Related Links

• CORE Week, Featuring the Marvin S. Goodfriend Conference
• Honoring Marvin Goodfriend
• Goodfriend profile page

Transcript

Tim Sablik: Hello, and welcome to Speaking of the Economy. I'm your host, Tim Sablik, a senior economics writer at the Richmond Fed. I'm joined today by Alex Wolman, vice president for monetary and macroeconomic research at the Richmond Fed, and Robert King, professor of economics at Boston University.

Alex and Bob, welcome to the show.

Robert King: Glad to be here.

Alex Wolman: Thanks.

Sablik: Today we're going to be talking about the life and legacy of Marvin Goodfriend, who was a longtime part of the Richmond Fed Research Department. He served in the Research Department for more than 25 years, as research director and policy advisor from 1993 to 2005. After leaving Richmond, he became professor of economics at Carnegie Mellon University until his death in 2019.

At the time that we're recording this episode on May 13, you both just concluded a two-day conference here at Richmond honoring Marvin Goodfriend. And you also edited a collection of essays about his legacy. That's available now on our website at Richmondfed.org. I would definitely encourage our listeners to go check out that collection.

Just by perusing the many titles of essays there, they can see that throughout his career, Marvin has had a tremendous impact on how economists both inside and outside the Fed think about monetary policy. We would need a much longer podcast to cover all of his contributions to economics, but today we're going to try and touch on a few of those.

To start, I wanted to ask about each of your personal connections to Marvin and how he influenced your careers as economists. Bob, why don't you start?

King: Marvin and I were PhD students at Brown University in the mid-1970s. We bonded over our shared interests in macro and our love of history. This was a time of great change in economics, and particularly in macroeconomics with the so-called "rational expectations revolution."

Our backgrounds in math and in history, frankly, equipped us to learn a new set of tools, but we needed support. We supported each other but we also had a diverse group of faculty. Herschel Grossman was a prominent macroeconomic theorist. William Poole was a monetary economics economist who later became the president of the St. Louis Fed.

Marvin's main adviser was George Bortz, who was an international economist and the editor of the American Economic Review. So frankly, in graduate school, Marvin and I got paid to check the math in forthcoming papers in the leading journal of the profession. It was quite a gig.

Sablik: It sounds great.

King: Then, I went to Rochester as an assistant professor and Marvin came to the Richmond Fed. And at that point our relationship deepened. We'd been study buddies, but now we were out on the frontier trying to figure out where our research should and could go. At the time, Rochester was a kind of analytical hotbed of monetarism, with the noted Swiss economist Karl Bruner, and of rational expectations with Robert Barro. At the same time, under Robert Black's leadership, Richmond was sympathetic to these ideas. So frankly, I was incredibly lucky to be one of Richmond's first consultants, and at quite an early point in my career. The Bank leadership realized it had a gem in Marvin and they took his recommendation that they should hire me.

Richmond provided me with a valuable intellectual stimulus and exposure to central banking that had a really major influence on the course of my career. Now I'll close this little segment with telling one story. I'm an assistant professor at the university. I'm coming down to visit Marvin at the Reserve Bank and I'm working in an office not too far away from where your office is nowadays, Alex. A trim man in a brown suit came by and he said, "I'm Bob Black. We're very glad you're here."

Wolman: Bob Black was the president of the Richmond Fed in 1989 when I came to the Richmond Fed as a research assistant. That's when I first knew Marvin, first got to know him, at that time as a towering figure in the Research Department when I was a 22-year-old RA. He was somewhat intimidating to the research assistants at that time. I remember we had a meeting with him, where he went around the room and asked, "Where are you all from?" The first RA answered the question, "I'm from St. Louis." Marvin shook his head. "I mean, intellectually, where are you from?"

Because I had the good fortune to work for him a little bit on an article about euro dollars for the important Richmond Fed publication, "Instruments of the Money Market," which I have here in front of me. That was great experience. Then, as a grad student at UVA, I took a second-year course in monetary economics from him, so he was my teacher. In the later years in grad school, I would go for dinner in Charlottesville with him on the evenings that he was teaching that same class, so we became something closer to colleagues and friends. Finally, I was hired by the Richmond Fed where Marvin was then research director in 1996, and so he was my boss, my colleague and my friend.

About influence, Marvin set an example for me of an economist who is equally passionate about research and his role as a monetary policy adviser. That example was replicated by others in the department, but Marvin really set the example with the full support of President Al Broaddus and Bob Black before him. Now we have that same support from Tom Barkin.

Some might view research and policy work as competing with each other. But Marvin showed that they can be complimentary, feeding off each other as policy questions lead to research which informs policy and then can even suggest new policy questions. For the leadership of the Bank, I think they saw that having a staff who were encouraged to do independent research enhanced rather than detracted from the quality of the policy advice that they got.

Sablik: Yeah. As you just mentioned, Marvin was instrumental in the development of the Research Department here at the Richmond Fed during his tenure. He was also a strong proponent of each regional Reserve Bank having a unique voice in the Federal Reserve System and advocating for policy positions based on sound research. Bob, how do you view Marvin's influence on the regional Reserve Bank model today?

King: Well, directly he had a huge influence in Richmond that was tangible. Over the many years that I spent visiting, Richmond became a template for other research departments around the Federal Reserve System starting in the mid-1980s.

I was talking with Mike Dotsey last night. He's the research director in Philadelphia with a Rochester PhD and 20 years at Richmond. He really emphasized this impact for me. Mike's kind of wry guy and the way he put it as after Richmond's success as a research director someplace else, you couldn't make any excuses because it didn't have natural advantages of a big city and major universities. All it had was heart.

Sablik: When Marvin started at Richmond, the Fed was much more secretive than it is today. He was actually someone who challenged that secrecy in a 1986 paper that was pretty controversial at the time. But I think he was ultimately vindicated by the fact that the Fed has become much more transparent. I wanted to talk to both of you about how you view the role that Marvin had in that transformation.

King: It's important to set some context here. In March 1975, the Fed was sued in a Freedom of Information Act case to release its policy directive, including the settings for the funds rate target, and memoranda of the meeting. To us today, that kind of seems strange — what do you mean? But at the time, it was not in the public domain what the Feds funds rate target was. So there was controversy, including from members of the financial community [and] members of Congress, about the extent of information. This court case really put everything on the line. The Fed was forced to write down its arguments in favor of limiting information.

Lars Svensson is a former Princeton economics professor and former deputy governor of the Riksbank, which is the Swedish central bank and is widely regarded as the world's most transparent central bank. In one of the essays in the collection that Alex and I put together, Lars talks about Marvin's 1986 paper. He says it's "an extremely well written, meticulous and fair analysis and critique of the Fed's defense of the practice of secrecy in monetary policy and central banking. His critique was devastating, and he completely demolished the FOMC's arguments in the most precise and convincing way."

Other essays in the volume also speak to aspects of the influence of this paper. In addition to Lars, Bill Poole, Marvin's former adviser, speaks proudly of this work. Al Broaddus discusses it in great detail and with great admiration in his recollection of Marvin's paper. I think it's fair to say that Marvin's paper set the Fed on a course toward greater transparency, a gradual course but ultimately a substantial course.

Sablik: It's definitely one of many examples where Marvin was ahead of his time and not afraid to take on controversial positions.

Another topic that he thought and wrote a lot about was how the Fed uses its tools to achieve price stability. That was certainly something that was top of mind when he started at Richmond in the late 70s. That was a period of high and volatile inflation. Today, the Fed again finds itself in a more volatile inflation environment than in previous decades. Alex, I'm curious what your thoughts are on what Marvin's lasting influence has been in this area?

Wolman: I think it's related to a discussion of transparency, although that might not be obvious.

Marvin was a great, very articulate advocate of inflation targeting very early. Inflation targeting is an aspect of central bank behavior that has become common [and] widespread, but it wasn't always that way and Marvin was an early advocate.

As you know, in 2012 the Fed adopted a formal 2 percent inflation target. That's an aspect of transparency. One could argue that previously the Fed didn't know what its inflation target was. So it's not just about transparency, it's about an actual change in the nature of the central bank's objectives. But it's also about being transparent about that objective.

I think that today, as you said, inflation is high at this moment, not just at this moment but inflation is currently high. But the Fed has a 2 percent inflation target. And four times a year in the Summary of Economic Projections, the FOMC participants provide forecasts, and you can see four times a year what FOMC participants expect for the path of inflation in the next several years. They all expect and intend for inflation to come back to 2 percent, the Fed's official target. I think we're incredibly fortunate in the current situation that the Fed has that inflation target. And Marvin contributed in a not insignificant way to the fact that that inflation target exists.

Sablik: Anything you'd like to add, Bob?

King: Yeah. Actually, I'd like to pick up directly on something that Alex just said. He talked about inflation targeting and he linked it up to transparency.

In my contribution to the memorial project, I reviewed a 2003 paper that Marvin wrote calling for a US inflation target, a public US inflation target in the 1-2 percent range. This was at a very prominent NBER conference managed by Ben Bernanke, before he was a central banker. Marvin argued strongly for such a target. But he also argued that Greenspan had been effectively on a 2 percent inflation target starting in 1996, that there was an implicit inflation targeting regime for the Fed. Now, the distinction between an explicit and implicit inflation targeting regime is precisely related to transparency.

In doing this paper, I went back and I spent some time working with a co-author Yang Lu, looking into the history of inflation targeting discussions in the FOMC. And I was shocked. The first FOMC member to call for consideration of an inflation targeting system in the US was Bob Black in a December 1986 FOMC meeting. Just to place that in context, that is long before the experiments with inflation targeting that began in New Zealand and other countries. Black was speaking to Paul Volcker, and they were concerned that the monetary targeting regime that Volker had brought in place was breaking down. So they were trying to think of a variety of different things, changing the definition of money, and so on and so forth. Black said, in a kind of quiet voice, "I have a more radical idea."

In the mid-1990s, Al Broaddus, with Marvin at his side, argued over and over again for the adoption of an explicit inflation target, talking about how it would make it easier for the private sector to understand what the central bank was doing, that it would avoid the potential for costly inflation scares where people become concerned about high inflation and the Fed has to respond to it.

With one foot in central banking and one in the academic research community, Marvin was able to build a particularly strong public case for inflation targeting. Other people had studied the inflation targeting systems in various countries. But beginning in the middle 1990s, Marvin leveraged economic analysis to make a case for inflation targeting. This was in a paper that he and I wrote in 1997, where we explained why inflation targeting had good properties in the model that macroeconomic analysis was moving toward at the time and is now the standard operating model for central banks around the world. Marvin and I called this the new neoclassical synthesis approach, and it's discussed in an essay in our volume by the Columbia economist Michael Woodford.

That paper that we wrote was much less technical than many academic papers. And it wasn't that we lacked the mathematical skills. It was instead that we were trying to speak to the central banking community and to young academic and central bank researchers about the path that research should follow. It was less technical than many papers, but we could highlight these key elements because the core of the so-called NMS model, had already been spelled out in a model that Alex and I published in 1996, where we talked about the powerful stabilization properties of inflation targeting. So there was a very nice mesh of the intellectual tradition beginning with Black and Broaddus and going down to the work of younger economists.

Sablik: Right. That gets to, again, Marvin's synthesis of research and policies, Al Broaddus being the president who succeeded Bob Black at Richmond. He and Marvin worked very closely together on this and other issues.

As we've been talking, one thing that jumps out from this discussion of Marvin's interest in transparency is it also connects to his work and interest in central bank independence. He thought and wrote a lot about how the actions of the Fed could impact its policymaking independence. Why do you think he viewed this as so important? And how has his work influenced the way that economists and policymakers think about the role of the central bank?

King: In order to talk about that, I want to first take a little bit of a detour into another topic that Marvin viewed as of crucial importance for central banking. That was the idea that the Fed needed and other central banks need to develop and maintain credibility, so that the policy plans that it would announce would be the central determinants of people's beliefs about the future. Everything we've learned in the last 25 years in macroeconomics is that people's perceptions about the future direction of the economy are central for what happens right now. So, credibility is important if the Fed is trying to manage expectations.

This theme of credibility figures prominently in much of Marvin's work and in many of the contributions to the project, including Al Broaddus' personal reflections, the Nobel Laureate Tom Sargent's essay on the Volcker disinflation, my essay with Yang Lu on inflation targeting, Mark Gertler's essay on consensus macroeconomic modeling, and a joint paper by Athanasios Orphanides and John Williams concerning Marvin's pathbreaking work on inflation scares. This nexus of commitment, credibility and communication is just absolutely central for the effectiveness of the Fed, right now as in earlier history.

The question about independence is also partly, as Marvin stressed, a question about the definition of the job that a central bank does. You can be, in some ways, more independent if you have a well-defined range of activities and authority to pursue those. Marvin believed strongly in limiting the scope of the assets that are acquired by the Fed. Essentially, he proposed that private securities should be purchased by the Fed only in its role as a fiscal agent for the Treasury. In the project, Charles Plosser, the former president of the Philly Fed, built on Marvin's analysis in an essay, following up on arguments that Plosser earlier made in the FOMC in 2009.

Now, intelligent people can reasonably differ on the question about whether the Fed's balance sheet could contain Treasuries only. But in my view, these balance sheet composition issues that Marvin first explored in 1988 are likely to be of major importance going forward.

Sablik: Yeah, absolutely. As you talked about many of these issues, again, as we've been saying over and over in this conversation, Marvin was ahead of his time in thinking about these things. Alex, did you have anything to add?

Wolman: I think I'd like to quote from the book of essays that Bob and I edited a couple of passages from people that worked closely with Marvin in the Federal Reserve which relate to Marvin's commitment to pursuing the economics of a particular issue, regardless of where that lead.

The first quote is from Don Kohn, who was a longtime economist at the Federal Reserve Board, the head of the monetary affairs division and, later, vice chair of the Board of Governors. Quoting from Don Kohn, "Marvin marshaled empirical evidence and embedded that evidence in the theory and practice of central banking over history. Marvin was open and honest about his views and the supporting evidence. And however much you might have differed, you couldn't doubt his focus on and devotion to bringing his considerable intelligence and deep learning to serving the interests of the Federal Reserve and the United States." That's from Don Kohn.

From Ben Bernanke, chair of the Federal Reserve Board, who wrote about Marvin's work on interest rate policy at the zero bound: "Rereading Marvin's papers today, I'm impressed by their prescience and insight. I'm also struck by Marvin's conviction that his job was to get the economic analysis right, without concern about the politics."

Sablik: I think that's a good place to end our discussion, although I would happily sit here all afternoon and listen to more of these stories. I want to thank both of you for coming on the show to talk about Marvin and his contributions.

King: Thanks for having us.

Wolman: Thank you, Tim.

Sablik: Again, I would encourage our listeners to visit our website to check out the book of essays of Marvin's work.

Wolman: And Marvin's papers as well, which are available on the website.

Sablik: Yes, thank you for reminding me. Well, that's all we have for today. Thanks again.