slices the valley of the wealth holdings. the more important impact has been on housing prices. and there is a much more direct channel because people buy housing with mortgages and so is the cost of mortgages goes down, it should have supported housing prices which begin let's be clear to have fallen dramatically, fell 30% or more of cross u.s. on average. but the evidence is a would've fallen even more and have had been even slower to recover without low interest rates. it's a more direct effect on economies were mortgages aren't variable-rate, like the united kingdom, the bank of england has said that low interest rates may have supported uk housing prices by 15-20% of u.s. is somewhat less direct because most people have a fixed rate mortgage. you need a good credit score to be able to refinance today defense of these low interest rates. but as josh's paper points out

the extent we believe that housing prices have been supported that would affect broad middle class and not the wealthy were for the top 10% of the income distribution, housing represents only 10% of the wealth portfolio compared to the broad middle class but it is the main financial asset. the more direct impact of quantitative easing on household that we look at in a report is on interest earnings and interest payments. subject of a direct effect. we don't even need to go to the one in anyone with the debt has a lower debt service ratio. for u.s. households you see that today's debt service ratio which includes the cost of interest payments and smaller principal payments is not at a level lasting into the early 1990s 20 years ago. ..

had my people under the age of 60 or have benefited because they have more debt and it's almost a linear effect. households under age 35 on average and $1500 per year to almost 3% of disposable income. it grew 35 to 44 benefit in $1700, 2% of income. households over 75 tend not to have dad are losing $2700 per

year through lower interest earnings. households between 65 and 75 lives about 2% of their income. there hasn't been a generational impact for sure. overall hard to see how this worsens inequality. i want to end with an open-ended question meant to spark discussion. we looked at the impacts of ultralow interest rates compared to what they have been. there is a very important question to what extent with the products of monetary policy. when you look back after history you've seen nominal and real interest rates fall quite dramatically. when you look across the economies and the 10 year government bond averaged 8% in 1985 down to less than 1% the nominal rate in 1985 and 2% on

average today. what explains this? we learned interest rate supply and demand fun. they pointed out long before the recession on one hand we have the rise of surplus saving many economies of the world running large exploits and also commodity exporters. at the same time we see a growth of demand. the investment rate than other advanced economies since the early 80s, you see a secular decline in the amount invested in physical capital. part of this reflects a knowledge economy and intangible capitals. part of it reflects capital group cost less. the costs come down but overall we live in a world in which companies don't see investment

opportunities. you read about share buybacks every other day on the press. many companies have decided to return the cash to shareholders because they don't see where productive investment is coming from. so if we are living in a world of secular state nation and one in which there are too few project of investment opportunities, there is a real question even with large-scale asset purchases when we see interest rates rise. the phenomenon of low interest rates may well process for years to come and maybe outside of the control of the federal reserve or other central banks. i'm not of time. [applause]

>> that's what happens when you don't read directions thank you both for a clear insisting statement. i'm going to keep the session short so we can get to the rest of the papers. there are two things that intuitively and my guide i wonder about. it seems to me there's a bit of attention here. on one hand he said all the monetary policy did a great job restoring getting us closer to full employment so that is a plus. and we say that didn't have much impact on the stock market said there's bad effects on distribution. if the quantitative easing pack such a big punch that helps get the economy stronger, how can we say it has such a small effect on stocks?

>> i definitely think the direction on lsap boosted economic activity, lowered unemployment. i don't know that it was an enormous punch. i think it's basically 2% gdp peak effect, which happens sometimes in the past year or so. so that seems inconsistent without enormous impacts on the stock market. my bigger point is any positive impact of low-grade unemployment has such strong progressive distributional consequence is that even if the actions didn't have enormous impact on employment, and the impact is so strong and progressive that channel works well. >> talk about the impact of low interest rates and purchase of governments. he wrote about this in the kinsey report. it goes to the heart answer

which is so did government benefit from this end shouldn't bat has made it easier to do more aggressive fiscal policy even though they didn't? >> yes. thank you for remembering. governments are clear direct beneficiaries. when you look at the payments it's much cheaper for government to borrow appear particularly for the united states were at the start of the recession the bonds from the neighborhood of four 4.5 years and it's now expanded a bit. it is a direct saving who can raise money more cheaply than they had. i would never suggest the federal reserve made monetary policy decisions as a remote consideration. it did enable the u.s. government to have a healthier fiscal picture than it would have otherwise. we can debate whether that should have been used on more

aggressive fiscal stimulus in the recession. >> do you agree with josh's view -- there was no reason the federal reserve could have been had it done last that congress would've done more. you agree with that? a political question. >> i'm not a political scientist but i'm an economist and empirically we need to look at the last seven years to see gridlock in washington. >> i think we can take a couple questions. for the microphone. we don't want to miss anything. >> i really like your paper josh. i just checked on a couple of websites. the median real household income has dropped substantially still

since 2008. it is hard to believe that is all part of a structural trend. so what you said at the beginning that there are problems with intentional policy designed is the right answer here. as you know, unemployment isn't the full measure of what's been happening in the labor market. we should also be cautious about not exaggerating how much improvement there has been. two points. first, you mentioned the stock market goes up but later when they withdraw the lsaps down i'm not completely satisfied with the argument partly because the assistance of the stock market dropped a lot in the aftermath of the recession. part of the recovery we see us back to something closer to a normal level. not necessarily the case that ending the lsaps would cause a

fall of the stock market. this is a policy that brought it closer to its normal level quickly. that was a policy decision. we could try to bring employment that quickly to its normal level. the other point is what you compared to fiscal alternatives. for the reasons we talk about including gridlock, i don't think that's the right comparison. the other tool used in other central banks have years. my colleague has been colleague has a nice empirical work examining differences between forward guidance and lsaps. there are important differences in how they work. there's a strong argument that don ken lay and over lunch about the extent to which the fed didn't use forward guidance at all until around 23rd team.

from 2009 2010, 2011 the extended good language, which basically said world a few are nine-month delay from liftoff. in the same way you're critical of fiscal policy you can ask questions about what were your counterfactual for the fed would've introduced much more forward guidance and look at distributional issues there. >> i just want to ask him if you think there's a distributional difference between forward guidance? >> that is what the results suggest that has to do with the effects of the premium versus the short rates. to talk about that during a policy break. the other alternative not considered in the united states but has been considered elsewhere is to have programs try to provide credits entrepreneurs and small businesses and they are critical distribution issues that the extent to which the monetary

policy helps large corporations to reduce their debt obligations and has not helped. the business startup rate has not improved since 2008. this to be something you could compare given the monetary policy that we are not going to come and fiscal authorities jumping in. a couple other possibilities could be considered in the lessons for the future. >> to be clear, in no way my contention that policies satisfactorily fill the demand and great recession. she made the most reliable way we could've done that was with aggressive fiscal policy we did not do that and that's why it's so critical of fiscal policy makers. to go back to your earlier question about how we can be sure that they wouldn't have acted better if the fed had not been so aggressive. to my mind the fed chair

communicated strongly that fiscal policy is a drag and yet still no response from congress. in terms of other counterfactual is another race to do my policy. i totally agree with that. maybe figuring out a way to give the fed the ability to provide $500 to everybody's checking account. they can't do it now for sure. i would also add housing policy. we did miss the cute transmission of lower mechanism or it's because people who could have refinanced couldn't because the loan to value ratios were too high. that could've helped a lot. this is not to say the fed did everything right. it is just to say what they did do question the right direction from a distributional angle.

>> i think the academic literature on forward guidance and effectiveness is more subject to debate than what it suggests. at the end of the day should economic conditions change for the better or the worse, the federal reserve and any other central bank in the world would act quickly no matter what they said previously. the second plane on funding for small businesses, europe has been the most aggressive towards sa man trying to promote securitization to small businesses. we are doing a research on this. the results are quite astonishing. if you take the e.u. as a whole and the u.s. they are roughly the same size in terms of gdp. u.s. the outstanding according to a study outside of london a

$3 trillion of credit and european is 1 trillion. despite the attempt to get credit flowing, that has not been a successful policy. whatever the fed has done right or not done right, funding for small business -- >> anytime you want to feel good about the united states, just use europe. the question is what could we have done that would've made it better. but only take one more question. bob sanderson over there and we will move to the second issue. >> banks. bob samuelson, "washington post." last week by removing who is a well-known strategist now works for blackstone put out a commentary in which he recounted the following arithmetic since

the low point in 2009 stock market evaluation has increased $13 trillion. but that he attributes 3 trillion, which is almost a quarter to the federal reserve's q. we policy is. that is a major part of the increase. by contrast your appraisals both of your appraisals is the qe had at most a modest effect on the increase of stock prices. could you explain why you think and i take the arithmetic to be tropical of wall street and what the fed is doing and has done and will do. could you explain why there's such a large gap in the markets and people watching people in the markets and trying to decide

what they're doing. >> definitely go with the economist. they fell 35%. that's one. and the analysis of qe we did not take the broader base economic growth effects. if the recession had been dramatically worse and corporate earnings would've been dramatically worse, how bad could it have been? the counterfactual is something we didn't measure. for reasons explained corporate profitability is up. low rates have helped companies play later lower debt service payments like they've helped households. overall we were living in a world where companies have done very very well, particularly in the u.s. and that explains the

outperformance. i will take a look at those calculations and see where we can difference. >> i have outlook data. i haven't heard this. i would take a look. i would say i occasionally see traders traders overestimating it might be the impact of federal reserve decision and my guess is because they live in such a short-term world. if you look at the empirical research on train for and if you stop there you might get a dramatic effect. but then the price goes up when it's announced and decays over time. getting the impact rather than the day i remember when they announced it in stock prices jump through the roof that is part of a difference between a traitor view of the world which is what happened day-to-day versus the over the entire time span. >> let's say he is right if

people got on the stock market make more money than people who don't bet on the stock market. so with e. was right and if the effect on stock prices with larger as you discussed in the literature it even the other things including house prices would that make a big difference? >> a real course rate is between what it does to stock prices which are concentrated at the hop versus housing prices distributed if i'm wrong and there's a much larger impact absolutely conclusions need to be modified. >> i will introduce the second panel so we can keep this going. the second paper is by martin roche error occurs at the university of chicago and andres poster at the new york fed. what they look at is okay is great to say this is good for housing prices, but if you happen to be at the misfortune

of living in a community where the housing prices were under water, were quite have the luxury of refinancing. their paper looks at inequality regionally rather than across classes. why don't you go sit down. >> outtake is different than the other papers. we are talking about people as we are space. greatest monetary policy have more of a bite in the places we do relatively bad or places we do relatively good. in terms of their recent economic performance in the u.s. are within europe there's a lot of heterogeneity across different places. las vegas nevada versus dallas, different economic performance during the recession.

unemployment rates in las vegas gone up to 13%. dallas speech about 7.5%, 8%. same scenario in europe where spain is much harder than it is in germany. when we think about monetary policy, we think of it is a pretty blunt tool. there's an interest rate some policy tool moving them because we are talking about monetary unions, by definition the interest rate is constant across the states of the union. so what we want to think about is the spatial component of monetary policy also is the result of variation in collateral values. the transmission of monetary policy to real activity. you've heard lots of stories about how monetary policy affects rail activity. whose home prices, lowers the

cost of credit making firms borrow more expanding investment which might also cause them to hire more workers. to the extent some of the transmission from a given monetary policy action to rail activity is dependent upon local collateral values and to the extent local collateral values differ dramatically, monetary policy could then have differential impact across space. and i'll show you this present data that the places where collateral values are most oppressed sometimes do the least amount of response in terms of really today to a given type of monetary policy. what we do in the paper is two things. i spent almost all my time today on the first part, which is data. i will show you a bunch of data

around the first quantitative easing. not because it is different than other monetary policy but because they contain it exactly. i will show you the response across different regions in the u.s. to some type of collateralized funding. in this case exclusively on refinancing. our point is this applies to broader types of lending and much broader types of monetary policy be used as a case study quantitative easing in the refinancing channel. i will show you data about how refinance being was much stronger in parts of the economy in parts of the u.s. that will translate into some aspect of spending local rail activity. the second part of not going to spend time on today as we try to write down a quantitative model that tries to put in collateralized lending channel

where there's two types of shocks in the model. one is a shot to local productivity, something that makes las vegas doing worse than dallas. there's also another type of shock which is collateral values. they might be causally correlated. it might cause collateral values in one place to change more than another place or they might be arbitrarily uncorrelated. the shock will determine the distributional facts of monetary policy and also the aggregate effect of a given monetary policy. if we lower interest rate than the places in the country wanted to bar the most or have the most demand for credit aren't actually able to get the credit because collateral values are low and can make monetary policy less effective in the aggregate than otherwise. correlation between collateral shock and product to be shocks

or some other local driver is a key correlation that determines the distributional and the aggregate effects. i'm not going to spend much time but that will be the key insight from the model we write down. from the empirical part of me is a lot of data. as a case study quantitative easing the first one and i will get refinancing behavior and then we use data from the home mortgage disclosure act which measures mortgage origination and mortgage application activity in real-time. we use the micro data that is accessed from within the federal reserve that could database by day. you could get very fine type of temporal response in terms of web the monetary policy -- when the mortgage activity takes place. we also used data from aqua

facts that has the credit risk insight servicing data set which merges credit records into applications with mortgage origination activity to save large amounts of information about the borrowers and their loan to value ratios at the time of refinancing. a bunch of other data sets as well. those are the main two. the first picture you should see here is the solid line is refinancing activity in the aggregate measure of the mortgage brokers association and the dashed line is the 30 year mortgage rate rolling average overtime changes. right at the moment every picture i show you the red line is the announcement of the first quantitative easing program in november 2008. at the moment orchestrates valid

refinancing a committee increased within the u.s. at that moment. the second picture shows the dark shaded line how much mortgage activity was due to refinancing and how much to new origination. almost all of the cavity responded after the first quantitative easing. there wasn't a whole bunch of homeownership by him at that time. that's what we're going to focus on refinancing in the paper. in the back of your mind we should know what defines faith as we've been talking about. collateral and locations will have at the moment quantitative easing takes place. what i show you here is the loan-to-value distribution of our worst in five different u.s. cities at the moment the first

quantitative easing took place. the bottom line is las vegas in the red line is how many borrowers have at least 80% equity in their home at the time of quantitative easing. the moment takes place in las vegas in november 2008, 20% of borrowers have at least 80% equity within their house at that time period where the comparable number in philadelphia a 70%. you can see the amount of borrowers at risk to refinance differs dramatically across different cities at the inception of the first monetary action we are focusing on in this paper. the second thing i want to show you not surprisingly this is well documented the correlation between how many borrowers are underwater on the vertical axis

or at least have loan-to-value ratios above .8 and the change in the unemployment rate up to 2008 november is highly correlated. the places hit hardest in rail activity measured by the unemployment growing up was for the most borrowers who are underwater. there is this correlation between relic today unemployment rate and house declines which make borrowers underwater in different cities. gary's pictures i will show you a few pictures like that and my remaining time. what i've done is clumped all of the nsa for which we have data. think about 300 msa in the u.s. waited into quartiles based upon how many borrowers are measured by a long value ratio of .8 at

november 2008. the bottom line will include las vegas where there's a lot of borrowers underwater. i referred to does is hide long value ratio places. the top line is the lowest quartiles of borrowers. philadelphia, seattle commit these types of magic. at the moment the quantitative easing takes place committees see a spike in refinancing activity. you see a spike in refinancing activity that is much larger in the parts of the country doing relatively well. these are going to be loathes loan-to-value typefaces. this is an application data. the high-resolution data. you can see applications back immediately after the announcement. in the country doing relatively

well. that is on origination data using art =-equal-sign merging of credit records and mortgage data and you can see the increase in refinancing activity in the data set between the high and low loan-to-value ratio but it's delayed a month or two because it takes time when we apply for a mortgage and when the mortgage closes. this is actually origination of the mortgage and even though the policy place, you see big effects in january and february because it takes time between when an application turns into an origination. so what about people removing equity. this is one channel that link to real activity in the economy. you basically lost her job the economy and suffering. you have equity in your house and want to refinance when interest rates go down. you might remove some equity he might be able to use for current

consumption. you can see the amount of equity being removed from the refinance thing during the refinancing process. quantitative easing was much higher. you can see they tapped into their home, remote equity during the refinancing process more so than in the cash out refinancing. before i show you the next picture the monetary fix somehow still use we need to think about. the key thing to keep in mind is house prices fall a lot in all areas. monetary policy might have stopped house pricing from falling more than one region than another but it still didn't cause people to get equity in their house. people in las vegas had no equity in their home in november november 2008 and monetary policy might've stopped it from getting less.

the key differences that didn't help at equity back in people's houses. house prices continue to fall for the next two and a half years from the start of the recession. this is just a measure on spending. we have one measure that we look at in the paper and that his new auto purchases. you can see in terms of spending on cars or at these purchases of cars they were tracking nearly identical with each other. these delayed by a couple of months. by the time the origination started and turned to origination and took three months before showed up in spending which is exactly what we expect if they needed to tap into equity before they could increase their spending. you could then see a pretty big difference in spending measure by new car purchases between the places that have equity in their

home in the places they didn't have equity in their homes at the time of the monetary policy inspection. two more sides before i conclude, the first of which is this a common feature of all recession and the answer is we don't find evidence. what i compare now in the paper is the 2000 recession, about the change in house price with the change in the unemployment rate. there is a strong relationship between unemployment growth and how much house prices change during the recession. the correlation was not there in the thousand one recession. it was a weak correlation between house price growth and unemployment changes at the local level during that recession. when we look at differential financing behaviors across msa not how much equity they have but unemployment changes, we

don't see any differential response between the two regions in this recession. if anything a stronger response in the country with a higher unemployment rate in terms of preventing. the correlation between collateral shocks in something like unemployment driving the differential heterogeneity during the recession. just putting a little bit of the back of the envelope numbers on some of this. as we go through and how much do you refinancing cash out and how much due to mortgage recess. we have a whole bunch of variable rate mortgages we luck out. would that get a home much of ways household can get cash into their hand through the interest rate change and you could find at the totally fact we find in terms of cash out and can

function, home equity lines of credit, refinancing cash out and reduction or changes in mortgage payments, 15% went to the bottom quartile. 30% went to the top quartiles so you could see the distribution affects for helping more the places doing relatively better than the places doing relatively worse. this is just my summary. this import to understand the interaction between regional heterogeneity. in the u.s. and europe as well. we might think the collateralized lending channel might have an effect we need to think about entering the great recession that monetary policy by our estimate was exasperating regional dispersions, helping the country doing relatively better. going forward a whole bunch more

things about who holds the asset and whether we could think about optimal policy. that's it. [applause] >> now will hear from mark sandy permitted analytics tool as long as i've been a reporter is someone we turn to you to help us think about regions of the country differ. mark. >> thank you dave. i can remember my first conversation with you and i can remember you saying that doesn't make sense. i literally remember 25 years ago. actually, you're right. i wasn't making a whole lot of sense. let me say a few things. first i enjoyed the paper very much. the understanding that the efficacy of monetary policy and

i'm very sympathetic with your two premises. one that if you've got an economy with a lot of different regional economies it impairs the efficacy of monetary policy in terms of sensitivity to the monetary policy change in the timing. that is intuitive and feels right to me. also the monetary policy changes can have different regional economic consequences. also looking at business cycle is over 25 years i think that makes a lot of sense to me and is very intuitive. i do have some observations. first is that i think you setting your paper this is a case study. it is very partial equilibrium analysis. you focus nicely on one aspect

of trading six monetary policy in the impact of none is the refinance channel and cash out with straw. only one of many and they truly understand monetary policy on regional economies has to be considered more broadly. one example of that would be the impact if you read low interest rate on our readjustment. you mention this in the paper and i think you are right. you're using the wrong counterfactual. you set it up here. you were lucky not to change and the payments resulting from declining interest rates. the real counterfactual is what would've happened if the reserve have not lowered interest rates. the impact on the hard-pressed regional economies would be much more severe. if you go back to the key index

rate for most of the subprime arms readjusted at the time was 4%. right after qe was zero and i made a huge difference. i can remember a lot of concern at the time about exploding arms and what impact they would have from a readjusted. the fact they did not readjusted us a huge boost to regional economies like vegas to california to miami to arizona. very important. various other channels that matter. lower interest rates about the banking system in lots of different ways. lowering cost of funds is key to the heart press banking system. one might argue the lower interest rates were quite helpful in bringing out mom-and-pop investors that came in and caused house prices to

bottom out and to rise without lower rates committee investors couldn't have come to the degree they did. certainly not as soon as they did. also a lot of second-order effects. one thing you point out is the impact of the cash outs on consumption, auto sales. the benefits go primarily to one of the hardest pressed region and that is the industrial midwest which is getting hammered by the collapse in the industry. there was a case for the lower grades the cash out refinance helps the economy struggling to a significant degree. even if you're lifting a stronger economy more than the weaker economy because of the mobility and the economy to do adjust more quickly and unemployment falls were rapidly

in places like nevada, arizona, california because texas economy is doing better and you see a pic up quite substantially. even if you only list the initial regional economy has a second order which is very important. the bottom line when you consider all of these things, to obviate the result. it mitigates it to a significant degree. look at employment got creamed in the downturn, california arizona, florida. since the bottom of the recession, the national recession employment and its economies are sent to employment everywhere else was up 8%. those economies -- job growth in those economies has been

stronger than the rest of the nation since 2012 and by orders of magnitude, current job growth is 3% year-over-year compared to 2% of the nation. lots of other things going on, not just qe. i think it highlights the point we need to think about this in a broader, more equilibrium sense. a couple other observations. one other observation is this is a case study in the field idea syncretic to me. for example, if i were constructing a scenario for a construction today and the stress testing every year, if you look at the last stress test scenarios that generated it, it was motivated by a global downturn, the european crack up. so if that is the motivation if

that is the cause of the next economic recession struggle within the responses to lower interest rates, if he affected that would be the value of the dollar and benefit the same regions getting hit by the slowdown in global activity. it depends. the case study is interesting but i'm not so sure it translates into other economic shocks. it does depend on the shop and understanding the impact across region. a final observation is these relationships may be changing pretty rapidly because the financial system is changing rapidly. have a downturn 25 years ago before interstate banking, regional impacts would've been much more significant. this go around we had a more nationalized banking system.

when indie mac went belly up in san diego which is a very large california blender, wells fargo came in to fill the void into fha lending. the regional impacts are much less significant and ill be much less significant in the next go round because the banking system now more national, but the shadow banking system is filling in the holes and is truly national international is that when the feature mitigates heterogeneity of the result could change in monetary policy. let me end by saying a couple things. but they were point number one. the papers really good and i agree with it. it's very intuitive. miscast in a final point. number one policy implication is in economies that have more rachel had originated a combo

pda to more aggressive monetary policy. this is patently obvious in the context of europe and the european central bank. regional dispersions are much greater than regional dispersions in the united states and not would've argued for a much more aggressive ecb and even the. we got just the opposite. that's why we've got such very different results here. the second implication in an economy with regional heterogeneity commie dietmar fiscal stimulus or less fiscal austerity. not also is very clear in the context of our experience, but certainly the european experience. but posterity almost immediate neighbors very good and much more so than it would have been here in part because of the great disparities in regional economies across europe.

finally on policy, this might be more controversial. it also argues fiscal policy should be used to help facilitate monetary policy. we got a good example of that in your case study open enough for refinance thing and that was the heart program, home affordable refinance program first implemented in 2009 every event in 2011. this cleaned out the channel and nasdaq today 3.3 million homeowners in the very distressed state guy refinancing because no longer with the ltv criteria for refinancing for a loan. it made a huge difference to those economies. there is a lot of political

economy issues with regard to the statement fiscal policy should be used to help support monetary policy and vice versa. smart policy going forward just need to think about how to work together to clean out the channels to allow monetary policy to work more effectively in recessions. thank you. [applause] [inaudible conversations] >> -- the new york fed who worked on this paper and i will say on his behalf anything to do with anything they think about -- my favorite was somebody from the fed gave a paper at the imf and said when i

use the word we i am not talking about her and me. i want to pick up a little bit where mark and dave that kind of so were questioned. monetary policy works as an economy as a whole. it is hard to target particular regions. is there any lesson here for how monetary policy could have been different? >> you've got to do more. at the end of the two places where people have the highest to consume aren't able to borrow and you want to stimulate aggregate. that is your goal. your targeted aggregate unemployment rate you might have to do more because you're not targeting people who had the biggest change in interest rates. >> i agree with that. >> i think you raise the question about fiscal policy but

i would've put it differently. >> of course he would. >> if you know your monetary policy would work better in some regions than others should you structure your housing policy to complement what the fed is? in other words, should they have done more on the fiscal side for the las vegas, took a long time to get the acronym. is that the lesson? if you have housing and you know monetary policy in a world with fixed-rate mortgages, should they have designed fiscal policy with this in mind if we had to go through this again? >> yeah, that is the lesson. i would say in all fairness fiscal the income like they didn't understand this and it's like they didn't try to grapple with it.

i mention harrop, but there is hand thinks the fha did. there's a zillion things designed to address these regional problems. saying things and putting them on paper and executing the context of the different parties involved and also given the complete mass and lots of different levels in servicing any underwriting originations. a lot of moving parts here. it was hard to make it work well. the one program that worked in my view well took time to get it going but at the end of the day with a slamdunk success. 3.3 million people, mostly in hard-pressed areas. nevada to florida, arizona california. they were underwater.

by the way i live in philadelphia. i don't feel like i have a whole lot of equities. i wish i had a home in las vegas right now. much less so than there used to be. i think the heart program work exceptionally well. the third thing i said about losing fiscal policy of course you have to have a prolonged attenuated economic problem like the great recession to give you time and a more typical economic downturn that doesn't work well. >> fiscal policy in general does have regional components built-in automatically. it was having some effect because of his treatment under water, but the key thing is unemployment benefit extension

in food stamps and all of those things set to act when people are out of a job. those are automatically set a so fiscal policy is dealt in. there's different ways we could cut a check to people in las vegas. some of that bailing out under water, some extending unemployment benefits. >> i don't have a bailout at all. this is danny to fannie freddie to friday transaction and make them better off because it reduces it. >> other people are being backed up. so there is some in the background some of this going on. >> i thought the loser was the person who held -- >> from their expectations and

expect pre-pays. they were underwater. >> it's a slam dunk but it happened sort of late. it happened in 2012. so the subprime borrowers were very prevalent and that could not refinance under the program. if you compare to a world for mortgages we don't have to underwrite the loan the transmission was quite a bit weaker. >> mark made some observations about europe. when you start thinking now there's two things the dispersion is bigger so we know they're bigger than dallas versus las vegas. they don't have an integrated fiscal system. the stabilizers we have built into our system doesn't exist.

we are thinking about monetary policy as being the tool of the european union with the reduced distribution affects. you don't have anything in the background to come in. that is why you see now that cut checks every time they want to cut a check to people in greece as well as the u.s. is built into the political process that las vegas got more chicks than dallas. >> a question back there. >> good morning. tom county from the afl-cio. thank you for a very interesting paper. i would like to try and roll the question back a little to something josh asked and make that connection. we know contraption agronomic

policy is essentially egalitarian and expansionary policy makes sense. you're going to be improving the labor market, good for wages good for jobs. some capital interest rate service payment between groups. but the question is could we have done better? josh kicked it off by saying monetary policy versus fiscal policy. since talking qe and want to draw implications of future policy, let's pull it back to monetary policy versus another form. of course josh started saying some thing so you must get to the policy implication and how we might improve future performance and make monetary policy more egalitarian even if it's pushing in the right direction even better.

josh started with the idea of giving the fed the power to send people checks directly. that would be a good way of doing things. if you think monetary policy is some form of transfer funds between groups this goes to everybody getting mad and the fed can drive back again if it ever wants to pull liquidity out of the system and use its existing powers. and get people to redeposit firms. >> you see any line? >> the policy is about buying resources. government spending. i want to make a list of things. the other thing is to recite directly. mark talked about work. in terms of the housing market it could've been so much more to add people been able to set up

some mechanism to jump through the process so you can't direct access if you want it. every time i have to pay $1800 in mortgage insurance. i would like to put that on the agenda. can we do something about the question about having to pay for fantastic mortgage. defaults on property rights and so on is the justification every bank will tell you. it's a fantastic fixed cost of refinancing. that is a policy consideration. >> one-liner list. >> i've advocated for a advocated for a long time something caught asset-based reserve requirements. for instance a mortgage is that directly. you could have requirements based on the state of housing markets. you could do mortgages in nevada versus new mortgages in new york. very applicable to europe right

now if they had some sort of asset-based reserve requirements game. how about bringing back marginal requirements. one of the things that is driving monetary policy as fears of an asset bubble. let's not torpedo higher rate that might affect investment, the exchange rate and housing if we are worried about an asset bubble the fed should be getting back into the business of adjusting. >> do you want to respond? ..

a lot of interesting ideas and a lot of negatives and positives but the one thing you did not mention which i think would be very useful in the context of future crises and recessions would be countercyclical capital, right? right now they're pretty much sat through the cycle. in fact, one could argue given the way they are implemented and likely to implement in the future third distressed testing process they could very well be procyclical. and that is exactly the wrong way. you would want to set up a system where you have capital standard set countercyclical. some countries are doing this. if you go look at macroprudential responses to

essential housing bubbles in new zealand or australia or even the uk they are taking this countercyclical stance. >> don't we have countercyclical capital buffers? >> we'll see how this works but -- >> basel iii spirit we'll see how this turns out. >> thanks. i'm john from the federal anything as they should not be held against them. i think this is a question for erik and so what your analysis shows was the lack of a positive effect in this sort of low, high ltv region. i'm wondering if the same nose could be used to show the absence of a continued negative trend in the same area? so in particular look at the faults and it defaults that were happening. was there anything around that time if we do the same sort of

pictures, you would see much higher default initiations in these high ltv regions? and did not suddenly change right around the time of qe? is that an avenue we could sort of add to the ledger on the other side? >> to declare everything nothing is about levels. everything is only about the differences. that's kind of the design of these regional things. anything that is a general equilibrium could push everybody up or down and this is on differential. think about as not the regions are not helped at all. it's just their health relatively less. that's the first thing. when you look at things like default or house price changes or things we looked at, some of those you don't see much differential response. if anything the pattern is when you have to swing a little and looks like a better regions having less house -- part of it is the bad regions were overvalued to begin with. people want to talk about

propping up house prices. which is affecting the trend back to equilibrium. sometimes i can go fast slow. we know these bad regions were going down much more than the good regions just because they're much more overvalued. you still see the. when you look at the slowdown coming you can see much evidence of differential effect between -- [inaudible] >> you don't see very much. there studies that show when payments are lowered, defaults substantially sort of on the back. >> we looked at that. we have it in the payment reset and it does look that much differential between the two regions. it could have aggregate effects but would only take at the relative effects. it was anything else adding up in the relative effect between these two, the high and the low region. >> let's stop and we can revisit later. we'll take a break. i'm going to try to hold to

about five minutes switching to close been back on schedule. there's coffee and pastries in the lobby. thank you, guys very much. [applause]. [inaudible conversations] [inaudible conversations]

>> a brief break in this discussion on monetary policy as the crew resets for the second of three panels. this forum examining quantitative easing or the purchase of bonds and how that affects other economic conditions and indicators. this is hosted by the brookings institution and we will resume live coverage in about 10 minutes on c-span2. a couple of news stories related to the economy. u.s. manufacturing, from the ap today, says the u.s. manufacturing growth accelerate last month for the first time in six months propelled by more new orders and an increase in hiring. the institute for supply management which is the trade group of purchasing management said its manufacturing index rose to 52.8 last month from 51.5 in april and that the highest reading since february, evening reading above 50 signals expansion. u.s. construction spending climbed in april to the highest level in more than six years.

healthy gains in housing companies than for non-residential construction. construction spending advanced to point to present enable and that is the highest level since november of 2008 from the commerce department -- 2.2%. the use of senate will gavel in just under an hour for more work on the u.s.a. patriot act. debate expected in possible votes later today. we will have live coverage of the senate here on c-span2. also to let you know kosatka when republican senator lindsey graham is about to make a presidential campaign announcement in the state capitol in columbia. to be the ninth republican candidate to announce. it is live on c-span right now and we'll take your phone calls. senator graham has the defense plant in new hampshire and iowa this week. while we wait for this policy forum to continue, here at the brookings institution, a look at the senate ongoing debate over the u.s.a. patriot act.

>> and for more on the future of nsa spying powers and to sort out last night dramatic sunday session were joined by niels lesniewski. where do we stand as of right now on the legislation to replace the now expired patriot act? >> guest: the next thing we're going to see is with us of having voted to proceed to and take up the u.s.a. freedom act which is a bill that passed the house with a 338 vote that would be the vehicle for the debate that's going to be had basically today and tuesday and made into wednesday. but what we were already getting is that late last night before the senate adjourned, mitch mcconnell, the majority leader has been a critic of the house bill from the beginning said that he wanted to amend it. and late last night richard burr chairman of the intelligence committee, republican from north carolina,

announced essentially made clear what his his intentions would become or to step in what his be in terms of amending the house bill. the biggest thing that is not as of late last night or early this morning is that he will try and amend the house bill to provide a year-long race period for transitioning the holding of the bulk phone record from the nsa to the telephone company. the house bill only gives 180 days to do that. he wanted to be a year in the intelligence community says that they can do in 180 days. the obama administration backs the house bill, but he has been concerned about that from the beginning and is trying to push it up from 180 days to a full year of the changes would hold of these records, the biggest probably most headline grabbing part of the u.s.a. freedom act. but what about the other

component of the patriot act that expires the lone wolf provision the roving wiretap provisions are those included in what would be the new u.s.a. freedom act? >> guest: yes. so the other provisions which in fact mcconnell tried at one point last evening to renew on their own without what we would call section 215 authority for the bulk collection of records, those would be revived as well in any legislative vehicle that would move forward. those are less controversial provisions presumably, but it's not been entirely clear how effective that they necessarily are or how often they have all been used partly what you hear some senators are particularly served on the intelligence committee say is that they have been used some more what they're effective -- effectiveness if they can't really say so that's

the problem in the intelligence community is often can't tell people how you're using thinks. >> host: does a question from a call in our first segment. are there numbers of how successful the patriot act has been? >> guest: i do not know of all those notes off the top of my head. there were some people in the intelligence community who will put outnumbers regarding the success -- >> and veronika selezneva of northwestern and martin snyder of the stanford. they built an economic model that helps us think about some of the surveys of consumer finance data john that helps us think about okay, if not for changes coming changes differently for different sets of people in the economy. and when we think about the distribution impact of quantitative easing, we would try and answer the question does it increase or decrease in equality, you to look at the different categories of people

and how much of their wealth change because it's a question of summing up the winners and comparing them to the losers. so as you hear the use a model where the fed sets out increase inflation which is kind of a prophecy for qe come what happens to different groups of people, different groups of homeowners? so mattiace will get the initial presentation they were very pleased to have the former deputy finance minister from canada who's done a lot of thinking about these questions now blackrock to respond. thank you. >> good to be here. this paper touches on many of the same things you are talked about in the first presentation the difference is we talk the approach is more from the perspective of formal economic modeling. as we have discussed monetary policy works in part by moving interest rates both short-term relief by setting the federal funds rate to some extent the long rates if you think of

quantitative easing having some impact on the global curve. perhaps most importantly all through expectations that if people expect high -- we want to document exactly how large it would be for alternative policy. a form of economic model to figure out the consequences of those changes for macro aggregates and also for developing. compared to the previous papers same question, more applied to formal modeling perspective. the motivation for the paper that goes back sometime. now this is a concern that is very widespread with the recent changes in the economic climate the market i both grew up in germany and germans have a pathological fear of inflation. one interesting thing for us when you grew up in germany, you learn inflation is bad. they tell you in second grade and they tell you it's bad because of -- the reason you

talk about is -- grandmother loses her money. lady gaga graduate school school and have a bunch of monetary models all monitoring models using grade schools are modeled on one person. there is a kevin households. there is no retribution. that is different to what we learned. what we're trying to do is use a model that is different types of people so distribution can happen and figure out whether what we learned in elementary school makes any sense. so that's the over all. so the first step of the program is to document in the data exactly who holds nominal assets as well as nominal do. if you are not even to lose quantitative.com value the value you have to get your a borrower,

if inflation because the real value of the mortgage insurance. first thing you have to do is document who has what in the economy. and we use the 2013 picture of us. a key part of that work is to distinguish asset let those the majority. they think about changes in inflation expectations such as an announcement of a higher inflation target this is short and long-term duration carefully. if you have money in an account with a daily changing interest rate, interest rates will adjust. on the other in figure 30 mortgage or 10 year government bond prices of those will be highly reactive. in this undated we document not just who owns what but also with the average liability for different groups in the economy. i'm going to talk about the data

in more detail entry one picture with the economic aggregate. this shows the overall as the president of the u.s. household. take a look at the flow of funds and some of all the nominal's. nominal means in u.s. dollars because that's what is affected by change and inflation. so the green line is the assets and then the solid blue line is the direct massive debt, mortgages. also some indirect holdings. the household sector owned firms their stocks and mutual funds and the corporate sector its of has that also. so if debt gets to inflation you would expect the we value of holding the corporate sector goes up also. the total debt the blue line

essentially -- to take account of this. there was a huge increase in the liabilities and advocate of household sector after about 1980. you can see just before the crisis and dashed blue line and the green line coincided. for a short moment with u.s. household sector being balanced. that's very unusual because traditionally the household sector -- the government that was financed by the u.s. household sector and that changed dramatically from 1980 until 2006 or 2007%. this reflects a huge inflow of funds from abroad. by about 2006, essentially all u.s. government debt on average,

of course that not every single one because there is huge difference is in holdings but the over all investments of the four sectors use economy was equal to government debt. that's kind of one thing that has changed and is relevant for potential distribution implications. after the crisis future leveraging, so both lines drop very quickly and so now there's a new gap opening up. this is the picture would be more interesting, redistribution and the household sector. huge liabilities come if you look into that household kevin households different liabilities. that's what the rest of the paper is. you can do with his accounting framework many different experiments. the one i want to show you today

for the most part is essentially an experiment of raising future inflation. is is related to the target. we have a period of its zero interest rate not just you but also in japan for many years which has raised questions to be savored have some higher inflation target. to figure out what would happen if the fed were to announce a new inflation target of 5%-the previous target. it can go up and down anyway we want. the experiment is what i'm going to show you is the outcome after this announcement the rest is fully participated. if there is the repeated surprise, people don't quite believe what is changes to the future also everything is the same only bigger.

in our experience because everything is anticipated, this will lead to a parallel. the nominal rates will jump by 5% to compensate for the higher rate. so here is just from the data and assumed experiment the impact on the different types of households of this redistribution. the most important one to consider are these three, so the first group is the renters. these are households of different ages who have to rent their home. at the bottom you see the rich and the rich is the top 10% of net worth. we distinguish the ridge because it is well-known the wealthiest edition is highly concentrated. so a small percentage, group at the top, we look at those simply. what is left is essential everybody else, people who are not rich and own their homes.

middle-class homeowners. what we see is the change in wealth from this inflation path for each group expressed any percent of gdp. the first thing you see this right is not affected. they are renting a house. they are also not rich but have been assets. the losses are essentially coming from a group which is the old, rich. look at the negative numbers. it is the rich people over about 55 years of age who are taking this hit. this percent of gdp but it is for a group that is only 2.5 years so each group makes up only about one or 2% of the population so it's 1% change in wealth. they are losing, because the older rich have a large portfolio of the bonds and savings. we talk a lot about the rich

being highly invested in equity, and it's true the rate is higher for the rich but because the rich are so rich it still accounts for multiple holdings. that's why where the losses are. they gains come essentially from holding market. the main source of that is mortgages and the people who have mortgages are the middle class and middle age. if you are rich you're rich enough to have a mortgage so the top 10% really have any doubt at all. if you're very old you've probably pay back your mortgage. if you're very young you haven't bought the house get. it's the middle age range. you see from age 30-50 large gains close to 1% of gdp for the screw. these are groups about 2% of households. so for them it's a huge change in wealth just because the

mortgage is very large compared houses and compared many people have mortgages that are multiple other household income. essential to a large flow from the older rich to the middle class, middle-aged. that's an interesting on its own but the next is to figure out what is this flow of wealth. that's to the macro economy. you need to understand how the behavioral of the rich old -- cancel out in aggregate or is there something that happens to the macro economy. different types of households, different welcome incomes. also preferences. where preference into because we want to capture the fact a fraction of households are financially constrained. will have some dirt on your consumption because of reactions in change to your wealth.

we focus on housing sector. we saw market data very important part. depend on how house prices react. we also distinguish two segments of the housing market, small and large. i will show you in the second on this chart. the way the models were, think of this is being set in world markets but the housing market inside the country. repercussions for the housing. and then what we do we calibrate the moral -- the model to u.s. behavior. we essential going to change the wealth distribution based only from the data. will take the middle-class middle-aged in our model and make them richer or lower the

debt in line with the data, take the older rich in our model and make them poor compared -- the same amount what's in the data. let me show you kind of the main points from the result. the first is that housing prices. zero to 25 years. what you see price go up but they go up only for the large houses. they don't go up at all for the small houses. that'sthat something was surprised but initially that makes more sense. they gains from the shock go to the middle-class mortgage borrowers and so the interest in wealth you would expect to get an increase in demand for housing. they are rich or not they want to have more. but if they think about these borrowers is they always have a house saw it demand that is to going before upgrade house at

the exchange the prices of how they want to move to not the house we are in right now versus demand for the small house people don't have houses yet a starter house. renters don't gain. you do have housing values but it's really for the asset distribution from not for the lowest level. if you're concerned about, for example, that their entry-level to the market the biggest change in the crisis, this model would help as much as we perhaps additionally -- initially would've expected. let me talk about macro. aggregate consumption and output over 25 years after the shock. to set a couple things about this comp the first thing to notice about the changes they are extremely persistent. most the time we talk about monetary policy can we measure it impacts of what happened two three quarters after.

you see the effects around for many years. output peaks after two and half years but it's kind of visible at least 10 15 years after the shock. this is because of these changes come through a change in wealth come and changes in wealth will be affecting the economy and health essentially court are replaced by new court. people age and die. these things are not super impact that they are persistent. something to keep in mind when thinking about redistribution of wealth. output falls and consumption falls. the reason this is happening is that first thing about consumption is that the losses go to older people. the older people have a higher capacity to consume. versus young people have many years to consider and so they're going to save a larger fraction of the gain and not spend as much.

this is natural from sort of a lifecycle model. people are financially constrained by there at the borrowing constraint getting a rainfall would make a lot of consumption right now. we did design the model to capture this because the people who are impatient and still that wasn't enough. it seems they gains go to essential to people with the biggest mortgage are not the poorest people that the age effect only. so i think i will skip this one. to talk about welfare. two things about this. the welfare effects are modified to some extent because impact on housing prices. if you have a direct loss to your wealth but the house that you go up, that you own goes up in value, that would mitigate to some extent the directive project a look at the model. more importantly is to look at this picture and knows the skipper everything i've shown you is to scale.

the units here are units of consumption. is changes inflation makes him as much better off as they would be if you increased inflation primo levi 5%. if you've seen any models if over changes 5% is huge. most policy changes to consider changes that are a fraction of the percent. so what i'm trying to point out is the stakes go well for particular groups are just huge. the potential impact you would get if you have a larger mortgage completely -- which to me suggests thinking about political economy of this is quite important because people are very much reason to be concerned about this change much more so than on the macro policy changes. interest rate shock.

a lot of times, i won't go into that. let me just say that lowering interest rates turned out to be similar, even though the effects over, are larger and magnitude. there's some debate on whether change interest rates are good or bad for rich or poor people. all models good for the middle-class. as peoples mortgages get cheaper, it's bad for the old rich. is some debate about changing the president did have a long-term bond and the value of the bond was up in the short term but if you're a safer instead what you do they will not be good for you. this is what comes out in the model. so let me summarize some of the key points. i think the most important point is a change in welfare from inflation or other real change that's huge. innocent the germans had some reason to be concerned about that because that's what dominates if you think about a personal perspective, what you

think about inflation. the second is i persistent because they don't go with a small as the court iran. a downward shift in labor supply output is to be expected. that housing prices more expected as opposed to the -- [inaudible] thanks. [applause] >> so thank you very much for having me here and give me the opportunity to talk about these issues and another chance to spend some time on this very interesting piece of work. so i've a few comments to make and maybe as way to start i will just start with some initial

considerations. so i took the topic in the question of what we're trying to dress as me deliver it and want to replace my comment by saying that it is i think there's a lot of interesting result from the paper, and that indications beyond the question mark on to talk with today. i'm going to try to see what the paper tells us about the question werequestion mark trying to do. i think questions about qe monetary policy, unconventional policies that impact on inequality, i think that raises the question of what you mean by monetary policy? i make a couple of comments on this and try to think about what they are presented in terms of result and whether this is what aspect of march a policy where talking about. at the end of the day my comment about the distinction in terms of what we mean by countercyclical policies, monetary policy versus what should be to decide future of monetary policy is a. i think this paper speaks more

about framework and design featured. so that's the second. i think the guys did a fantastic job. -- mathias. i would've just not show it as i think i understood the paper so starts from the reservation number of large gross nominal positions which means that inflation could potentially have their important application in terms of welfare distribution and the experiment that is being considered here is what if the fed were to increase its inflation target from 2% to 7% for 10 years? i'm making it as explicit as again because of what a to come back to that and try to think about how to think about this experiment. then we have an environment in which they're going to be

carrying out this experiment and the design ingredients are we have over whether his borrowing constraint so that will would explain part of the result. we also have models that are different in terms of their age, their patients and also we assume that there's some inequalities at the outset. so these households are different in terms of the inequality of outcome or the income outcome to be facing during her life. if anything there's a lot of great work being done. the flow of funds accounts and the survey of consumer finance. this is a considerable contribution being made. what did we find? they found i think this is pretty intuitive. it's not obvious all of that is carried out automatically as was mentioned in the presentation i

think if you boil it down we see that inflation distributes wealth away from the asset rich elderly in this setup. towards the more indebted middle-aged, middle-class orders which typically large mortgages. doing that it pushes the price of larger house higher or the more the higher end of that payment because these middle income people now that has been given to swindle are trying to upgrade as. again i think this is pretty intuitive. i finally inflation -- because the middle-class household has a low propensity to consume. to have a larger life span adam allowing them to be more patient. based on that because i think interpretations, conclusions are inflation has large effects dispensing important result because we haven't been

exploring implication in terms of redistribution that extensively. the authors suggest this makes changes in monetary policy contagious from a political point of view. they also conclude include inflation may have a contact ready impact on activity, which is again interesting and maybe intuitive. and, finally we have some implications for the market which we've been discussing and i will not dwell on the. so what do we take away from those in terms of how i think about monetary policy? i think this adds implications for the design of policy framework. back and 2011 with the process of renewing our inflation target and we have to think about questions like should we move to a price level target instead of the different target commercial we think about changing the level of that inflation target? interesting at the time the question was more to lower the inflation target as opposed to

increase it. so we went through this and the distribution of questions were part of the analysiscome at a think this is very relevant. so i think the paper but itself speaks to the question what the right level of the target as was mentioned during the presentation this is a relevant question. this on the table right now. i don't think person issued on the table. i think it's the wrong moment to be thinking about this but we should be first achieve our inflation target and then talk about changing them. but it is on the table. it started with i think at during the crisis. the bank of canada in fact have been doing of speeches recent would imagine this is a question that they are studying as part of their renewal for 2016. and there was a lone neighbor in the last minute has raised that as well from the last minute. this is on the table. and i think this paper shows

another challenge potentially. it seems working in the opposite direction because it would be contractionary in terms of it does look at the output application. but in that context that is at the paper we were talking about inequality and it wasn't sure where the others were coming down in terms of what it means for inequality. so we have in this setup people are born unequal by construction adjudicative be born rich or as part of the masses as they put in the paper prevent inflation create some redistribution and the context. from the elderly to the middle income people, and so should rethink that come at a don't think this is what the germans are bringing, i'm not sure this was in the mine here, but i think it might suggest it does look out the face of it it might not be a bad thing if this is what you're looking after.

inflation might actually redistribute in progressively wealth. some people could see that has made an outcome of that. i think the question is what you make out of this implication were inequality. the more general point is in this case he'd have a record to start with. you have to assume that. i think that maybe this is something for the coveted these questions about when we are talking about qe affecting inequality or the pressure pulses can what is behind the inequality we are exacerbating potentially? i think you have a couple of minutes let me make a couple more points. even if the question is about inflation target i'm wondering if this is the right experiment to look at. and let me just explain anakin

taking things literally. have a 500 basis point increase in inflation target which means 55% increase in the price well over 10 years. so i think this is huge. people are talking about potentially raising the inflation target, but i think one of the reasons is because the mutual rate might be low enough for reasons that were mentioned in the first section. i think if you look at the forecast, from a few years ago doug made a comment back in february thought the long run was 3.5 as posted 4.1 flickr talking a something in the order of 75 basis points. babies a the crisis has shown us on top of that would like, zero lower bound is significantly want to add some question so maybe you add 100 basis point 200 basis points may be but i think 500 basis point is out of the realm of at least question

the level we would consider seriously. so then the question is if that's the question we are after are the results quantitatively important? at a think there are questions about that. i think this is a nonlinear model pics i think we can do with a much smaller impact on consumption and output. and also there's another question about the increase been proven as opposed to being only for 10 years. so these are designed questions can a framework for model might allow to do more but based on the design i think a question we need to think about. i am at a time such as whether this was a couple of things. i think this experiment is useful to think about the 1970s style situation where you have inflation that goes up by 500 basis point and this is the order of magnitude you'd

want to calibrate for the '70s. in that case i think i was to the application of not being really about monetary policy and implementation but a sequence is something policy mistakes. i don't think any central bank are intended to represent the '70s outcome, i hope at least in that case i think this is about inflation which is important and it's a design a policy but less about what policy itself in the implications about distribution impact. this is getting into kind of g. tony type things. -- g20. i would say changes in inflation target should be contentious. this summer the policy regime because, in fact i think this is why we think in canada the agreement on the level of inflation as as a household decision at issue be jointly decided by the government at the bank of canada which is a separate question.

so that's why i'm going to leave it with a minus two minutes etiquette i want to reiterate this is about the question of this forum but i think this is a very important piece of work. [applause] >> so why don't company keep this short but please. for a minute. matthias, i wonder if you could start if you want to respond at all to what jean said speakers thanks for your comments. i basically agree with what you say. this of course to the extent we do is a large change, not exactly what we would expect to be of them in the next few years. this stage is more exploit what the model does come kind of a drastic experiment. you can use the same framework. another echo slightly the other way. the thing that makes -- borrowing constraint potential.

they behave differently compared to being away from it. because the experiment we do is one that relates borrowing constraint to move people away from the maximum because it lowers that the it would likely be done in the other direction. i don't think proportionately smaller in terms of the impact. that's just in terms of the experiment. in terms of aggregate, too the output is relatively small and i think it's going fair to say that probably the main reason that monetary policy will affect output. in newspaper if only look at one aspect which is institutions and also for such a. the other thing that was visible from the first picture is redistribution between the broad sector the households, but also a government. this picture simply changed.

by this point with a huge amount of households held by foreigners and all these huge government debt. some of the potential benefits from inflation would come from deflating some of the government debt at the cost of foreigners. you can think of them for it or not but this i think some of the also take into the picture if you think, for example the state in europe it's not so much about rich germans versus poor germans. is to some extent about the pressure of sovereign debt around the euro zone and something we can figure into account. so just to say i think it's a bit more aggregate effect that we show in the top analysis speed and let me see if there's a question or two, and if not we'll go right to the panel. wait for the mic. >> is their quest in the model? everything about the fact parents have kids and if they get worse off, then maybe they could just save a little less

and transfer to the kids? >> the one actually doesn't have it yet. just a function of how high we have gotten with the spirit we had an earlier version at effect we do need it to make the rich rich enough. we get a slightly different model but we know it is highly concentrated just like well. and so putting that back in there will make the declining -- some of the effect will go away. in the past when we had in their it is too much of an impact. based on what we have done previously i'm confident. >> the gentleman here. >> i'm a little bit puzzled by

the last. in my long life in economic by the way i am from imf. formally imf. i heard a statement, the right rate of inflation is minus two. then when we read 7% inflation we would about annexation of texas. so first of all that doesn't make sense to say really the that can bring about 7% inflation and keep it there. to the have the tools to do that? second kennedy announced make this unannounced statement? on people are dreaming. how can you when they wake up and say we're going to bring 7%, and nobody else anticipated it? makes no sense to me. >> let me say couple things about this. it certainly won't debate about

whether they should go up there i think ability to maintain a higher talk is a big part of that. about a different part of the debate. i would say certainly history has absorb large changes. in the '70s inflation went up in many countries. germany much less so than u.s.a., for example. i think there was some choices. the same experiment in reverse. look at what inflation did the u.s. households, the same thing just with a negative sign. i think if you think of this as applicable to analyzing i think we've seen many of those. what's crucial is of course this is something has to be to be effective, to be surprising. everything is being anticipated.

if you could do this as a policy as the runtime windfall but this is not systematic. what we could do any most sophisticated policy which we haven't talked about yet but to have something that is systematic but is going to the business cycle something countercyclical variation to try to alleviate the burden of debt for example, in a more strategic minute. there some steps to be taken sure something of that kind. >> can't i just start by which an account of paper to make sure i understood at the conclusion. are you advocating this experiment as something that should be considered? if so is it because it is reducing inequality? how do you look at the inequality implications versus the contraction? word you land on this? >> given at the paper and the

pulse i would not take this as a recommendation of policy. more cut have one tool to assess the policy like this in one dimension. to my personal view i do think that impact on output is there but it's not particularly large. i think whatever decision is going to be it will not be driven by disaffected the potential desire is driven by something else. i think it is driven to some extent certainly in europe by the desire to lower the burden of debt of the government and also the private sector. i think it's going to be the key aspect to understand what are the implications of that. we think about increasing inflation of potential attacks on foreigners who hold u.s. assets. somewhat mischievous i guess but would be relevant.

>> someone will take you up on that. >> do you want to to weigh in on that, or anything? >> i consider that as a side effect. >> mean inequality? >> exactly. >> i think we'll move to the panel of the we don't have enough chairs out there for everybody. so if dawn and kevin and susan can come up and join here. >> you mind bringing -- >> i'm going to ask the authors do feel free to participate from the floor. [inaudible] >> so just to reiterate, as a former federal reserve governor --

[inaudible] donald kohn who's here at brookings -- [inaudible] former federal vice chair of the federal reserve. kevin i want to start with you. i think somebody quoted you without attributing it quantitative easing is kind of like reverse robin hood, he once said. what i've heard this one as a whole bunch of people saying maybe quantitative easing doesn't have the effect on inequality a lot of us thought when we just thought about this as lifting stock prices. you think it did and so defend your position. >> so thank you and thank you for having me here. i appreciate my security blanket. don sat next to me at the fed for five and half years, so the extent we disagreed on sure he's right. now with susan and it's going to be more difficult. so i will begin at eight by just trying to frame david's

question. that david and brookings called together this conference i think says that distributional consequences matter to the conduct of public policy. and we central bank types of some of them were supportive of to be a different faces, some of whom were not nothing defensive about this question. and the idea that distribution consequences should be service of any central bankers we wouldn't talk about a come is wrong. we talked about efficiency and efficacy of any policy, fiscal policy, monetary policy consider. we also talk about the institutional consequences. david eck if someone rolls out a new fiscal policy and you tax reform plan the front pages all the newspapers was he who were the winners and who are the losers? that gives you an brookings enormous credits and this matters and we should treat it as somehow not right for central banks to take it into consideration. at the end of the day we should

all be very modest about her conclusion both from josh's paper which was terrific and my own judgment on this. quantitative easing was created by don and others -- [laughter] including the and the depth of the crisis and i was a huge supporter of qe1 ended up being quite a bit of a different view by the time qe2 and beyond. but it was created to deal with a certain problem that was in the markets. and i would say that it has become such a long life product and is a product not that is used by virtually every central bank around the world tells us that if the for judgment for one thing, we should be thinking about it in a different context now. as a first approximation i do think what we did was radical or new or novel and unprecedented. so none of us should think we have the answers right. however it does strike me as though quantitative easing is fundamentally different than

cutting interest rates. and that it appears to working through fundamentally different transmission channels. no longer quite channels and lending channels appear to be the dominant way in which impacts the economy. it appears much more to be working itself through asset prices when we think about housing stocks are financial stocks. i think that is the dominant channel. as a first approximation if three quarters of our fellow citizens get 96% of income their income from labor income, it strikes me we ought not be dismissive and sang everybody wins. we talk about trickle down economics in the conduct of fiscal policy come and we should ask ourselves as brookings is today, what are the impacts? the end of the day my view is because the asset transmission channel is the dominant channel and because of those assets are whole, not so much in and of itself by rich people, but it is held by people with big balance sheets a lot of sophistication, and openness to liquidity a

sophistication about what central banks are trying to target, and if you they have liquidity. so they would react differently versus those that are at lower quintiles of income strikes me that something is quite possible. when i look at the wealth creation across the financial asset world post crisis, i.e. the wealth creation as being significantly above what are my former colleagues predicted. when i look at what to expect in the real economy i look at the real economic performance as markedly worse than they predicted. and so that's what i think races these questions can makes them a germane to today's discussion at a very much to worry as i'm sure many of the people in this room do that we have created a product not with bad intent, we created a product that may or may not turn out to be counterproductive. we are in the middle of this experiment as we are now but where the games have been extracted by the most

well-to-do by the most sophisticated, see that the central banks are to one degree or another trying to get asset prices up to trek up the real economy. they get the joke. they have been willing to play the game and it does strike me as though we have to think about not just the efficacy of these programs but really who are the winners and losers? and because we're in the middle innings of this game it reminds me david when he came to visit thank you to a book on bear stearns and the financial crisis, was among us, it was hard to judge the burdens of any individual decision to having this discussion now is great but i think neither josh nor i nor dot want to give you definitive answers. >> .com a definitive answer it's because i agree with the last part of what kevin said. and i agree with the first part. i think this is a good discussion to have. i do not think that the federal reserve should target particular

income distributions. the fed has been given jobs by congress, maximum employment, stable prices and financial stability as part of it. and there are certainly intersection between what the fed has done and those things, and the distribution of income affects the channels by which these things as kevin was noting can be effective, but i would be, i think it would be wrong for the federal reserve to say we are going to steer away from our maximum employment stable price target, or take longer to get there, because we think it getting there as rapidly as we can will have a facts on income or wealth distribution. they are adverse to those are decisions for congress to make through taxes and transfers not for the fed to make the i thought today's discussion was really good and really

interesting because, and this goes to the last point kevin made because it really illuminated the channels that were working and were not working in order to make monetary policy effective. and the fed needs to understand that so we can make a determination about how much monetary policy needs to do to get at primary goals to get aggregate demand and to keep prices at its objective. and it might inform a conversation between -- >> you can continue to watch this forum on the federal reserve and monetary policy as it continues on our website, c-span.org. we are leading about up to bring you live coverage of the u.s. senate. the senate coming into the continue work on the nsa intelligence gathering bill. last night senators failed to stop the expiration of the u.s.a. patriot act a more

intimate and possible debates today. and now to the senate floor live here on c-span2. the president pro tempore: the senate will come to order. the chaplain, dr. barry black, will lead the senate in prayer. the chaplain: let us pray. let us pray. god of all mercies in whose love and wisdom lies all our hope still our anxious hearts, as we bring our weakness to your might, our failure to your perfection and our