Governor’s notes from Jackson Hole 2024

CNB Governor Aleš Michl with Jeffrey R. Schmid, President of the Federal Reserve Bank of Kansas City, which organises the Jackson Hole symposium, August 2024.

The mountainous environment of the Jackson Hole valley, close to Yellowstone National Park, regularly plays host to the most closely followed central banking symposium in the world. The event is organised by the Federal Reserve Bank of Kansas City. This year it was held on 22–24 August. Most of the world’s central bank governors attended. Academics from institutions such as the University of Chicago, Harvard University and Stanford University presented previously unpublished papers prepared specially for the symposium.

These are my notes from the symposium, which I attended for the third time. I have tried to apply everything to the Czech Republic. None of it is criticism of the policies of other central banks. It’s solely about the lessons for us here at home.

The high inflation will be analysed long after we are gone, said Federal Reserve Chair Jerome H. Powell in his keynote speech.^[1] For the Czech Republic, I would add that the high inflation in our country was mostly cost-push inflation. The Czech Republic was greatly aided by the strong-koruna policy I referred to in my speech in Brno in November 2022 (Michl, 2022). The strong koruna made imports cheaper and hence reduced inflation.

Demand-pull inflation was also important and will remain so going forward. The cost shock was large and short-term. The demand pressures built up slowly and steadily. In the case of the Czech Republic, it is necessary to admit that interest rates were extremely low for years before the high inflation. They were below the rate of inflation for more than ten years, despite the fact that headline inflation was above the inflation target most of the time from 2017 on. Inflation-inducing monetary policy was therefore pursued in the Czech Republic. We now know that was a mistake.

Added to that was a period of public finance deficits. A public finance deficit increases inflation. Stanford University’s Hanno Lustig presented a paper at the symposium showing that fiscal policy should be responsible to avoid future financial crises and inflation (Goméz-Cram, Kung and Lustig, 2024) and that irresponsibility can also stem from central banks helping governments to finance deficits, for example through low/zero-rate policy. Again, this also happened in the Czech Republic.

In his speech, Chair Powell also said: “The time has come for policy to adjust…the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.” In my speech in Zlín in autumn 2023, I said something similar: “The previous monetary policy has had the desired effect. It’s time to move forward slowly and carefully. Whether or not we reduce rates – moderately, gradually and cautiously – by the year-end, we will stay hawkish and do everything to protect our country from more high inflation.” The timing differs, because in the USA demand-pull inflation dominated and the initial level of central bank rates was also different.

Our knowledge has its limits. The economy often does not behave in textbook fashion. Chair Powell: “The limits of our knowledge – so clearly evident during the pandemic – demand humility and a questioning spirit focused on learning lessons from the past and applying them flexibly to our current challenges.”

As for the Czech Republic, our main DSGE model failed to predict the inflation episode well. Benigno and Eggertsson (2024) showed that standard Phillips and Beveridge curve DSGE models are unable to explain the inflation surge and subsequent fall seen in previous years, and in particular that inflation fell without an increase in unemployment. The authors address this by introducing non-linearities into the model: when the labour market is tight (that is, when the unemployment rate is low and there are plenty of job vacancies) and a certain threshold is crossed, a decline in inflation may be accompanied exclusively by a drop in vacancies. FT journalist Colby Smith^[2] summarised this nicely in her report from the symposium. By the way, her article contains a photo of the wonderful symposium organisation team from the Federal Reserve Bank of Kansas City.

My colleague Oldřich Dědek and I described the cost shock in 2021 (Dědek and Michl, 2021). In traditional DSGE models, it’s mainly about the relationship between inflation and human resources (unemployment). But in the short term at that time, it was about the relationship between inflation and the supply of production resources, which dried up. There were shortages of parts. Supply chains were disrupted and commodity prices rose. Supply went down and inflation went up. Alfaro and Chor (2023) discussed the issue of supply chains at Jackson Hole last year.

In my notes last year,^[3] I mentioned the need for a monetary policy review. The Bank Board acted on this. We decided to commission the first external assessment of monetary policy in the history of the CNB (for details, see Michl, 2024b).

The above-mentioned short-term role of supply in the high inflation doesn’t change the fact that in the long run, inflation is about the quantity of money in the economy. When analysing this period, we should therefore distinguish between the short run and the long run, i.e. between the short-term supply shock and the demand pressures that gradually affect inflation in the long run through growth in money in the economy/low rates/borrowing/public budget deficits.

If you hesitate and keep interest rates too low for too long and then try to catch up and react quickly to the onset of inflation by hiking rates sharply, it can cause a whole range of problems – see Bauer, Pflueger and Sunderam (2024) and the notes of Norges Bank Governor Ida Wolden Bache.^[4] In the Czech Republic, for example, when the period of more than ten years of low rates was replaced by sudden rate hikes aimed at catching up quickly, firms began to borrow in euros instead of korunas and monetary policy became less effective (for details, see Michl, 2023, and Michl, 2024a). That’s one reason why we opted for a strong-koruna policy in our fight against inflation. It tightened conditions also for exporters, which were taking out loans in euros and were not affected by koruna rates. Last year this topic was addressed at the symposium by Yueran Ma (Associate Professor, University of Chicago) and Kaspar Zimmermann (Professor, University of Maryland). They demonstrated in their paper that a radical and rapid monetary policy tightening reduces investment in innovation and hence lowers productivity in the economy and paradoxically pushes up inflation in the future (Ma and Zimmermann, 2023).

The long-run stabilisation of inflation will now involve combating the quantity of money in the economy. This demand- or money-driven inflation may be more persistent. Interest rates – at least in the Czech Republic – can therefore be expected to stay higher than we have been used to over the last ten years or more, even though we are in a rate-cutting phase. Sometimes “less is more”. We need to have rates higher for longer and avoid “rushed, volatile, ad-hoc policy moves and experiments”.[5] It’s better to have a more consistent but overall more restrictive policy. The economy should be based on savings, not debt. If we are strict, we will one day prevent further major inflation.

PS:

Notes from Jackson Hole 2023:

Notes from Jackson Hole 2022 (available in Czech only):

Symposium programme, including papers presented:

• https://www.kansascityfed.org/research/jackson-hole-economic-symposium/jackson-hole-economic-policy-symposium-reassessing-the-effectiveness-and-transmission-of-monetary-policy/

References

Alfaro, L., and Chor, D. (2023). Global supply chains: The looming “great reallocation”. The Annual Economic Policy Symposium “Structural Shifts in the Global Economy” organised by the Federal Reserve Bank of Kansas City in Jackson Hole.

Bauer, M. D., Pflueger, C. E., and Sunderam, A. (2024, 22–24 August). Changing perceptions and post-pandemic monetary policy. Paper presented at the Federal Reserve Bank of Kansas City Economic Policy Symposium, Jackson Hole, USA. https://www.kansascityfed.org/documents/10337/pflueger_jh.pdf

Benigno, P., and Eggertsson, G. B. (2024, 22–24 August). Revisiting the Phillips and Beveridge curves: Insights from the 2020s inflation surge. Paper presented at the Federal Reserve Bank of Kansas City Economic Policy Symposium, Jackson Hole, USA. https://www.kansascityfed.org/Jackson%20Hole/documents/10385/Eggertsson_Paper_JH.pdf

Dědek, O. and Michl, A. (2021, 13 October). Krotitelé nákladové inflace (Tamers of cost inflation, available in Czech only). Mladá fronta DNES.

Goméz-Cram, R., Kung, H., and Lustig, H. (2024, 22–24 August). Government debt in mature economies. Safe or risky? Paper presented at the Federal Reserve Bank of Kansas City Economic Policy Symposium, Jackson Hole, WY. https://www.kansascityfed.org/Jackson%20Hole/documents/10341/Hanno_Lustig_Paper_JH.pdf

Ma, Y., and Zimmermann, K. (2023). Monetary policy and innovation. The Annual Economic Policy Symposium “Structural Shifts in the Global Economy” organised by the Federal Reserve Bank of Kansas City in Jackson Hole.

Michl, A. (2022). Policy for a strong koruna. CNB Discussion Forum. Faculty of Economics and Administration of Masaryk University, Brno. 23 November 2022.

Michl, A. (2023). Inflation: The road to the target. University of Economics and Business in Prague, Prague. 15 May 2023.

Michl, A. (2024a). The target. CNB Discussion Forum 2024, University of Pardubice, Pardubice. 23 April 2024.

Michl, A. (2024b). Taming inflation from 18 to 2% and paving the way for ESG financing. Central Banking Summer Meetings, London. 13 June 2024.

^[1] https://www.federalreserve.gov/newsevents/speech/powell20240823a.htm

^[2] https://on.ft.com/3X4TSJi

^[3] https://www.cnb.cz/en/about_cnb/cnblog/Governors-notes-from-the-2023-Jackson-Hole-Symposium/

^[4] https://www.kansascityfed.org/Jackson%20Hole/documents/10434/wolden_bache-Handout.pdf

[5] https://www.cnb.cz/en/public/media-service/interviews-articles/Ales-Michl-No-Victory-Yet-in-Inflation-Fight/