost of Equity and Expected Earnings of Individual Firms with theResidual Income Model” by Tetsuya Adachi, Takashi Asano, and Tatsushi Okuda

“Upstreamness in the Global Value Chain: Manufacturing and Services” by Kenji Suganuma

“The Intraday Market Liquidity of Japanese Government Bond Futures” by Naoshi Tsuchida,Toshiaki Watanabe, and Toshinao Yoshiba

IMES Newsletter November 2016