Ed Nelson on the Life, Work, and Legacy of Bennett McCallum
In addition to being a pioneer and a titan in the fields of macroeconomics and monetary policy, Bennett McCallum was an even better colleague, friend, and husband who has left an illustrious legacy.
Ed Nelson is a senior advisor in the Monetary Affairs Division of the Board of Governors of the Federal Reserve System. Ed has also previously been a professor of economics at the University of Sydney and has worked at the St. Louis Federal Reserve Bank as well as the Bank of England. Most importantly, however, Ed was also a former student of, and co-author with, the late Bennett McCallum, and he rejoins David for this special live episode of Macro Musings to talk about Bennett McCallum’s life, his work, and his legacy within the field of monetary economics.
Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected].
David Beckworth: Ed, welcome back to the show.
Ed Nelson: Thank you.
Beckworth: He's been a previous guest on the podcast. He has some books on Milton Friedman and some other interesting work we've talked about before. As you know, we're doing this live recording of the podcast at a conference honoring Ben McCallum. You're going to help guide us through his contributions to monetary economics. So you're the perfect person. You know his work well, you can help us understand what he did and his contributions. Before we get into his contributions, just a quick overview of Ben's life-- and I will mention that Ben's wife, Sally, is back here as well. Thank you, Sally, for coming out. She shared some information about Ben's life as well that I'll share with you as we get going.
Beckworth: Just a quick overview of his life. He was born in 1935 and grew up in Corpus Christi, Texas. He attended Rice as an undergrad and that's where he met and married Sally in 1961. He became a chemical engineer, did that for three years, and then he went to Harvard, got his MBA, and I believe that's where his appetite for economics was wetted. He decided to go back to Rice, got a PhD in the mid '60s. Thereafter, he went to the University of Virginia stayed there until 1981, where he went to Carnegie Mellon and stayed there until his retirement in 2016. While he was there, he got involved with the NBER, with the Richmond Fed. In fact, a number of Richmond Fed people are here. He was good friends with Marvin Goodfriend, Bob King, Bob Hetzel, who's here, Alex Wolman, Jeff Lacker, Tom Humphrey, and probably others I'm forgetting. He had a real close connection with the Richmond Fed, so we're happy to see representatives from the Richmond Fed here as well.
Beckworth: He also worked at the Reserve Bank in New Zealand and was a regular visitor to the Bank of Japan. Ed, you were a student of his at Carnegie Mellon and I learned that Charlie Evans was also a student of his around the same time. Later in life, he became an active member of the Shadow Open Market Committee, so he had a very active and productive life. Just a few interesting extra notes about him; in high school, he was a newspaper editor which served him well. Later he became the AER editor. He knew firsthand how to do desk rejections. He played baseball and basketball, and Sally told me later in life, he continued to play basketball in church leagues and recreational leagues. At Harvard Business School, he played basketball, see the love for the sports, a big New York Yankees fan. He grew up listening to them on the radio.
Beckworth: And he had a love of music, just something really fascinating. Sally told me he has thousands and thousands of vinyl albums in his houses. When they were in Pittsburgh, there's a store that sold vinyl albums. He would walk down there and buy a lot of them, so really fascinating. Sally said he was not a natural musician, but he loved music. He had a guitar and then learned to play some music, and then him and Marvin Goodfriend formed a little jazz group called The Joy Strings Trio. I thought, man, that's amazing and a missed opportunity, if they had gotten Alan Greenspan to join them with the clarinet, they could have had a little jazz band to perform. That's just a quick overview of his life, his interests. I'm going to turn now to you, Ed, and talk about the contributions he made. Let's begin with the Rational Expectations Revolution, there's a picture of him on the screen with Bob Lucas. Talk about his contributions to that revolution and what he did.
Bennett McCallum’s Contributions to the Rational Expectations Revolution
Nelson: Ben got very interested in the rational expectations literature. He had a background really in, he called it micro econometrics or applied econometrics, mainly the theory of the firm, but a lot of it was to do with the Phillips Curve and with the intersection of firm behavior and macroeconomics. I think the rational expectations literature is an example of Ben McCallum learning something through sheer immersion because I don't think he, in the early years, had particular interaction with the individuals in question.
Nelson: He read a lot of Tom Sargent’s stuff, he knew the original [inaudible] paper very well. He read Bob Lucas very religiously, really said back to me one time that he knew Lucas’s 1972 paper better than anyone, and that was at a time when Carnegie Mellon taught to Lucas 1972 paper in about three courses and separate from Ben's course because the GE people loved it, the RBC people loved it. So we got a lot of exposure to Lucas, but Ben said, “I know that the best of anyone." And so through this process of self-education… In fact, he said once… he said, because he believes so much in reading and immersion in reading as a way of learning things, he said that everybody is, in a sense, self-educated. In fact, I was once at a dinner with him, and some ECB, and Bank of England bigwigs, and Frank Smith was asked about his co-authors, and Frank said, “well, he's a sort of self-educated economist.”
Nelson: Ben said, "Well, we all are except for Ed." Anyway, he learned about the rational expectations literature from afar. Then he was in the money and banking workshop when we were visiting University of Chicago in 1975. Lucas was there by that time, obviously, Friedman was in charge of the workshop but there were a lot of rational expectations papers. Ben had, by then, had a paper accepted in Econometrica, which is the paper I'll talk about first, which is this paper on estimating rational expectations models. As I said, he had a background of being interested in the Phillips Curve. He had a paper in 1976, published in 1976 in Econometrica, on estimating rational expectations models, which in a sense, is the precursor of GMM because it was talking about how you can estimate models that have expected future values in them. His procedure was essentially two-stage least-squares.
Nelson: But it's essentially… if you look at the more sophisticated version of GMM that was later developed with weighting matrices and optimal distance matrices by Lars Hansen. That was Lars Hansen's big contribution to GMM, but as a prototype of GMM, Ben argued a way for estimating an equation that has an expected future value in it, and that is, in a sense, the main way that GMM has been used a lot in monetary economics because the famous Gali-Gertler paper on the Phillips Curve and Clarida-Gali-Gertler paper on estimating forward-looking policy rules by using expected future inflation as the endogenous variable, expected future variable, they have to find a way of including it in this equation and then being able to estimate the equation.
Nelson: Ben's procedure, that he advocated in the 1976 paper, is essentially the one that they used of using the actual value, the future value, then treating that as an endogenous variable as you would an instrumental variables or a two-stage least-squares approach. That was used with a lot more generality in the GMM literature when they had looked at all the equations and all that kind of thing. But the simpler version of just having a one period ahead future value has a lot to do with the New Keynesian literature, and Ben foreshadowed a lot of the way that literature would go on the empirical side with his 1976 paper. That was really his first-- He had very good publications before then, had full professor, all that kind of thing, but he was unhappy that his micro econometric work was not getting really the vibrancy in terms of attention that he would've liked. This was really a blockbuster paper, the 1976 paper.
Beckworth: When did he make this transition from being a microeconomist to macro? Was it working on rational expectations?
Nelson: Yes, I think it was really from 1972 to '74. By 1974, he was mainly working in macro rational expectations because he reviewed a book in 1978 on monetarism. The conference on monetarism had been held in 1974. He remarked in that review that he thinks this was probably not the most exciting conference in 1974 because it wasn't about rational expectations, which suggests to me that Ben was on the conference circuit by that point. He certainly had the Econometrica paper accepted by the end of '74. He presented it in the Freedman Money Workshop in '75, but it was already accepted.
Beckworth: So his work on rational expectations, he got to know Bob Lucas well, and you told me a story that Bob Lucas began to follow his NBER papers just to stay abreast of what was happening in macro.
Nelson: Yes, a lot of Ben’s papers-- there's this sort of trap when you are regarded as an authority and also not regarded as really having a super strong hardline representative view. For example, nobody would ask Ed Prescott to do a survey of macroeconomics because Ed is very much… has a very hardline RBC view. You would not accept him to be very fair to the monetary side of things or at least very sympathetic, whereas Ben was much more give and take, much more wanting to know what other people had to say and trying to understand their point of view and not really adversarial in that sense. The trap in that is you get invited a lot to give survey type papers, then people say, well, this is a survey. Is this a contribution? A lot of his really quote worthy things are buried in these long survey articles, which are worthwhile themselves.
Nelson: But, of course, there's a resistance to regarding those as research contributions, but he did a lot of papers that were overview type papers, particularly in the '90s. In the '80s and '90s, obviously RBC was on the march, especially at Carnegie Mellon, but he was one of the people who kept monetary economics very alive. Also, he kept in touch with what was going in monetary economics at the Federal Reserve and at universities. He did a lot of papers that were largely expositional because he was invited to give them, and it was only to give courses and that sort of thing. And so, Bob Lucas, at a tribute event in Pittsburgh in 2004, said that when he wanted to find out what was going on in monetary economics, he really needed his fix of these Ben McCallum yellow cover, open the sticker, hard copy NBER working papers because they had really brought him up to speed on what was happening in monetary economics.
Nelson: Obviously, Bob was working on growth and cities and all sorts of things other than that at that point. But, there was obviously a very deep mutual respect between them. I had the privilege of having a lunch with them one time and it was very much, they were old friends and a lot of-- Bob Lucas said, "I've given up on monetary economics. It's just too hard." Ben said, "I think it's too easy. The big problems are elsewhere.'' That went back to the '70s when—Ben, when he was at University of Chicago, he audited the Bob Lucas graduate courses. He was a full professor, but there's no standing on ceremony. You want to go to Bob Lucas's classes. He actually distilled a lot of the Bob stuff… that he saw that a lot of the Bob stuff, though very sophisticated, was not necessarily what you would want to use in everyday macro, like fixed point theorems and that sort of thing.
Nelson: He was, in a sense, a translator along with Tom Sargent and others, of a lot of the harder mathematical line. Bob did some of that translation himself, obviously, but in terms of making these concrete linear models, he was instrumental, in that among other people, Ben was. Ben learned the hardcore Bob Lucas stuff by going to class and by learning Bob's paper, so they had a long background together. In fact, in 1980, as you may know, it was obviously quite hard to get Bob to agree to write a paper for a conference. Ben did it a couple of times. One of them was in 1980 when Ben was still at UVA, but was actually asked to organize a conference that the AEI was holding in DC on rational expectations. If you look at the people who went there, it was basically the last research conference Arthur Okun was ever at because he died six weeks after the conference.
Nelson: It was probably the last research conference Arthur Burns was at because Arthur Burns was still-- this was before Arthur Burns moved into diplomacy and was in the world of nuclear missiles and that sort of thing. He was still in the economics world at that point because he was at the AEI. He actually got Bob to write a paper for that conference. So, both Bob and Ben have overview papers about what the rational expectations literature means for macroeconomics and for economic policy in that very nice JMCB conference volume. He got Bob to write a paper for that and he later got Bob to write a paper for the Alan Meltzer conference. Bob wrote that paper at the very last minute because he eventually said, I really have to write a paper for this conference because he said initially to Ben, "I'm working on other things. I don't want to work on this." He actually sent Ben, out of the blue, a full written paper just before the conference, and so he was part of the program at the last minute.
Beckworth: So, another contribution he made is with regard to monetary policy rules, and we'll talk about the McCallum rule in a minute, but he actually did work on interest rate rules before that.
Neson: Yes, he did a really-- I think probably one of his most cited papers in 1981, which was, in a sense, a rebuttal to the Sargent-Wallace paper on interest rate rules. Obviously, the monetarist literature is pretty critical of interest rate rules in many ways, but that's-- being critical of it isn't saying it's not feasible. The question is, is an interest rate rule feasible? Is it possible with an interest rate rule to pin down inflation, to pin down the price level? And, the Sargent-Wallace paper, although you can have different interpretations of it, it was essentially saying you can't, and his paper, he summarized his own 1981 paper as saying that interest rate rules are viable if some weight is given to a nominal target. Obviously, that was precursor to the way that New Keynesian economics eventually went of very much focusing on interest rate rules.
Beckworth: You said it was foundational to the Taylor principle that later--
Nelson: Yes, and in fact if you look at John Cochrane's recent book, he cites McCallum's 1981 paper in that context because of the idea of putting a weight on the nominal variable really gives you solutions to the whole system.
Beckworth: Let's move to the McCallum rule, probably better known. It had the monetary base as the instrument and it targeted nominal GDP. Walk us through the history of that.
The Basics, Influence, and Significance of the McCallum Rule
Nelson: Ben was very sympathetic to the monetarist side. He considered himself a monetarist, but he was pretty early in among those concluding that financial innovation had made monetary targeting dead in the water. He basically concluded that in 1983, and he had a paper in the AEA proceedings in 1984 that said, we have to do something that's broader than just a straight constant money growth rule, and he was arguing for nominal income targeting, which other people argued for before that. But his take on it, if you like, was that the rule should be an instrument rule.
Nelson: In other words, it should be a rule that is… like an interest rate rule or a monetary base rule refers to an instrument that the authority can definitely control, and it should give instructions, by that rule, how to set the instrument per period in order to achieve the target. The nominal income targeting rule came out of that focusing on normal income growth, but he did it in terms of the monetary base in 1988 because you could argue between the monetary base and the interest rate rule, but at the time, the monetary base had a more straightforward reduced former relationship with GDP. That was a key reason he focused on the monetary base in that work.
Beckworth: Was that tied into the broader context of the debates in the early '80s over nominal GDP targeting? So, back then, we had a number of people discussing it and he was one of them. So, the 1980s was the first round of nominal GDP targeting discussions.
Nelson: Yes. He was quite unsympathetic to a lot of the other proposals for nominal income targeting insofar as they were not instrument rules and they were not, as he called them, operational rules in the sense that the right-hand side variables were all variables that you could observe in real time. And so, although nominal income came to be regarded as something that is advocated by a particular side of debate, at the time, in the '80s, it was regarded more as a bridge-building thing to advocate nominal income targeting because, in a sense, it was, perhaps incorrectly, it was viewed that there was a consensus that stabilization policy was about stabilizing nominal spending.
Nelson: Within that consensus, saying I wanted nominal income targeting instead of money is, in a sense, trying to build bridges among Keynesians and monetarists. And so James Tobin and Bob Gordon were two examples of people who were advocating nominal income targeting. Alan Meltzer, to some extent, was, although he didn't like being called a nominal income targeter. He regarded it as more of an inflation-oriented money rule was the way he thought of his rule.
Beckworth: Was it viewed as a velocity-adjusted money supply target?
Nelson: Yes, that term is really, I guess, due to James Tobin, but it's a nice way of describing it because, certainly the way Ben did it, which was to have a monetary aggregate as the variable that you're moving around, the monetary base in particular, and trying to make those adjustments with the view to stabilizing nominal income growth, but making those adjustments explicitly in terms of trying to allow for changes in velocity over time. He had a moving average of velocity changes as the way he would get the monetary growth rule to allow for velocity changes over time. In that sense, his was one of the most literally velocity-adjusted money rules.
Beckworth: We know the rest of the history. Inflation targeting takes off in the '90s and pushes nominal GDP targeting or nominal income targeting. Let me ask about that phrasing. Back then, it was nominal income targeting. More recently, we talked about nominal GDP targeting. Did he have a preference or any issue with the language?
Nelson: I think he would not have liked nominal output because, as a purist, he would have thought output is a real thing, but I think nominal income would be fine with him. I don't think he used nominal GNP targeting, the term, when GNP was the main nominal aggregate production variable in the US. I don't think he was averse to calling it nominal GDP targeting.
Beckworth: So, my interaction with him was limited to emails, but I started engaging with him because I was a big advocate of nominal GDP targeting in the 2010s. Of course, I was an advocate of level targeting, nominal GDP level targeting. I quickly found out he was an advocate of nominal GDP growth rate targeting. Walk us through that discussion. Why did he favor growth rate targeting versus level targeting?
Growth Rate Targeting vs. Level Targeting
Nelson: I think, to start on a reconciliatory note, he did think it was legitimate to be worried about the level of nominal income. If you look at the 1988 paper in the Carnegie-Rochester, which was, in a sense, the main launch pad paper for this nominal income targeting proposal, he has a nominal income path, and in the stimulation results… so he regarded that as what you were targeting, but he regarded the growth rate of normal income as the variable you should be responding to.
Nelson: You can think of a few reasons why that would be the case. One is, obviously with Athanasios-- here we know from his work that potential output is very uncertain and levels of potential output are particularly problematic, and so it bypasses that problem. Also, he wasn't really of a camp of saying we've had a move up in the price and that we now want to offset that move. So, in his 1999 paper, he said, “the growth rate targets appear somewhat more desirable than growing level targets as the latter requires stringent actions to drive any nominal target back toward the predetermined path after shocks have led to target misses.”
Nelson: So, he actually had a phrase that was reborn during the debate about the form that inflation targets should take a few years ago, which was, “the irrelevance of bygones is one of the most fundamental propositions in economics.” That's what he said in 1985. And then in the JPE in 1989, he said, "Bygones are, after all, bygones." So, he was not very sympathetic to the idea that we've had a level overshoot, now let's have a compensating undershoot. Growth rates got away from that idea.
Beckworth: Would he have been sympathetic to make-up policy, like if you're below target and then catch back up?
Nelson: I think that he thought that growth rate targets do that through the back door. If you think about the Phillips curve, what the Phillips curve says is that inflation depends on the level of the output gap. And so, if you're responding, let's say, to inflation or to normal income growth, a deficiency, as measured by a negative or positive output gap, is eventually going to show in a deficiency in terms of normal income growth or inflation. So, by the back door, you're responding to the level by responding to the growth rate. That's the way that I think he would see it.
Beckworth: Speaking of Athanasios, he mentioned to me that just before the conference started, there was a conference in 1992 on the Bennett McCallum Rule, dedicated to the Bennett McCallum Rule, which is fascinating because the year after that, of course, John Taylor publishes his famous paper, which becomes the Taylor Rule. Walk us through that history. The Bennett McCallum Rule is there, then the Taylor Rule emerges, and we forget about the McCallum Rule, unless you love nominal GDP targeting, you dig into the literature and you find it. What were his thoughts on that evolution?
The McCallum Rule to Taylor Rule Evolution
Nelson: This is where I came in because I came from Australia in which interest rates… there wasn't much, if you like, interest in policy rules, period. But, insofar as monetary policy was discussed, it was all in terms of interest rates. And, one more reason I was attracted to the American literature was, there was a lot of talk about money and monetary aggregates, including in Ben's work, and in the time I moved to the United States, those references disappeared completely, and it disappeared in the time I was working with Ben.
Nelson: And Ben, I think, was not-- because he really felt that people who were saying interest rate rules don't make sense are incorrect. In a sense, he was pleased that the Taylor Rule was doing well because he believed interest rate rules were viable. He thought it was analytically mistaken to think that interest rate rules were internally inconsistent or anything like that. And so, one casualty of that was the McCallum Rule because interest in the monetary base, which was never high at places like the Federal Reserve to begin with, sank in the profession. Also, later on you had-- the monetary base was a survivor in the '80s as an indicator of normal income. That changed later on when you had much bigger currency flows abroad, the fall of the Berlin Wall.
Nelson: Philip Jefferson, now the Vice Chair of the Federal Reserve Board, actually did work on, how do you adjust the monetary base and how do you adjust the McCallum rule in the form of currency flows. But that was a mark against the monetary base as an indicator in the United States. Then, of course, there was interest on reserves and there was the ZLB. That really sank the monetary base. At least, it would be a full-time job getting the monetary base adjusted for those things. You would be having to do it constantly. In that sense, it was understandable that interest rate rules took over. But, of course, the New Keynesian literature was all money-oriented in the '80s, almost all. Then in the '90s, it became very Taylor Rule-oriented.
Beckworth: I will mention that Peter Ireland will actually come to the rescue of the monetary base McCallum rule later today, so we look forward to that. You mentioned also [that] the McCallum rule was used as an input or as a cross-check on monetary policy at the Bank of England and the Fed, so even though they weren't using it to guide policy, they would cross-check themselves.
Nelson: It was a baseline, and when I was working at the Bank of England, part of the briefing materials we gave to the Monetary Policy Committee every period had the McCallum Rule prescription. In fact, Andy Haldane, shortly before I joined the bank, in fact, I think it may have been while I was a student at Carnegie Mellon, Andy Haldane was working with Ben McCallum on a paper, I think with Chris Salmon, on applying the McCallum Rule to the UK, nice paper. That was published, I think, in the Manchester School, and that was published in late '90s.
Beckworth: One more topic and then we'll turn it over to you, for those who knew him and want to have comments or stories that you want to share. But, you mentioned [that] Ben took money seriously. He thought about monetary aggregates, one of the reasons you were attracted to him. Would you call him a monetarist or a New Keynesian? How would he describe himself?
Bennett McCallum’s Monetarist Leanings
Nelson: He called himself a monetarist, so that is the clincher. In fact, he's listed in the Dornbusch-Fischer textbook, he had a very good friendship with Stan Fischer. In fact, in some ways, they were-- I worked with Stan, I worked with Ben. I had the privilege of working with both of them. They had a lot of similarities in personality, outlook and that sort of thing, although a lot of disagreements as well, and Stan Fischer and Rudy Dornbusch, their textbook classed… listed the main, if you like, main monetarists in the US, and of course, they had Milton Friedman, they had Anna Schwartz, they had Alan Meltzer, they had Karl Brunner, when he was alive. They had Phil Kagan, they had Bill Poole, but they also had Ben, and I asked Ben about that, and he said, "Oh, I'm very proud to be included."
Nelson: He once said to me, "You know, I'm more of a monetarist than you and Alan," and his grounds for that was that he believed in a more straightforward way in which money matters in a domestic macro model. If you look at the McCallum-Goodfriend paper, obviously he and Marvin were very good friends. Marvin was his best friend. They have a very straightforward [inaudible] money demand function. I think he didn't like that cluttered up too much.
Beckworth: Okay, now you had a 2010 paper with him, a Fed working paper, one of his last probably. In that, you guys looked at money, right? What information does money tell us about the economy? You gave a New Keynesian model, and you said that lurking in the background there is this money demand equation we typically drop, but over the long run, it is helping shape the path of inflation. What were your objectives in that paper with him in writing that paper?
*Money and Inflation: Some Critical Issues*
Nelson: Again, it was sort of a bridge building, because in the era by that point, obviously, money was very much out of favor in New Keynesian economics. In a sense that it was going back to the 1981 Ben McCallum paper of saying interest rate rules and monetary control are compatible, was doing more about how the notion that the monetary relationships still might work to a degree empirically are still a precedent in these models… that was common ground, I think, a lot among a lot of people, but maybe putting more emphasis on that point. Again, this was not really a-- if you contrast that with Steve Williamson's paper in the volume… now, Steve, very admirable body of work and so forth, but Steve is much more of the, “New Keynesian models are critically flawed.” That's his attitude. Ben was not [of] that attitude.
Nelson: In fact, one of Ben's papers contemporaneous with the one that he did with me, was an exchange with John Cochrane, in which Ben is defending New Keynesian models against, in that case, not a monetarist critique, but the fiscalist critique that John was making. But again, Ben was willing to go to bat for monetarists, but also willing to go to bat for interest rate rule-based approaches, and not at all somebody saying that the way to restore money is to show that there's some critical flaw in New Keynesian models. It was much more trying to show the consistency of the basic ways of looking at things.
Beckworth: I first became aware of your work with Ben as a grad student. I read papers that you wrote, and you used the New Keynesian workhorse model. You called it the Expectational IS-LM model, but that was what you used, you had nominal GDP targeting in it, but you very much were engaged with the New Keynesian framework, when I became aware of your work.
Nelson: In fact, one thing I should say is that Ben really liked-- going back to Ben liking the simple version of things, Ben really liked the IS-LM model. He was not somebody who said, "It's some Keynesian model You shouldn't teach." He really liked the IS-LM model. He was very pleased to meet Hicks one time, and he was very much against the idea that the IS-LM models are inherently Keynesian or they can't cover a wide range of views.
Beckworth: Very nice. Well, let's turn over to the audience. Okay, we're going to have some microphones that go around the room. If you have a question, please raise your hand, or a comment, if you want to share a story about Ben, I'm sure Sally and others would love to hear it.
Jim Bullard: Jim Bullard, Purdue DSB. Ben McCallum gave a Homer Jones lecture in the 2000s, [and] I wondered if you could comment on it. It was cheerleading, I would say, for the New Keynesian model, and because he was giving it in St. Louis, he wanted to reassure people that there really was a decoupled money demand equation, but you didn't need to make reference to the money part in order to do good monetary policy. I saw that as a culmination of his intellectual journey at least up to that point, and that he had come to the conclusion that you didn't need to resuscitate money or rehabilitate Milton Friedman, that you could go with the New Keynesian approach. And as an aside to this, some other parts of the literature were referring to the New Keynesian model as the New Monetarist model because it has really fundamental monetarist underpinnings. So, I just wondered if you have any reaction to that.
Nelson: Yes, one thing I'd say is that this is, again, an example of Ben, although he was on the monetarist side, and would joke about it, he would-- I remember one time he introduced Athanasios on a program and he said, "Athanasios has done very good work on rules, and he's done very fundamental papers, and he's overcome an education at MIT." He was willing to make jokes of that kind and be a happy [inaudible] in that sense, but he was not really somebody who said that New Keynesian models should be shunned or anything like that. It was quite the opposite.
Nelson: It was the case that he was always receptive to interest rate rules, but was much more inclined to use them in his research later on. In fact, one of the papers he did in 1983 argued that the interest rate rules should be used in empirical work, basically, and there was a paper that Larry Christiano, Marty Eichenbaum, and Mathias Trabandt did in the JEP, that said, “in a seminal paper, Sims, 1986, argued that one should identify monetary policy shocks with disturbances to a monetary policy reaction function, in which the policy instrument is a short-term interest rate.”
Nelson: That's an extraordinary thing to say because Ben actually had a paper on that in 1983 in the Economics Letters. So, I agree that it's a very important argument, and I think that the Sims 1986 paper actually cites that 1983 paper. So, Ben was saying in both empirically and in analytical work that interest rate rules are viable, and they may actually be preferable in many contexts, particularly empirical work, when you want to actually model what policymakers actually do, you want to use interest rate rules in that context.
Beckworth: So, Ben was one of the first people to identify shocks to the interest rate in the VAR as a monetary policy shock?
Nelson: Yes, in 1983, in Economics Letters. In fact, if you just look at the abstract of the Economics Letters paper, it's an open and shut case that this attribution needs to be modified somewhat.
Athanasios Orphanides: David, thanks for organizing this great event. I wanted to add one element about Ben's capacity, as I'd mentioned, to translate things from academia, and his care to give advice to policy. Not all academics do this. Ben was a wonderful academic in that he cared deeply about how to improve policy in real time. At the Federal Reserve, I joined Federal Reserve in the early '90s, we were doing a lot of work at the Fed on the McCallum Rule, and later on, the Taylor Rule, with great support from Ben at the time. He was very involved in all of the discussions we had, but I want to also bring out something that probably will not get sufficient mention in the conference later on.
Orphanides: When Japan got in trouble in the late '90s, Ben was visiting as an advisor to the Bank of Japan and was actively giving them good advice on how to escape the zero lower bound. Unfortunately, it took the BOJ more than a decade to understand what Ben was telling them, but he cared deeply about the translation, not just modeling. Ben was a great theorist, a great empirical person, but he didn't just care about that, he was doing that in order to improve policy outcomes. I'd be interested in getting Ed's perspective on this. How would you view Ben compared to other academics as gifted as he was in that regard?
Nelson: I think one thing that's important to recall about Ben is that he was quite a bit older than a lot of the contemporary people working in the field. He got his PhD not particularly early and he got his interest in macro even after that. So, if you compare it with, say, Phil Kagan, who I had the privilege to know and who was a mentor to important people including Phil Jefferson, Phil Kagan was not that much older than Ben, maybe eight years or something, but Phil Kagan, in a sense, had a blockbuster paper when he was 29, a 1956 paper, and really had a lot of trouble topping that paper, but he became, if you like, he reached his peak in his profession in his 20s. Whereas Ben got a paper that-- the first Ben paper that really got attention was when he was 40… he told me, if you look at Michael Woodford's papers in the '80s versus the '90s, there's a big difference in the policy interest.
Nelson: In the '80s, it's the sort of stuff that a lot of GE people really like. Steve Spear would teach it to me when I was a student, very abstract GE stuff. Whereas the '90s paper is much more interest rate rules, practical New Keynesian models, markups, all that sort of stuff. And Ben said that about Woodford, that as people get older they get more interested in policy. Well, Ben was mature, and by the time he was well-known in the profession, he was in his 40s. Before I met him, he had a pretty bad year of being quite unwell for about a year, and so I think that made him look older in the '90s than he actually was. Anyway, he was a sort of elder statesman in a sense, somewhat prematurely in the profession, but he had that older perspective of being interested in the policy side and not necessarily being interested in the theorem-proof side of macro as he might've been.
Joe Gagnon: Joe Gagnon, former Federal Reserve Board staffer. This is just a comment, but I started at the Federal Reserve in 1987 and I was working on rational expectations macro modeling. Ben visited us frequently in the late '80s, early '90s and he was my favorite visitor because he was so fun to talk with. He would be rigorous and pull no punches, but he was also very open to other views and always trying to figure out, could he learn something even as he was trying to persuade you that you needed to learn something.
Gagnon: And I don't remember any disagreements, but I remember [that] the give and take was great. It was, I think, a common view among people I was with at the time. This is just a comment on personal, but a few years later I saw him at Wolf Trap, which some of you may know is a performance space in suburban DC, and we had a great chat to catch up because it had been several years. It was great to see him. He was always so friendly. I don't even remember who the performer was at the time, I can't remember that, but I do remember [that] he had driven in from Pennsylvania which struck me as a long way to go to see a performance, but it did show that he had a personal life and music was important.
Beckworth: Ben loved his music. Any Richmond Fed stories? Bob, do you want to share anything?
Robert Hetzel: Ben was a real fan of Milton Friedman. He read everything that Friedman wrote, Ed can tell you, and that very much influenced his advocacy of rules to support free markets, and he played bass guitar along with Marvin Goodfriend. He loved music. He and Sally loved opera, and Ben was a real jazz aficionado too. He'd go to clubs and knew all the performers so he was multi-dimensional.
Beckworth: Yes, Sally told me he literally has thousands of opera records, so he definitely loved his music. I know that he was active in the Shadow Open Market Committee. Michael, do you want to share anything about that?
Michael Bordo: Well, before I do that, I want to say that he was really interested in economic history, too. I knew him well before the Shadow Open Market Committee. I knew him because I spent a year at Carnegie Mellon, and Ben and Sally were most gracious in finding a house for us, and just across the street from them. I hung out with him that whole year so I got to know him really well and I've kept up. But, he was interested in the two books he wrote, Monetary Theory and the one on international money. He was really interested in history, and I was working on the gold standard back then in the '80s, and he did a chapter in his money book which is… if you want to explain this to undergraduates, that's the way to go. And he was also interested in the history of thought, so he wasn't just models and econometrics, he was interested in the history of ideas and in history.
Bordo: In the Shadow [Open Market Committee], I've been in there about maybe 15 years, and Ben started before me, but we just always got along, the two of us, we'd hang out. His role was to tell us the truth, so he explained things. What's the quantity theory of money? What's monetarism? What is a nominal income target? He would give these speeches, these talks, and he'd just want to go and say, this is what the truth is, not the truth, but this is the clearest exposition, and he was the guy who always, at the end of every panel, he'd always make everybody honest. I don't remember every single thing he did, but that was his role, and he didn't really get into the armchair quarterbacking, “the Fed did this, the Fed did that,” he went right to the basic issues.
Beckworth: Well, Ed, maybe we can end on a story. You told me that Ben did not have a great poker face. You learned this the hard way.
Nelson: No, he didn't. Marvin Goodfriend was, in a sense, the opposite. Marvin had a very neutral expression when-- I'm talking about when you're presenting something and he's in the audience. Sometimes Marvin would look very angry, but otherwise, Marvin would have a pretty neutral expression, whereas Ben was a very active listener. If he thought the person who was talking was on the right track he would [do] vigorous nodding. If they're on the wrong track, vigorous shaking [of] his head. Also, one thing that I was relieved to hear from Charlie Plosser one time, that it wasn't just me. Ben, in conversation, but also in conferences, would sometimes bury his head in his hands, so he would be like that and you would think maybe that's the end of the conversation when he's talking like that but actually he would keep talking with you.
Nelson: But, obviously, something had made him quite unhappy. Either it was the direction something was going, or it was sometimes a reaction to a story and he would just, oh my goodness, but he would do this in conferences. I remember there was one time I was just presenting a solo authored paper, and I was looking over at Ben, and he'd buried his head in his hands almost like I'd done something that was… I think partly he was getting so involved in it and maybe he felt he had a stake in whether the talk I gave was successful or not, but he was very not [good] at the poker face, very much… if somebody was using the term natural rate hypothesis in a way that he thought was wrong, for example, [or] if people thought that the accelerationist Phillips Curve had embodied the natural rate hypothesis. And as Mike Bordo said, he was very committed to terminology, and that would be one of the things that would provoke-- if he thought somebody was using the term neutrality incorrectly or quantity theory or any of these very familiar tech terms, he thought if they were getting the term wrong, [there would be] the shaking of the head or sometimes, in the worst case scenario, the burying of the head in the hands.
Beckworth: Well with that our time is up. Thank you, Ed Nelson, and thank you participants for sharing your memories.
About Macro Musings
Hosted by Senior Research Fellow David Beckworth, the Macro Musings podcast pulls back the curtain on the important macroeconomic issues of the past, present, and future.