And together with Leandro Citria, we serve as local chairs of this Congress, and it's our pleasure and our pride to welcome you to Montevideo and to our Universidad de la República. We have ahead of us a Congress that we hope you will find as engaging as we do. Our program features eight keynote speeches, eight invited sessions, 14 institutional invited sessions, and 12 contributed sessions. We want to thank our program chairs, Diego Restuccia from the University of Toronto and Christine Campos from INPER, for putting together such a rich and stimulating program. And we are also very pleased to have organized the LAA Mentorship Workshop, providing feedback to nine PhD candidates from Latin American universities. So we thank all the mentors who will guide these students. And before we begin our conference, we would like to take some minutes for welcome addresses from our organizing institutions. I will first give the floor to Rodrigo Arim, President of the Universidad de la República, followed by Marcela Eslava, the President of LAA, and then Sebastian Galiani, Chief Editor of the Economía LAA Journal, and then we will hear from Barton Lipman representing LAMES. And afterwards, I will briefly return to offer some practical information. So I give the floor to Rodrigo.
If you allow me, I'm going to speak Spanish to welcome you all to our university.
Well, welcome everybody. It's great to be here. And as Rodrigo was recounting last year during one of those wonderful grill dinners that they organized here, the conversation came up with the possibility of holding the conference here in Montevideo. LAA has been seeking to expand the geographical reach of its conferences, and we were amazed at the possibility of organizing this year's conference here in Montevideo. Veronica Amarante's willingness to take on this difficult task, with the help of all the faculty here at the two amazing economics departments that they have here at the Facultad de Administración, and their drive has been absolutely fundamental. So a very big thanks to Rodrigo, Veronica, and all the team here. Also to our program chairs, Diego Restuccia for LACEA, Christine Pinto for LAMES, and very especially Lorenzo Cendo, who started as our program chair and unfortunately couldn't join us in the end. The initial steps that he took were fundamental. Warm regards to Lorenzo. We are very happy with the way that this has developed. We had almost 800 submissions of papers for the conference. There are over 500 people who have been registered for this conference, so you'll see a lot of people around. There are over 350 papers in contributed sessions that you will be seeing featured at this conference. And there have been other events in these last few days: the Network of Inequality and Poverty, the Impact Evaluation Network held events yesterday, pre-conference events. Our Women in Latin America group at LAA will hold its meeting on Friday. We also had pre-conference events by the World Bank. The Rethinking Innovation in Latin America event was held yesterday, as were the Replication Games. So there's a lot going on. We are very happy to see you all engaged here. Let me also take a couple of seconds to thank the institutions without whom this wouldn't have been possible. For LAA, our institutional members are absolutely crucial, both in terms of providing financial support for this conference and our other events, but also in terms of improving and enriching the program as you will see throughout the conference. Very special thanks to the IDB, the World Bank, the Corporation Andina, the IMF, the Central Bank of Chile, and the BIS, who have been joining us as institutional members. The Central Bank of Uruguay has also joined efforts with the rest of the community here. And I want to very especially highlight this LAA Mentoring Workshop that Veronica was mentioning at the beginning. We're making huge efforts to help improve the research conducted by PhD students here in Latin America. You will see featured throughout the three days nine papers by PhD students who have been mentored. So all of that is going on these three days. We're extremely excited and happy to see you all here. Welcome. Let me pass on to our editor-in-chief for the Economía LAA Journal. There are some exciting changes coming up for the journal, and we wanted to take the opportunity to share those news with you. Thank you, Marcela.
Yes, I started my tenure two months ago, and we've been analyzing the path of the journal and how to keep finding its ground. Essentially, we introduced three important things. Two will be two new lectures: one held at the LAA conference and one in the spring online through the LAA network. One is going to be the Gisheer Moalo lecture, and the other is still unnamed but will soon be named. Both lectures will invite very recognized scholars to publish on a topic in the journal. The other thing is that looking at the trajectory of the journal, it started basically publishing collections of papers on specific topics that were by invitation. They gave a lot of visibility to the journal. It was a period in which topics were very interesting, and it attracted very important scholars, but that was not sustainable. We wanted to keep receiving more and higher quality papers that are submitted by scholars, but we will also reintroduce a bit of the special issues and invited papers to get back to some of that relevance and visibility. Finally, we renewed the editorial board, and we have a very good, balanced editorial board. We are now trying to be very fast in handling all submissions, as most journals have moved to, and hopefully that will also be a factor to consider submitting to our journal.
Let me also remind people that Economía moved to open access, and it is now published by LSE Press, so you can check out the website. All of the archives are online, so it's not only the new submissions that are open access, but everything is online. So you can check that out. Welcome again. We'll have three very exciting days, and we'll be seeing you around.
I am Bart Lipman. I'm the Executive Vice President of the Econometric Society, so I also want to welcome you to the conference. I want to second the many thanks that Marcela just offered, and in the interest of time, won't repeat them all, but I do want to underscore the thanks to our gracious hosts for bringing us into this lovely facility, and the program committees and the local organizers for all the hard work that they did in putting together an excellent program. I note that this is the 45th Latin American Meeting of the Econometric Society, which is an exciting milestone. It makes me start thinking about the 50th, but that'll come soon enough. So it's exciting to be here for that. Also, I want to thank the many partners of the Econometric Society that are crucial. First on the list is LACEA, and particularly want to thank Marcela, whose leadership of LACEA has been so critical and who also works directly with the Econometric Society in many ways. We're very grateful to her. I also want to thank the BBVA Foundation, which supports the BBVA Foundation Lecture, which is this year in its fourth year and will be given by Petra Todd. I want to thank the Econometric Society's other sponsors: the Kohl's Foundation, the European Central Bank, and NYU Abu Dhabi. And finally, not finally, almost finally, I want to thank the Regional Standing Committee for the Latin American region, which is, as the name would suggest, the guiding force of the society in Latin America, and in particular its leadership: the chair, Ario de Alba, and the secretary, Jean Laforun. I have to give a special thanks to her because this is the last chance we'll have to do that, as her term ends at the end of the year. We're very grateful to her for the hard work she's put in over her term. We'll be welcoming Bruno Ferman, who will be her replacement and has quite a job following her. And finally, the last thanks is I want to thank all of you for coming and joining us for this wonderful event. Thank you.
Okay, now let me briefly share some practical information with you before we start the Congress. The Congress takes place in two buildings. The building where you register is the Social Asa building, and the building across the street, and please use the traffic light to cross the street, which houses the Facultad de Economía y Administración. Lunches will be served in the courtyard of the Asa building where you register, and please note that you will need your Congress credential to access the lunch area every day, so don't forget to bring it. We have a group of students supporting the organization, so you can ask them for any help you need. As we said, the Congress has been jointly organized by the Facultad de Economía y Administración from Udelar, and I want to thank the respective deans, Professor Javier and Professor Car Midia, for their support and help in the process of preparation of the Congress. Also, on behalf of the local organizing committee, we would like to express our gratitude to our local sponsors: the Central Bank of Uruguay, the Universidad Católica de Uruguay, the Bank of the Republic of Uruguay, SEPA, Feri Consulting, and PricewaterhouseCoopers. And lastly, I want to extend my very deep thanks to the entire local organizing committee, the secretariat, and the staff of the Facultad de Economía y Administración, who have worked a lot to bring this Congress to reality. This has been a remarkable team effort, demanding but also fun. I want to particularly thank those who have been working this month from the Instituto de Economía secretariat: Caba, Mercedes Morales, Veronica Cal, Camila Barto, and Andrea Cavalo, who is serving as Congress secretary, and our organizing committee members, researchers from our university: Florencia M, Maya, Kache, Maau, Rosa, and Lones. So before we conclude, I would like to invite you to join in a round of applause for all the ones who have been working to organize this Congress. I hope this is an enriching Congress experience. Thank you very much. We have now two parallel keynote speeches. One is taking place in this room, and the other one is in the Facultad de Economía, in the building across the street. So let's start our conference. Thank you.
Everybody, it's a pleasure to be starting this Albert Hirschman Lecture of this year. We are extremely happy to have a very esteemed member of our community, Adriana Kugler, who has been part of LACEA for a very long time. We are very proud to present her today as a member of the Board of Governors of the Federal Reserve System. Adriana is also a professor on leave of public policy and economics at Georgetown University and has had different academic positions at different universities, as well as being an NBER research associate and a fellow of the CEPR. Adriana has also had different policy positions as Chief Economist at the US Department of Labor, serving on the Technical Advisory Committee of the Bureau of Labor Statistics, and more recently, Adriana was the US Executive Director at the World Bank. She has also participated in a series of advisory committees, both in academic associations and in government. And of course, we in this circle know her best for her important contributions in labor economics. She was a winner of the John T. Dunlop Outstanding Scholar Award awarded by the Labor and Employment Relations Association and has very important publications of which many of us know. In her new life, Adriana is now going to talk today about central bank independence. We're eager to hear from her on that position. The session will work as follows: Adriana will hold a presentation, and we'll have a conversation and a short round of open Q&A. So Adriana, please, the floor is yours.
Thank you very much, Marcela, for your generous introduction, and thank you for the opportunity to be here at LACEA at the Albert Hirschman Lecture. I believe I'm the first central banker from the US to address this annual meeting, but I know for sure, and I am very proud to say, that I am the first who is also Latin American. And of course, I have been part of the LACEA executive committee, and I have presented papers at many LACEA conferences over the years, so it is just such a pleasure to be back here with so many colleagues and friends. You know who you are out there. When the US suffered very high inflation beginning in 2021, it was a new and unfamiliar experience for many too young to recall the last time this occurred in the 70s and the 1980s. Of course, very high inflation is not such a distant memory for people from Latin America, and that includes me. Growing up in Colombia, I vividly recall the daily challenges of trying to plan and live with sustained double-digit inflation, and I especially remember the pain it imposed on the most disadvantaged. Gaining control over inflation requires a commitment by society to address the tradeoffs and sacrifice that are needed, and it also requires deliberate and principled decision-making by central banks. Central bankers must both formulate their best judgment of the correct policies and also follow through by executing and maintaining those policies. It has been widely recognized that central bank independence is fundamental to achieving good policy and good economic outcomes. It is not sufficient by itself, but it is almost always necessary. Let me start by defining terms. An independent central bank is one that can carry out monetary policy insulated from pressures arising from other parts of government. When there is central bank independence, the role of governments is typically one of representing the public in specifying a mandate for the central bank and holding the central bank accountable by monitoring its performance and appointing its leadership. In this arrangement, the public, through representative government, specifies the overall objectives that central banks should pursue. Some noteworthy examples of central bank mandates include the dual mandate established by the US Congress that requires the Federal Reserve Board and the Federal Open Market Committee, or FOMC, to promote maximum employment and price stability. The European Central Bank's primary mandate of price stability is spelled out in a treaty enacted by the legislators of its constituent member states. The Central Bank of Brazil likewise pursues price stability as its primary objective. In the UK, its Parliament has mandated that the Bank of England pursue monetary and financial stability. Similarly, the objectives of the central banks of Chile and Uruguay are both to keep inflation low and stable as well as to foster the stability and efficiency of the financial system. Before we discuss why monetary policy independence can benefit the economy, let me just take a step back and discuss the tradeoffs associated with the conduct of monetary policy. Central banks significantly influence prices, interest rates, employment, and income in the economy, so it is natural that sometimes there would be different views on these decisions. For instance, monetary policy actions that promote economic activity and employment can put upward pressure on inflation. Conversely, policies to lower inflation tend to slow economic activity and employment. This tradeoff typically means that returning inflation to a specific target when inflation has been allowed to run high may require more restrictive policy and a reduction in demand and higher unemployment. As I pointed out in a speech last spring at Stanford University, however, we have seen this tradeoff dissipate over the past couple of years, pointing to the possibility that we have now been for some time in the steep part of the Phillips curve, where inflation can come down without a substantial increase in unemployment. Yet there is a possibility that this tradeoff may become more prominent as we move towards that flatter part of the Phillips curve. The economic literature points out that striking a balance in these tradeoffs can be difficult for an elected government for various reasons. One reason highlighted in the literature is that an elected government may naturally focus on short-term goals of its constituents and may have an incentive to try to lower the unemployment rate in the short run with less concern for long-term effects on inflation and on growth. The literature has labeled this fundamental problem time inconsistency. This incentive may generate undesirable economic cycles, potentially destabilizing prices. And if the public learns over time that the central bank is actually responsive to these incentives to increase inflation to boost employment temporarily, expectations of future inflation would rise, a symptom of the loss of credibility of the monetary policy authority. Governments also may have an incentive to increase inflation to monetize its debts, which becomes effectively smaller as the purchasing power of money declines. Also, if elected officials are responsible for monetary policy decisions, the typical alternation in control of government between different parties may lead to different preferences in the tradeoffs between employment and inflation, destabilizing prices and the economy in the long term. In summary, economic research argues that demands on government to address concerns in the short term may result in excessively discretionary policy decisions and do not provide the best incentives for effective monetary policy that promotes the long-term health of the economy. A solution devised by governments and explored in economic research is to delegate monetary policy to an independent entity, the central bank. By establishing policy mandates in laws or treaties, the government voluntarily constrains itself from suddenly altering policy, and thus it also discourages public pressure to do so. As in Homer's Odyssey, in which Odysseus asked his crew to tie him to the mast of his ship to avoid being bewitched by the siren songs, policy mandates help central banks avoid being swayed by short-term desires to the detriment of long-term goals. Now that we have discussed the reasons for delegating the authority to conduct monetary policy to an independent entity, we are left with the task of describing how such independence should be designed and implemented in practice. There are two broad categories of central bank independence. The first of these is goal independence, and the second is instrument independence, which I will discuss later. Goal independence refers to the extent to which the central bank is free to define its goals. In particular, the Federal Reserve's goals are defined by law, so it is not goal independent. Nevertheless, in spelling out these goals, the law provides the Federal Reserve some degree of independence in defining them in detail. First, let's talk about the extent to which the law has defined the Federal Reserve's monetary policy goals. Unlike some other central banks that target inflation, the FOMC has been handed two coequal goals: maximum employment and price stability. The committee is not free to pursue one or the other; it must pursue both. And these two sides of the mandate are pretty clear. Maximum employment means, in effect, the lowest unemployment rate that is consistent with stable prices. The law does not spell out a level of inflation that fulfills the goal of stable prices, but it has traditionally been viewed as low and stable inflation. Mandates limit goal independence, but the form of those mandates can allow some role for the central bank in setting out its goals. The 1977 law in the US defined the FOMC's dual mandate, allowing the FOMC to work out the details. In 2012, the FOMC defined price stability as a longer-run annual inflation rate of 2%, as measured by the Commerce Department's estimate of the rate of increase in the personal consumption expenditure, or PCE, deflator. Because maximum employment is observed to change over time, it can only be estimated with some uncertainty, the committee chose not to define it in numerical terms, but the committee participants estimate a related number, the longer-run rate of unemployment, which is published every three months in the Summary of Economic Projections. Another aspect of independence is instrument independence, which affords central banks flexibility in how to use tools of monetary policy, such as policy interest rates, to achieve its goals. In the case of the Federal Open Market Committee, this has allowed it to adopt new ways to achieve its goals as the financial system has evolved over the decades. This has been particularly important when the economy faced unprecedented challenges, as it did during the 2008 global financial crisis and during the 2020 pandemic. Because of this flexibility, the Federal Reserve Board and the FOMC were able to respond promptly and, as it turns out, very effectively. Across countries and jurisdictions, goal and instrument independence have different dimensions and many variations. In some countries, including India, Brazil, and South Korea, the targets for inflation rates are jointly decided by the central bank and the Ministry of Finance. In contrast, the central banks of Chile, Colombia, Mexico, and Peru, among others, are given authority to choose their own inflation objectives. To understand how governments have come to embrace independence of central banks, it is helpful to review how they have evolved from their origins in the 17th century. Sweden's Riksbank was established by the private sector in 1688 to lend the government funds, and the Bank of England followed in 1694 with a very similar structure and purpose. Other European central banks followed in the 19th century, and a wave of many in the 20th century, including the Federal Reserve. At different times, these central banks made the transition from wholly private to wholly public institutions and became accountable to government. And by the mid-20th century, there was a growing recognition that independence made for a more practical and also ultimately for a more effective central bank. In the US, the moment of truth came in 1951. During World War II, the Federal Reserve had agreed to peg interest rates on Treasury securities in order to ensure the smooth funding of the war effort. And after the war, it continued to peg the longer-term Treasury rate. In the early 1950s, inflation soared, but Treasury favored continuing a cap on longer-term interest rates so that debt management costs could continue to be low during the Korean War. After a series of high-level meetings, the Federal Reserve and the Treasury reached an agreement in 1951 that freed the Fed from the obligation to fix interest rates and allowed it to use monetary policy independently to pursue national economic goals. Researchers have analyzed the historical experiences of particular central banks, such as the Federal Reserve, to understand the transition towards central bank independence and how it affects economic performance. In addition, researchers have also developed large cross-country indices measuring the level of central bank independence. The empirical regularity that stands out in many of these studies is the rise in central bank independence starting in the 1980s, with studies analyzing at least 120 countries. Economic research has cited several factors driving this adoption of central bank independence in the 80s and 90s. Emerging economies saw central bank independence as a way to facilitate access to global trade and also to financial markets, which were liberalized precisely during this time period. Another important factor was the experience of developing country debt crises during this period, which led to demands by creditor banks and international lenders to call for central bank independence. To whatever extent these other factors pushed governments towards central bank independence, a consensus developed that such an arrangement yielded better economic outcomes. Based on measures of central bank independence, researchers indeed have found a relationship between independence and lower inflation, especially for advanced economies. While the evidence on this negative relationship between independence and inflation has been a bit more elusive in the case of emerging markets and developing economies, or EMDES, the economic literature does find a relationship between independence and lower inflation volatility in these countries. Among the reasons I would cite for why it may be more difficult to find a relationship between independence and lower inflation in EMDES is that the legal measures of central bank independence, or de jure independence, may not reflect the relationship between the central bank and the government that existing practice, or de facto independence, provides. In countries where the rule of law is not as strongly embedded in their institutions, there can be wide gaps between the formal legal institutional arrangements and their practical impact. Indeed, alternative measures of independence, such as turnover of central bank governors, point to de facto measures being negatively associated with inflation, especially in emerging markets. Another possible reason is that emerging economies may be more exposed to volatile shocks and government regime changes, leading to greater turnover in central bank leadership and clouding the relationship between central bank independence and inflation. The relationship between central bank independence and lower inflation and inflation volatility is therefore clear, but the connection to faster growth in economic activity is not. On the one hand, the primary reason for central bank independence in most countries with a single mandate is to provide price stability, so the lack of association between monetary policy independence and adverse economic consequences is not that surprising after all. On the other hand, indices of central bank independence may be biased. Most indices of central bank independence tend to penalize the presence of additional mandates or responsibilities beyond price stability. However, a mandate that excludes full employment does not seem optimal, given that central bankers should focus on the consequences of its actions, certainly on long-term growth and economic activity. Research has emphasized complementarities indeed between price stability, economic stability, and financial stability, providing rationale for these overlapping objectives at many central banks. And in practice, although the recent inflation run-up showcased the commitment of most central banks to fight inflation, it also appears that they have been willing to provide some accommodation after having gained greater confidence that inflation pressures had dissipated. In fact, most central banks have initiated an easing cycle even with inflation still somewhat above their respective targets, and regardless of the presence or not of an employment goal in their mandates. So if central bank independence does improve inflation outcomes, one question is how it accomplishes it. Let me now turn to an issue I mentioned earlier: credibility. If the central bank is credible about its long-run inflation target, it would be a natural outcome that long-run inflation expectations will tend to be closer to the target than when that credibility is lacking. And a central bank will be more credible if it takes actions that lead the public to be confident that the central bank is actively pursuing its stated goal. It is possible to formalize the channel through which a central bank chooses a long-run inflation target and the public slowly learns about its commitment to achieving it, gradually anchoring long-run expectations. The public observes inflation and economic activity outcomes as well as the central bank's actions.
Example changes in the federal funds rate and it updates its long-run inflation expectations, which in this model coincide with their perception of the long-run target. For instance, a nominal interest rate that is higher than expected given observed inflation and economic activity and the public's long-run inflation expectations leads to an updated lower value of the perceived inflation target. If the central bank's policy actions are consistent with its long-run inflation goal, the public's long-run expectations will gradually settle at the central bank's long-run goal, and this dynamic will anchor inflation expectations to that long-run target. The stock of credibility of a central bank will be reflected in long-run inflation expectations moving in a relatively narrow range close to the stated inflation goal. Conversely, inconsistent actions will imply that agents will update their long-run expectations higher or lower depending on the direction of surprises in central bank actions, causing the anchoring of expectations. And to the extent that long-run inflation expectations matter to the dynamics of actual inflation, such as in some Phillips curve models, anchoring of inflation expectations is one of the key elements leading to stable inflation. The model also offers an interpretation and a contrast of the behavior of inflation and inflation expectations during the Great Inflation of the 1970s and during the post-pandemic period. As inflation rose in the 70s and monetary policy actions failed to rein it in, the Federal Reserve lost credibility and longer-term expectations of future inflation rose towards the end of the decade. The Federal Reserve indeed struggled for years to rebuild that credibility, resulting in high and volatile inflation. Conversely, in the recent episode, the post-pandemic period, inflation has traveled a long way from its peak with no deterioration in economic activity and comparatively limited movement in long-run inflation expectations. Credibility is enhanced by transparency and accountability, and I will conclude with a discussion of how these principles are carried out by the Federal Reserve. The Federal Reserve seeks to explain as clearly as possible what it is trying to do in carrying out its dual mandate objectives and how it is trying to do so. Such transparency and accountability are necessary under our democratic system, but it is perhaps particularly important for the Federal Reserve, which has been assigned such an important role in promoting a healthy economy. In addition to conferring legitimacy for decisions, transparency makes monetary policy more effective as the public better understands our monetary policy reaction function, which informs the public how our decisions are shaped by economic conditions. Monetary policy works in part by trying to influence the public's view of future economic conditions, so it is crucial that these intentions are clearly communicated. The Federal Reserve promotes transparency by issuing a FOMC meeting statement explaining its decision and then following up three weeks later with detailed minutes. Every three months, FOMC participants' projections for inflation, unemployment, economic activity, and the likely path of monetary policy are public in the Summary of Economic Projections. The chair conducts press conferences after every FOMC meeting, and both the chair as well as other FOMC participants, such as myself, explain their reasoning on policy in speeches, news interviews, and other public appearances. The chair testifies to Congress on monetary policy twice a year, responding to questions from lawmakers. Transcripts of FOMC meetings are published after five years. More recently, the Fed has adopted the practice periodically of reviewing its monetary policy strategy, tools, and communication practices, including holding public Fed Listens sessions around the country to get public input. Transparency is likewise seen in other economies as fundamental to monetary policy independence, which has increasingly been recognized for delivering better policy decisions that are more focused on the long-term health of the economy. Research continues to add to our understanding of the extent of these better outcomes in different economies and also how independence works in different institutional arrangements. The goal, of course, is more stable economies that deliver broadly rising living standards in Latin America, in the Caribbean, and around the world. Let me now turn to the current economic outlook in the US and how our monetary policy independence has permitted us to be and to get where we are now. The US has seen considerable disinflation while experiencing a cool but resilient labor market. Numbers just released this week showed that headline and core PCE inflation have fallen substantially from 7.1% to an estimated 2.3% and from 5.6% to an estimated 2.8%, respectively, in October. While wage moderation and anchored inflation expectations may allow us to continue to make some progress on inflation, stubborn housing inflation and high inflation in certain goods and services categories may slow our progress in reaching our target. At the same time, labor markets have rebalanced given greater labor supply from immigration and prime-age workers and lower demand from restrictive monetary policy. Thus, although the labor market experienced an extended period of low unemployment and job creation these past several years, as well as strong wage growth, the labor market has cooled. It is yet to be seen whether changes in the trend of immigration may take us back to a tighter labor market. The combination of a continued but slowing trend in this inflation and cooling of labor markets means that we need to continue paying attention to both sides of our mandate. If any risks arise that stall or re-accelerate inflation, it would be appropriate to pause our policy rate cuts. But if the labor market slows down suddenly, it would be appropriate to continue gradually cutting the policy rate. Thank you again for inviting me to address you today, and I would be so glad to spend some time with you responding to your questions.
Well, I also have to thank the organizers for inviting me to chair this session and hold this conversation today. The idea now is to spend a few minutes that we have left to go over some of the points that you raised and discuss them further given the audience at this conference. I was wondering, you reviewed a lot of what the research has said about central bank independence and its effects. I was wondering about the challenges that you think that research should address in terms of central bank independence. What has not been said? What do we need to research? What do you invite this audience to look into?
This is a great opportunity for researchers out there to help us policymakers out, so thank you for raising that issue. In preparing this speech, I have to say I was so glad to see so many interesting papers and to review some of the seminal papers even on the theory side on this topic, including Guillermo Calvo's 1977 Econometrica paper. So I'm so glad you have an invited lecture series on his name because he's really made some seminal contributions, also Kydland and Prescott from 1977. But I was really impressed with the very extensive empirical literature that has developed in this field, and some of this literature is really very good. It does a really good job and a very meticulous job in measuring central bank independence with these very good indices that start even all the way back to the 1800s. However, as is usual in this literature and in macro literature, obviously because of measurement issues but also because of the fact that we cannot just randomly make decisions, the issue of empirical identification is certainly a challenge. So looking at the causality from independence to the outcomes that I was mentioning, including the level of inflation, volatility of inflation, and certainly economic activity, I would say that's a challenge. Certainly variation comes at the yearly level, so the temporal variation in the indices is at the yearly level, but many banks don't change their independence or level of independence year to year. And so what researchers have done is try to expand this panel cross-sectionally, and they have expanded it to about 120 countries, and that helps because you can then control for country fixed effects, time fixed effects, even country-specific trends. But certainly that doesn't quite get there to identification. So I guess as a microeconomist myself and somebody who cares deeply about identification, I would urge researchers to try to look for exogenous sources of variation, some ways in which you can identify that causal effect, and try to find some sources of variation, whether political or otherwise, that change the level of independence and doesn't affect that outcome. Look for natural experiments. In addition, as I mentioned, there are some interesting papers starting to try to get under what conditions this independence is more or less effective, and I talked about the judiciary and the factor independence, for example. There are other dimensions that I mentioned that have not yet been explored fully in the literature, so I would urge researchers to try to pursue those. And then I think looking through the channels I talked about, credibility and expectations, so looking at micro data, for example, trying to look at both consumer and business confidence and expectations as an outcome, looking at big data and micro data could help us to get at the issues of the channels through which independence affects outcomes.
How about another issue that you raised, which was transparency? How do you see research in terms of shedding light on the importance of transparency? And let me put that together with another question. You talked about transparency in terms of its role for monetary policy transmission. You talked about how you guys work towards transparency. Do you also see a connection between transparency and central bank independence? Is transparency also important to foster central bank independence? So a lot on that question, but transparency research, central bank independence, how do you see those connections?
Thank you for that question. As we speak right now, this speech is being transmitted to the media and to the public in the US as well, and we view that as being incredibly important because with independence comes the responsibility to certainly provide transparency, and that actually enables Congress to do proper oversight, and in turn that supports our democratic legitimacy. So that's really important. We definitely try very hard to proactively seek that transparency, to explain to the public, to the media, to legislators how we make our decisions. I mentioned a few of the ways in which we do that. One of the ways is certainly by giving speeches like this one. I give many speeches around the country and around the world explaining our thinking about where policy may be going, explaining our analysis of inflation and labor markets, and why we're making those decisions. I also take very seriously the fact that we should represent all Americans, and so we engage with the public actually on a regular basis. We have a Community Advisory Council, we have a Federal Advisory Council, we have a Community Development Institutions Advisory Council. We meet with labor groups, with builders associations, with insurance associations, with banking, with small businesses, with a whole range of constituents and people out there that may be affected by our policies. So we take it very seriously. And by the same token, I meet with Congress. I had a hearing to get confirmed through the Senate, but my dialogue with Congress didn't stop there. I meet with certain frequency to hear the views of those in Congress, to hear their concerns, and to explain my thinking as well on monetary policy. So I think transparency obviously is very, very important in terms of providing democratic legitimacy, but it is also really, really important in terms of our monetary policy transmission. So if we explain our thinking, as I mentioned during the speech, what happens is that the public can understand how our policy responds to economic conditions. In essence, it explains to the public our monetary policy reaction function, and they will know exactly why we're going there, and that's what allows us to keep inflation expectations well anchored. So that anchoring of expectations, that credibility as I said before, is critical for our policy to pass through to prices, and that is why we believe we need to be as clear as possible, communicate with the public, and explain to the public where our decisions are coming from, so that they know that our decisions are purely based on the state of the economy and the risks that we see in the economy.
So I want to change gears a little bit to something I feel more connected and comfortable with, because you and I have shared in the past an interest on productivity. And I'm wondering to what extent your understanding of the role of productivity, the trends of productivity, the roots of productivity, and also the directions that productivity growth has taken, to what extent those perceptions also shape your view of where the US economy is going and therefore of your current role.
