What is the role of supply vs. demand shocks in current inflation?

The speaker suggests that while central banking machinery is often oriented towards demand shocks, supply-side developments (labor, supply chains, productivity) have been significant drivers of recent inflation. He cautions against over-reliance on models that primarily explain demand-driven inflation, especially when supply shocks are prevalent.

Why are traditional M2 money supply measures less correlated with inflation now?

Financial innovation and the shift to electronic payments have radically changed the velocity of money (V in the M*V=PY equation). This makes interpreting the relationship between M2 and inflation more complex than in older models.

Did the US avoid a recession in 2023 despite high inflation?

Yes, the speaker notes that 2023 saw a significant drop in inflation without a severe recession, defying historical patterns where substantial inflation decreases were typically accompanied by serious recessions. This suggests demand-shock-centric models might be insufficient.

What evidence suggests post-pandemic inflation wasn't solely demand-driven?

Several factors suggest a supply-side component: inflation surged when unemployment was high, similar inflation occurred in countries with less stimulus, and inflation only fell significantly when supply chains healed, not just when stimulus rolled off.

Why does money still matter if it's a close substitute for T-bills?

While T-bills and money might seem similar, there's a perceived 'yield to safety' with money that is not fully understood. Furthermore, the proliferation of 'money-like' deposits and stablecoins creates complexities, making economists cautious about returning solely to M2 measures.

Are stablecoins a risk to financial stability?

Yes, if people can create money-like deposits (stablecoins) that are redeemable on demand, without adequate deposit insurance or strict asset backing, they are prone to bank runs, drawing parallels to 500 years of financial history.

Is the US housing market a bubble?

The speaker suggests that while recent high house price inflation is extreme, the trend of rising relative housing prices has been occurring for decades, outpacing goods inflation. This long-term trend, potentially linked to negative construction productivity growth and regulations, is a deeper puzzle than a simple bubble.

What is the value of regional Federal Reserve Banks?

Regional Feds provide crucial input from different parts of the country to the FOMC, ensuring monetary policy isn't solely dictated by Washington or New York. They foster independent thought and have been sources of new ideas in banking and supervision.

Can AI predict bank failures?

The speaker hypothesizes that AI, especially when trained on the Fed's vast data on banking failures, could potentially do a much better job than humans at predicting failures, provided it's trained and run internally on secure data.

What are the risks and benefits of a Central Bank Digital Currency (CBDC)?

A CBDC could address the risks of proliferating, poorly regulated stablecoins but might disintermediate traditional banks. The speaker is cautious about retail CBDCs, citing concerns about customer service and grandma losing passwords, but sees potential in wholesale applications.

How will AI impact economic growth?

While uncertain, AI could significantly boost productivity growth over the next 10-20 years, potentially exceeding pre-COVID trends. However, there's a risk of over-anticipation leading to overheating if adoption and integration are not managed carefully.

Key Moments

Austan Goolsbee on Central Banking as a Data Dog | Conversations with Tyler

Conversations with Tyler

News & Politics4 min read61 min video

Jun 25, 2025|2,148 views|41|7

Fed Federal Reserve Banking AI Ted Cruz Economics

Save to Pod

Key Moments

On this page

TL;DR

Austan Goolsbee discusses central banking, inflation drivers, financial stability, AI's economic impact, and the structure of the Federal Reserve.

Key Insights

Central banks, like the Federal Reserve, should prioritize data-driven analysis ('data dogs') over rigid adherence to partisan labels like 'dove' or 'hawk'.

Distinguishing between supply and demand shocks is crucial for understanding inflation, especially in non-traditional economic environments.

Financial innovation has altered traditional monetary policy relationships (e.g., M2 and inflation), necessitating a more nuanced approach.

Regulating the growing shadow banking sector and stablecoins is critical for financial stability, posing challenges for central banks.

Productivity growth may be significantly boosted by AI, but its long-term impact depends on its adoption as a general-purpose technology.

The decentralized structure of the Federal Reserve, with its 12 regional banks, is vital for incorporating diverse economic perspectives and preventing groupthink in policymaking.

THE MINDSET OF A DATA DOG IN CENTRAL BANKING

Austan Goolsbee emphasizes his identity as a "data dog" rather than a partisan "dove" or "hawk" in central banking. This approach prioritizes rigorous data analysis and understanding causal relationships, a discipline honed in academic economics. He believes this empirical focus is essential for navigating the complexities of monetary policy, particularly in distinguishing between supply and demand shocks, which is often overlooked in traditional macroeconomic models oriented towards demand.

INFLATION: DEMAND SHOCKS VERSUS SUPPLY SHOCKS

Goolsbee challenges the notion that recent inflation was solely demand-driven. He points to soaring inflation when unemployment was high, simultaneous inflation across countries with varying stimulus levels, and inflation's decline only when supply chains healed, not when demand stimulus waned. These observations suggest that supply-side factors, often neglected in standard models, play a critical role in inflation dynamics.

THE EVOLVING ROLE OF MONEY AND FINANCIAL INNOVATION

The relationship between money supply (M2) and inflation has weakened due to financial innovation, such as the shift to electronic payments and the rise of new money-like instruments like stablecoins. Goolsbee notes that the velocity of money has become unstable, making traditional M2-based monetary rules less reliable. He expresses caution about the risks posed by unregulated stablecoins, drawing parallels to historical bank runs.

FINANCIAL STABILITY AND THE SHADOW BANKING CONUNDRUM

The increasing size of the shadow banking sector presents a significant challenge to financial stability. Goolsbee highlights the conundrum of regulating an officially recognized banking sector while a larger, less regulated portion operates outside direct oversight. This can lead to regulatory arbitrage. He acknowledges that past efforts to increase capital ratios in official banks have demonstrably improved their stability, as seen in the 2008 crisis versus recent events.

THE HOUSING MARKET PUZZLE AND CONSTRUCTION PRODUCTIVITY

Goolsbee views the persistent rise in relative housing prices over decades, even in rural areas, as a significant puzzle. While not dismissing demand-side factors, he points to evidence of negative productivity growth in the construction industry. This suggests a potential combination of factors, possibly including land-use regulations and inefficiencies, that are making housing construction more difficult and expensive over time.

MANAGERIAL LESSONS FROM MICROECONOMICS

In his role at the Chicago Fed, Goolsbee applies microeconomic principles such as understanding marginal costs (often zero for knowledge sharing) and the theory of delegation. He stresses the importance of leveraging the expertise of individuals like the First Vice President and Research Director. These concepts are crucial for effective management, especially in an organization with a complex, multi-faceted mission.

THE STRUCTURE OF THE FEDERAL RESERVE SYSTEM

The Fed's hybrid federal structure, with its 12 regional reserve banks and a Washington-based Board of Governors, is a key strength. Goolsbee argues this decentralized model, established in 1913, prevents a monolithic perspective from Washington or New York, ensuring diverse regional input into monetary policy. This structure fosters independent thought and has historically been a source of new ideas in banking and supervision.

AI, PRODUCTIVITY, AND ECONOMIC GROWTH PROSPECTS

Goolsbee acknowledges the potential for AI to boost productivity, citing recent above-trend growth, though he cautions against over-reliance on short-term trends. He draws parallels to the slow, decade-long integration of technologies like computers and electricity. The impact of AI may concentrate in specific industries initially, spreading to user sectors later. However, he warns of the risk of over-anticipation leading to potential overheating.

THE CHALLENGES OF CRYPTOCURRENCIES AND DIGITAL CURRENCIES

Goolsbee expresses nervousness about stablecoins and cryptocurrencies, particularly regarding risks of bank runs and fraud, and cites historical parallels to the free banking era's instability. He is cautious about central bank digital currencies (CBDCs), particularly retail versions, due to potential disintermediation of community banks and operational complexities for the Fed. He believes Congress and the Board of Governors, not individual Reserve Banks, must set policy for CBDCs.

THE DELICATE BALANCE OF AI AND ECONOMIC THEORY

Goolsbee remains skeptical of AI's ability to fully replace human judgment in economics, citing the 'hallucination problem' and the training data limitations. He contrasts this with academic economists' rigorous analysis. He suggests that while AI can aggregate data and reduce errors, it may not inherently solve complex causality problems or replicate the nuanced reasoning required for policy decisions. The analogy of dot matrix versus laser printers highlights the difference between incremental improvement and fundamental breakthroughs.

Mentioned in This Episode

●Products

●Software & Apps

●Companies

●Organizations

●Concepts

●People Referenced

Common Questions

Austan Goolsbee referred to himself as a 'data dog' to emphasize his approach to economics and central banking, which prioritizes empirical evidence and data analysis over ideological stances like being a 'dove' or 'hawk'. The core principle is knowing when to analyze the data broadly and when to focus on specific details.

Topics

Supply Shocks Demand Shocks Money Supply Velocity Of Money Financial Innovation CBDC Productivity Growth

Mentioned in this video

People

Chad Severson

Co-author of a paper with the speaker on negative productivity growth in the construction industry.

Anna Pollson

The research director at the Chicago Fed, mentioned as part of the competent team that supports the speaker.

Ted Cruz

Mentioned as a former national champion debater whom the speaker beat, with the speaker's strategy involving humor and teasing to get Cruz flustered.

President Barkin

A participant in the FOMC meetings who shares his economic perspective.

Jeremy Stein

Cited for his work highlighting the balance needed in financial stability and the risk of regulatory arbitrage as activity shifts to less controlled sectors.

Nick Bloom

An economist who strongly believes that hybrid and remote work arrangements have significantly boosted productivity.

Eric Budish

A colleague at the University of Chicago who wrote a paper on blockchain, contrasting centrally controlled crypto with non-centrally controlled crypto.

Ed Glazer

An economist who believes the negative productivity in construction is heavily tied to land use and other regulations.

Jean FMA

Mentioned as an example of an economist who would be skeptical of overly complex, incomprehensible academic papers, contrasting with those who might be impressed by such complexity.

Concepts

Keynesian

Mentioned as a framework for understanding inflation coming from overheating, which is embodied in the official Federal Reserve Bank model.

supply and demand framework

The speaker's preferred basic framework for analysis, emphasizing the need to distinguish between supply and demand shocks.

free banking era

Invoked to describe a historical period in the US characterized by numerous bank failures and financial crises, used as a cautionary tale against unregulated banking and the proliferation of entities like stable coins.

nominal GDP

Proposed as a target for a monetary growth rule, considering both money supply and velocity of money.

M*V

The equation of exchange is discussed in the context of changes in the velocity of money (V) affecting the relationship between the money supply (M) and nominal GDP (PY).

Locations

Switzerland

Mentioned as an example of a country with lower price inflation, which the host uses to argue for a demand-side explanation of inflation.

Software & Apps

O1.pro

An AI tool that the speaker compares to, suggesting it hallucinates less than Jstor content, but also notes that paying for higher versions might not eliminate all hallucination issues.

JSTOR

A digital library of academic journals, cited as a source of potentially hallucinated information, though the speaker agrees to defend it.

FedNow

A payment system operated by the Fed, part of the critical financial infrastructure for the United States.

stable coins

Discussed as a form of money-like deposit that can proliferate and poses risks similar to traditional bank runs if not properly regulated, due to potential issues with backing assets and deposit insurance.

Organizations

Federal Reserve Bank of Dallas

Mentioned as an example of a regional Fed bank, prompting the question of why such branches need substantial research staff.

FOMC

The Federal Open Market Committee, where 19 members (7 political appointees and 12 non-political appointees from reserve banks) discuss monetary policy. It's described as the world's greatest deliberative body.

Federal Reserve Bank

The central bank model discussed as a framework for macroeconomic analysis, with its machinery potentially oriented towards demand-side explanations for inflation.

Chicago Fed

The speaker, as president of the Chicago Fed, shares insights and references its operations, including its cash vault and research into construction productivity.

FDIC

Mentioned in the context of deposit insurance, highlighting that a significant portion of lending occurs outside FDIC-insured formal banks, increasing systemic risk.

Nigeria

finance

central bank issued digital currency

The central topic of a dilemma presented by the host, weighing the risks of proliferating stablecoins against the potential disintermediation of banks if a CBDC is created.

Tether

Products

T-bills

Mentioned as a close substitute for money, questioning why money would still matter if it's similar to T-bills with interest and liquidity profiles.