Guest post: Sebastian Mallaby responds to Ben Bernanke

In this guest post, Sebastian Mallaby discusses how his research into Alan Greenspan’s life and career informed his belief that central banks should consider financial stability at least as important as price stability.
Continue reading: Guest post: Se…

In this guest post, Sebastian Mallaby discusses how his research into Alan Greenspan's life and career informed his belief that central banks should consider financial stability at least as important as price stability.

Continue reading: Guest post: Sebastian Mallaby responds to Ben Bernanke

Don’t clean — lean!

One of the reasons it’s fun to write about monetary policy is the lack of consensus. Within the field, no subject is as stimulating — or important — as the debate over how central bankers should think about the risks of financial excess.

Continue reading: Don’t clean — lean!

One of the reasons it's fun to write about monetary policy is the lack of consensus. Within the field, no subject is as stimulating -- or important -- as the debate over how central bankers should think about the risks of financial excess.

Continue reading: Don’t clean — lean!

How would a Fed rate hike affect consumers?

We don’t really understand how changes in the level of short-term interest rates affect things we actually care about, such as growth and employment. There are too many moving parts and leaps of logic required, many of which are based on bogus assumptions about how the world works.

So it’s always nice to find new research into a small piece of the monetary transmission mechanism that’s grounded in facts. Researchers at TransUnion, the credit reporting company, looked at which American consumers would be exposed to an increase in the Federal Reserve’s policy rate corridor and the dollar magnitude of the impact of different tightening paths. We recently had a chance to discuss their findings with Nidhi Verma, who led the project.

Continue reading: How would a Fed rate hike affect consumers?

We don’t really understand how changes in the level of short-term interest rates affect things we actually care about, such as growth and employment. There are too many moving parts and leaps of logic required, many of which are based on bogus assumptions about how the world works.

So it’s always nice to find new research into a small piece of the monetary transmission mechanism that’s grounded in facts. Researchers at TransUnion, the credit reporting company, looked at which American consumers would be exposed to an increase in the Federal Reserve’s policy rate corridor and the dollar magnitude of the impact of different tightening paths. We recently had a chance to discuss their findings with Nidhi Verma, who led the project.

Continue reading: How would a Fed rate hike affect consumers?

Monetary policy: it’s mostly fiscal

Inflation is always and everywhere a monetary phenomenon…Government spending may or may not be inflationary. It clearly will be inflationary if it is financed by creating money, that is, by printing currency or creating bank deposits. If it is financed by taxes or by borrowing from the public, the main effect is that the government spends the funds instead of the taxpayer or instead of the lender or instead of the person who would otherwise have borrowed the funds. Fiscal policy is extremely important in determining what fraction of total national income is spent by government and who bears the burden of that expenditure. By itself, it is not important for inflation.

–Milton Friedman, “The Counter-Revolution in Monetary Theory” (emphasis in original)

Friedman’s idea was radical when he suggested it in 1970, but it has since become boringly mainstream. Nowadays the standard line is that central banks have all the power and (usually) offset the impact of fiscal policy changes.

So it was refreshing to read a speech by Christopher Sims at this year’s Jackson Hole economic symposium suggesting that the common view has things backwards. To the extent central banks have any impact on inflation, it’s by tricking elected officials:

Continue reading: Monetary policy: it’s mostly fiscal

Inflation is always and everywhere a monetary phenomenon…Government spending may or may not be inflationary. It clearly will be inflationary if it is financed by creating money, that is, by printing currency or creating bank deposits. If it is financed by taxes or by borrowing from the public, the main effect is that the government spends the funds instead of the taxpayer or instead of the lender or instead of the person who would otherwise have borrowed the funds. Fiscal policy is extremely important in determining what fraction of total national income is spent by government and who bears the burden of that expenditure. By itself, it is not important for inflation.

–Milton Friedman, “The Counter-Revolution in Monetary Theory” (emphasis in original)

Friedman’s idea was radical when he suggested it in 1970, but it has since become boringly mainstream. Nowadays the standard line is that central banks have all the power and (usually) offset the impact of fiscal policy changes.

So it was refreshing to read a speech by Christopher Sims at this year’s Jackson Hole economic symposium suggesting that the common view has things backwards. To the extent central banks have any impact on inflation, it’s by tricking elected officials:

Continue reading: Monetary policy: it’s mostly fiscal

What we’ve got here is a failure to communicate

The conflict between economists and market strategists is one of our favourite theory-versus-practice debates, since both groups try to answer big questions about the allocation of resources.

And in the bumpy years since the global financial crisis, the two groups have had an especially tough time agreeing. That’s why it’s been fascinating to see a mini-debate unfold between economist Brad DeLong and Matt King, Citigroup’s global head of credit products strategy.

Continue reading: What we’ve got here is a failure to communicate

The conflict between economists and market strategists is one of our favourite theory-versus-practice debates, since both groups try to answer big questions about the allocation of resources.

And in the bumpy years since the global financial crisis, the two groups have had an especially tough time agreeing. That’s why it’s been fascinating to see a mini-debate unfold between economist Brad DeLong and Matt King, Citigroup’s global head of credit products strategy.

Continue reading: What we’ve got here is a failure to communicate

Richard Koo’s chart to explain the past 200 years

It may take a few minutes to wrap your head around it, but this chart from Richard Koo, borrowing heavily from the insights of W. Arthur Lewis, is a pretty good framework for understanding the history of the world since the start of the industrial revolution:

For most of human history, technological progress was achingly slow, especially when it came to agricultural productivity. Unable to boost yields, populations couldn’t expand unless additional farmland were brought under cultivation. There were about as many people alive on Earth in the age of Caesar as there were more than a thousand years later. When that finally changed, farmers moved to urban factories and joined the proletariat.

Continue reading: Richard Koo’s chart to explain the past 200 years

It may take a few minutes to wrap your head around it, but this chart from Richard Koo, borrowing heavily from the insights of W. Arthur Lewis, is a pretty good framework for understanding the history of the world since the start of the industrial revolution:

For most of human history, technological progress was achingly slow, especially when it came to agricultural productivity. Unable to boost yields, populations couldn’t expand unless additional farmland were brought under cultivation. There were about as many people alive on Earth in the age of Caesar as there were more than a thousand years later. When that finally changed, farmers moved to urban factories and joined the proletariat.

Continue reading: Richard Koo’s chart to explain the past 200 years