In June, 2022, Governor Waller of the Federal Reserve spoke on monetary policy at the 2022 meetings of the Society for Computational Economics. After his session, I attended the FRB Dallas reception in the George W. Bush Library. I met Governor Waller and told him that the modeling methods used at the Fed were substantially behind the frontier, and even behind methods used at other Washington D. C. agencies lie the World Bank and IMF.
His response was clear and direct. He told me “That is because of you.” I thought that was ironic because I was the founding president of the Society for Computational Economics. Moreover, I thought I had a good record of promoting modeling skills of Fed economists, particularly the ones who took my courses and attended my workshops (including eight ICE workshops). I also think that several Fed economists have my book Numerical Methods in Economics. What do I have to do to impress Governor Waller?
I suspect Governor Waller did not know who he was talking to. He probably thought I was a generic economics professor, a natural presumption but not true since I am a Senior Fellow at the Hoover Institution.
I am not surprised that a Federal Reserve Governor is not aware of my work, but I was surprised that he held the Fed blameless for its weaknesses. He did not dispute my contention that the Fed’s modeling efforts were inferior relative to what is standard elsewhere economics, even in the policy world. His only response was that the Fed was not responsible.
I have written about the Fed’s weaknesses in earlier blogs. See Macroeconomist Confesses to Lack of IQ, Why can’t the Fed be as good as the Bank of Canada? and, my favorite, Congress Investigates DSGE Models: One Witness Says Big Problem Is The Lack of Brain Power.
I also gave a seminar presentation on the backwardness of the Fed; see When Will the Fed Join the Third Millennium?
These posts and presentations may be from many years ago but I see nothing to indicate substantial progress. The Fed system employs about 1,000 PhD economists at an average salary of 200K, and has a large number of “visiting economists” from academia. There are a few who can use modern computational methods but it is much more common to see ignorance of and hostility towards serious computational methods.
Governor Waller is a prominent member of the Federal Reserve Board of Governors, a fact indicated by his being included last fall in the short list of successors of Chairman Powell. However, I know his attitude is common among leaders in the Fed.
The Fed has a very difficult job. It is expected to control business cycles with only a few instruments, and must react to events over which it has no control. I would not want that job.
However, the quality of the analysis done at the Fed is something it can control. I like to compare my suggestions to the Fed as being similar to the role played by accountants. Business executives find accountants annoying and are not going to let them run their businesses, but they should realize that they want to hire accountants that can give them the best possible assessment of their financial condition. The Fed spends hundreds of millions of dollars each year on PhD economists but blames others for the weakness of their analyses.
Governor Waller (among others) have laid down the gauntlet. I accept the challenge and will expand on these points in future posts.