ESA (Vic) 2014 Professional Development Seminar #8 Bruce Preston "Stabilization Policy with Long-term Drift in Expectations"

About the seminar

This talk develops a theory of the fiscal foundations of inflation based on imperfect knowledge and learning. The theory is similar in spirit to, but distinct from, unpleasant monetarist arithmetic and the fiscal theory of the price level. Because the assumption of imperfect knowledge breaks Ricardian equivalence, details of fiscal policy, such as the average scale and composition of the public debt, matter for inflation. As a result, fiscal policy constrains the efficacy of monetary policy.

The strong implication is that heavily indebted economies with debt maturity structures observed in many countries require aggressive monetary policy to anchor inflation expectations. The model predicts that the Great Moderation period would not have been so moderate, had fiscal policy been characterized by a scale and composition of public debt now witnessed in some advanced economies.

About the speaker

Professor Bruce Preston is one of Australia most outstanding macroeconomists. He holds the Richard Snape Chair in Business and Economics at Monash University; is an Australian Research Council Future Fellow; Senior Research Adviser to the Reserve Bank of Australia and former faculty member at Columbia University.

His main interests concern monetary policy and the formation of expectations. A specific focus of his research explores empirical evidence supporting different theories of belief formation and also how “near-rational expectations” potentially constrain what can be achieved by macroeconomic policy.

His recent work has been published in prestigious journals such as the American Economic Review, Journal of Monetary Economics, the Journal of International Economics, the Journal of the European Economics Association, and the Journal of Econometrics.