Lecture by Dr. Stephen Miran, Μember of the Board of Governors of the U.S. Federal Reserve System

Thank you. Thank you, Madam Ambassador, for the introduction and thank you to the Deli Economic Forum for the opportunity to speak today. My topic is the implications of deregulation for monetary policy, an appropriate one for this setting. Greece's recovery from the crisis that began in 2009 was only possible after the Greek people implemented substantial and painful reforms, including alleviating suffocating overregulation in many sectors. In addition to the other reforms embraced by Greece, deregulation freed businesses to compete domestically and internationally and promoted individuals access to the economy. The range of reforms has included liberalizing product and service markets, easing licensing and administrative burdens, opening previously restricted professions, and increasing labor market flexibility. The government liberalized electricity and gas utilities, privatized airports, ports, and utilities, and reformed bankruptcy procedures and other business laws. While it is challenging to quantify how these deregulatory actions have affected the economy, there is little doubt that these reforms have supported a remarkable return to economic growth and higher living standards. Macroeconomic stability has returned to Greece. Unemployment has fallen to its lowest level since the global financial crisis, and investment and exports have rebounded. Product and labor market reforms helped restore competitiveness, reduce unit labor costs, and encourage firm entry by easing the ability of supply to respond to prices. These reforms have improved the transmission of monetary policy. While monetary policy is set by the ECB, its transmission varies in part with how national governments manage their economies. Long-term Greek borrowing rates have narrowed their spread to Germany's now below 1% compared with 6% a decade ago. Greece has come a very long way impressing the whole world with its recovery. For all of the conversation around Mario Draghy's report, Greece shows that well-targeted deregulatory reforms can help lay the foundation for more sustained and robust economic growth by expanding the productive capacity of the economy known as the supply side. Such sustainable increases in actual and potential growth have different implications for monetary policy than purely cyclical growth spurts which boost growth in the near term without raising economic potential. These jolts can create substantial inflation undermining growth in the medium-term by forcing central banks to raise interest rates and also in the long term by causing a misallocation of resources. Recent experience has reinforced the need for central bankers to fully consider the broad range of non-monetary factors that could affect the appropriate stance of monetary policy. One such factor that is especially important at this juncture is the regulatory burden borne by businesses and individuals which has begun to recede in the United States in the last year. I believe that the sweeping deregulation underway in the United States will significantly boost competition, productivity, and potential growth, allowing for faster economic growth without putting upward pressure on inflation. This would support continued easing of restrictive monetary policy. But ignoring these effects would result in monetary policy that is needlessly contractionary. One challenge for central bankers in fully incorporating deregulation into their economic outlooks is that it is difficult to measure in aggregate. Economists are inclined to study things when there are quantitative data to eliminate their work. A version of the famous lampost problem of only looking where the lampost shines. This may have contributed to a tendency to give short shrift to regulation in judging the economic outlook. Quantitatively measuring regulations is more difficult than measuring taxes, subsidies or interest rates. Regulations that businesses face can vary enormously based on the sector size and sometimes even age of a company. Some regulations ban activities altogether. Some regulations impose fixed or variable costs for complying. Some regulations affect consumption decisions and some affect production. Regulations can vary enormously across jurisdictions and sometimes within jurisdictions. Additionally, enforcement determines how binding regulations are in practice, and enforcement can be even harder to measure than the effects of regulations themselves. These measurement challenges are evident in the abundance of economic studies on specific regulations, but the much smaller volume of work that tries to comprehensively measure the aggregate effects of the accumulation of regulations on the macroeconomy. From the perspective of an individual firm, it may be easy to adjust behavior in response to one regulation known as a margin of adjustment. But compounding regulations can constrain the ability to shift costs by hitting multiple margins of adjustment all at once. One pebble doesn't stop a stream. Water can flow around it, but pile enough of them up and the pebbles will collectively stop the stream. A common approach to quantifying the effects of regulations is to count the number of pages of new regulations. Though this does not account for varying economic significance across pages. Another approach is to count the number of work hours required to comply as reported under the paperwork reduction act. However, there is wide variation in how different regulatory agencies produce these cost estimates. even sometimes variation within agencies and more importantly the counting of work hours related to the P does not capture the full opportunity cost of the regulations that is how the lost hour of work could have been used more productively or the firms and industries that don't exist at all because of the regulation if a firm needs to hire a person to comply with some new regulation and can't hire a sales associate who could generate new business or can't engage in a productive activity at all then the foregone opportunity can be significantly larger than the wage for compliance hours. There has been some progress in measuring regulation through advances in natural language processing and artificial intelligence and I expect more of this to come. For instance, Patrick Mclofflin's Quantgov project at Stanford University's Hoover Institution uses computational tools to move beyond regulation page counts toward counting restrictions and obligations imposed by the text and quantifying regulations by industry. In other work, Joseph Kalmenovitz uses machine learning methods to count and separate regulations that are relevant for a firm's core business opportunities from those that are not relevant. These measures show a substantial drop in the number of roles in 2025. Among other deregulatory efforts is the current US administration's onein 10 out policy, revoking 10 old regulations for every new one adopted. Based on the pace of the administration's deregulatory efforts in the first part of 2025, I estimate that if this pace continues, 30% of the regulatory restrictions in the code of federal regulations will be eliminated by 2030. Though this may prove to be an underestimate, regulations can have far larger consequences for the supply side than, for example, taxes because they amount to outright prohibitions and thus function as infinite taxes. Quantity controls are usually far more damaging economically than those that directly affect prices. Consider agglomeration. When a group of firms in the same industry benefit from proximity, such as R&D labs being near to production plants or clients and customers, an auto parts producer benefits from being close to an automaker. Environmental or other restrictions that restrict collocation can affect the entire economy's supply side by preventing the agglomeration necessary for an industry to be profitable. Take one piece of an industrial ecosystem away because of regulation and the rest become harder to sustain. Supply chain ecosystems exist or don't because of regulations determining what activity can take place and where. I think it is hard to argue that say the excess burden of going from a 30 to a 33% marginal tax rate has the same effect as a regulation preventing an entire industry from existing domestically. Regulations, particularly those that affect physical production, can force the economy from high productivity sectors to low productivity sectors by encouraging capital intensive production to move to less regulated places like China. Research on the effects of regulation on the supply side of the economy has developed along two major lines of inquiry. The first studies regulation's effect on total factor productivity or TFP and economic growth by making production more expensive. If regulations make say electricity or manufactured goods more expensive to produce, they lower TFP productivity. Regulations can also distort investment decisions across sectors or impede innovation leading to an economywide misallocation of resources with commensurate effects on aggregate productivity levels. An alternative way of modeling regulation is via its effect on free entry and markups. Regulatory costs that appear as marginal from an industry perspective often originate as fixed costs from a firm perspective. An existing home builder building one more house may be marginal, but for a new entrant to build it, they would have to invest in a vast compliance infrastructure. In many jurisdictions, they'd have to learn how to measure carbon emissions, decipher labor regulations, pass various inspections at various stages, and pay other fixed costs. The barriers to building a house have become so burdensome that many builders exit entire markets, leaving numerous large metro areas without desperately needed supply. As such, regulations often serve as barriers to entry with all the attendant consequences. Reduced competition, artificially high returns to scale, higher markups, reduced innovation, and reduced productivity growth. Let's call these markup regulations. There is abundant evidence both within and across countries that increased regulation causes reduced firm entry, decreased competition, and lower investment. All consistent with these elevated fixed costs of operating. Decreased firm entry competition and innovation lead to a malaise familiar to many. Formerly dynamic industries calcify, flagship businesses choose to move elsewhere or shutter completely, and communities feel cheated out of their way of life. Now let me discuss the implications of regulation and deregulation for monetary policy. Most theory and research suggest that increasing the regulatory burden reduces productivity and thus puts upward pressure on prices. This is intuitive. Regulations impede production and deregulation removes those impediments. More production means lower prices and vice versa. But gauging the magnitude of these effects can be difficult. Work by Dustin Chambers, Courtney Collins, and Alan Krauss found that a 1% increase in US federal regulations in a particular industry is associated with a roughly 10 basis point increase in consumer prices in that industry and that is only in the near term. Longer term effects and effects from more substantial changes in regulations are in my view likely to be substantially larger since firm entry and the effects of increased competition develop over time. Supply chain ecosystems can take years to rise or fall. I'd also expect cross-industry spillovers to boost aggregate effects above this level. But even these modest within industry short-term effects would be substantial in the context of the potential 30% decline in the regulatory code that I projected earlier. This implies a cumulative drag of roughly 3% on the consumer price level through 2030, a little over half a percent per year. What happens in the short term depends on various factors. The types of regulations involved, the way these regulations affect firms and households, and the manner of enforcement. On balance, I believe the substantial deregulation that has occurred in 2025 will continue over at least the next three years and be a large positive shock to productivity that will put downward pressure on prices. On net, this supports a more accommodative stance of monetary policy. As I've argued, I think the primary effects of deregulation are on the supply side of the economy and have the effect of increasing potential output more than they increase actual output. For example, if the number of goods I can produce is effectively limited by a regulation and that cap is removed, this means I can produce more. If demand increases and production is limited by regulation or some other factor, then prices increase. If demand rises and these shackles have been removed, then output grows and pressure on prices is much smaller. While I think of regulation as primarily a supply side factor, it can affect demand. For instance, the news of planned deregulatory action can stimulate investment now for future production, increasing aggregate demand and prices in the short run before prices adjust to the lower level that would prevail over the longer run. However, I see little reason to expect the shortrun effect on demand will exceed potential. In an earlier speech, I assumed that deregulation immediately increases actual output half as much as potential output and then the two converge over a few years. While some approaches assume TFP shocks increase actual and potential output by the same amount, work by Olivier Quabon, Yuri Gardenko, and Mauricio Latte shows that a structural approach to modeling the supply side results in potential output overshooting actual output in response to a TFP shock. Of course, this matters because the output gap is a primary input into calculating the appropriate setting for monetary policy. If actual output falls below potential output, there is slack in the economy that could be accommodated by looser monetary policy. If deregulation boosts potential output above actual, the correct response is to cut interest rates. At the same time, by increasing the marginal product of capital, deregulation may raise the so-called neutral rate of interest at which monetary policy is neither accommodative nor restrictive. I addressed this in an earlier speech, my first speech as a member of the Federal Reserve Board. Turning to markups, the second channel for the effects of regulation on the supply side, models indicate that if monetary policy ignores the deflationary effects of deregulation, then we risk causing an unnecessary contraction in the economy. That is the implication of important 2014 paper by Gaudy Eggertson, Andrea Ferrero and Andrea Rafo which models deregulation as a reduction of markups meaning increased competition in a standard new Keynesian model. They find that the appropriate response of monetary policy is to reduce interest rates in response to this type of deregulation shock and offset its consequent deflation. If for some reason monetary policy fails to do so, then deflation and economic contraction needlessly result. This model implies that if the Federal Reserve fails to reduce policy rates in response to deregulation, there will be adverse consequences. Greece's experience testifies to this. Had the ECB not implemented exceptionally loose monetary policy and effectively accommodated Greece's structural reforms, the outcome for Greece would have been quite different. The outcome for the Euro zone would have been quite different. I believe that central bankers should be paying close attention to the effects of regulation on productivity, output, and prices. In recent quarters, policy has been tighter than it should have been to reflect significant deregulation, lifting potential growth and reducing inflation. Going forward, I expect that the ambitious deregulation underway in the United States will boost growth without boosting inflation and be one factor supporting a further easing of monetary policy. In this regard, Greece and the ECB have lit the path and shown us the way. I've raised this point with my Federal Open Market Committee colleagues and I expect to continue to do so as our deliberations proceed. Thank you.

Well, I think perhaps you give me too much credit and also refer to work that I did in my previous job, not while I was not at the Federal Reserve. I think that there was a variety of goals behind those things. And I think that when you look at what tariffs have done thus far, what the effects have been as far as a central bank and monetary policy is concerned, I think there's no doubt about it that tariffs have had some consequences that we have to take into account and do in our as we make our outlook and as we decide what the appropriate settings for monetary policy are. I think chief among those has been an effect of raising revenue which has served to underline and stabilize financial markets and particularly treasury markets and interest rate markets. As you know, the world gets bouts of concern over the size of deficits and I think by reducing that it's reinforced stability by reducing deficits. The congressional budget office estimates over almost $4 trillion dollars over a decade something like that for the effects of tariffs. And I think by bringing in that revenue and stabilizing bond markets, they've helped to stabilize financial markets, which of course matters for us. I've also spent a lot of time discussing how the revenue from tariffs has lowered what we would think of as the neutral interest rate by adjusting the national balance of savings minus investment. And then of course there's effects on inflation. I've spoken a lot about that as well. About a month ago, I gave a speech on inflation where I analyzed that I do not view tariffs as having driven material inflation in the United States for a variety of reasons. I think that a lot of the people who do make that conclusion do so because they compare goods prices to some sort of trend that was occurring before the pandemic. In my mind, if you compare United States goods inflation to goods inflation elsewhere in the world, it doesn't stick out. Which is something that you would think would happen if tariffs are driving inflation in the United States. Or if you compare imported core goods versus overall core goods in the United States, again, there's not really a material difference that would make you think that tariffs are driving some sort of significant inflation in the United States. So, I think as far as monetary policy goes, those are the things that tariffs really matter for. As far as the other stuff, I think that there was a lot behind organizing and implementing those tariffs and we'll see how they develop but as a central banker I have to stick to central bank issues.

Oh, I mean it seems very clearly that the volatility in trade has gone down materially over the last six or seven months. I think there's no question about that. The United States has reached trade deals with more than two-thirds of our major trading partners. Not including China. I think that's very substantial and we sort of continuously hear about new trade deals being worked out. It seems no doubt about it to me that volatility associated with international trade has declined materially in the last six months. Things seem to be much stabler now. I have no doubt that we'll get continued little bouts of new news flow and continued shocks to those, but I think there's no doubt that we're very past the peak of this volatility.

Well, you know I think that you're pointing to one fact that shocked me is that the Euro zone now has a larger trade deficit with China than the United States does. Right. And so this was a shocking thing to me when I learned it a few weeks ago. I think it does have consequences that matter for monetary policy because international demand really is an input into how we think about the development of the US economy and the way that we would set interest rates in the United States based on employment and inflation in the United States. And to the extent that the Chinese export of cheap goods is destroying demand in a place like Europe that would lead to decreased trade with the United States, decreased demand for US goods. I mean I think it absolutely is something that would affect growth and inflation in the United States. To put it another way, a lot of international price trends, a lot of inflation trends are international in essence right and there's a reason why inflation has for many periods of time co-moved so closely across countries. And China increasing its export of goods to places like Europe, to other US trading partners, very much has an effect on the international economy that is absolutely one that matters for inputs into United States.

So that's a great question and I wish I knew the answer to that especially. I talked a moment ago about how I don't think tariffs are driving goods inflation for some of those reasons as well as other reasons like the bottom in goods prices and the increase in goods prices happened in the middle of 2024, right? So unless somehow these goods prices were looking ahead nine months, it stretches credibility in my view to think that tariffs are driving goods prices in light of all that evidence. So then I'm left with a question of what is driving them? And to me it's an open question. I don't have an easy answer to that. I think there's a few possibilities none of which are really that satisfying. It's possible that it's a combination of those possibilities. One is that it's just more continued post-pandemic bull whips, right? Where we had surges in prices and then prices came down and inflation came down in goods and then we had another surge in goods prices. It could just be oscillations. It could be that they'll mean revert down in light of those. It also could be that it's due to other international developments that are not tariffs. Right? We've had increasing use of export controls in the high-tech sector and in critical mineral sectors. Those have existed for many years now, right? They didn't occur in April. They weren't invented in April of 2025, right? Those restrictions have been in use for many years. China implemented its law around rare earth restrictions in 2016, right? And even though they've ramped up implementation of that law in the last year, those laws date are almost a decade old at this point. And then of course there were many years of increased tech restrictions prior to the introduction of tariffs. So the co-experience as well of not being able to source necessary medical equipment in the middle of a national health emergency. So I think it's quite possible that there have been all these disruptions to international trade that have been going on for many years and are driving goods inflation higher. And I think it's an easy facile and lazy conclusion to blame all of that change on tariffs when in fact there have been many changes to the international trading system. Tariffs are only one part of that. If that's the case, it's possible that goods inflation stays elevated for a longer period of time. And to be clear, I don't know that this is the case. I want to see more research on this. I want to see more studies on this. If it is the case that goods inflation stays higher for a longer period of time, then that's potentially a problem. However, it's not a problem that I'm too worried about from a monetary policy perspective because I see so much disinflation coming from other parts of the index. When you look at market rents in the United States, they've been growing at a 1% rate for two years. Measures of all tenant rents have finally caught up to measures of new tenant rents. That means that there's going to be exceptional disinflationary pressure from shelter in the pipeline. Non-housing services are also going to revert down because they'll ultimately follow the labor market and because certain peculiar categories like the way portfolio management services are calculated, they basically just track the stock market, right? which means that there's no reason to expect a enormous duplication of the outsized portfolio management service contribution to the inflation index again following years. So I see a lot of disinflation coming from shelter and services both shelter and non-shelter in the future and so I don't know that it's the case that goods prices will stay elevated for a longer period of time but if they do I think it's okay because there's so much disinflation coming from elsewhere. One point that I think it's important to make is that if I end up being right about shelter, that there's a lot of disinflation in the pipeline from shelter because of the stance of market rents and I end up being wrong about goods prices and say tariffs really are driving goods prices higher, then that means that the tariffs are a one-off increase in the price level and the inflation rate in goods comes down after that. If I end up being right about shelter and wrong about goods, that means that we're going to really undershoot our inflation target. In other words, two-sided inflation risk around the inflation target is back on a forward-looking basis.

From a central bank perspective? Uh, you know, I think stability in financial markets, stability in international financial markets, is important is the most important thing. And so that sort of transcends weak or strong. They both weak and strong both have consequences for economic growth for inflation that we would take into account when we set monetary policy. You know because they can affect growth, they can affect employment, they can affect prices. But I think overall stability of financial markets is something that is of more concern from a central banker's perspective than the actual level of the dollar, weak or strong.

Yeah. So, my perspective, as you heard I have a general view that less regulation is better for economic growth and leads to better prices.

Yeah, I have a general disposition in that direction. You may have gleaned. With respect to private credit markets, I think a lot of the growth in that sector has been a form of regulatory arbitrage not all of it but a lot of it has been a form of regulatory arbitrage where we've overregulated the banks so much. Look, arguably before the global financial crisis the bank maybe there was not enough regulation, that's why we had the global financial crisis potentially or sorry it contributed to it, but I think then we overreacted in the other direction and we implemented way too much regulation on the banking system and that meant that it only really became profitable to make a lot of those loans outside of the banking system because the balance sheet cost, the regulatory cost of making certain types of loans became too big. And so banks retreated from those markets and private credit stepped in to fill that void. And in some ways the growth of private credit, the growth of some private markets has been a form of regulatory arbitrage where it's not necessarily that it makes more sense from an economic relationship between borrower and lender to make a loan in this way but it makes a lot of sense from a regulatory perspective. And my view is that regulatory arbitrage is bad. I want markets make a lot of sense. I think that individual buyers and sellers know what's best for them and if a borrower and a lender agree that it's best that this loan be made through a bank, great. If they agree that it's best made through a non-bank, great. But that reasoning shouldn't be because of regulations, right? The government should not be putting its thumb on the scale to tilt economic activity into one sector or one form of lending versus another, right? So my view is that a lot of the growth there has been as a result of overregulation of the banking sector. And I think that we've been making a lot of progress on peeling back some of the overregulation of the banking sector. Vice chairwoman Bowman has been doing a marvelous job modernizing and right sizing the banking regulatory apparatus and I expect a lot more of that to continue in the future. So my expectation is that a lot of the success of the retreat of banks and a lot of the private credit markets will return back towards whether it makes economic sense or not. And if it makes economic sense for this lending to happen in the non-bank sector that's great, it's fantastic. And if it makes sense for it to happen in the banking sector, that's also great. That's fantastic. But it shouldn't be because of regulation.