Reforming the Euro: Lessons From Four Crises

With Luis Garicano and Klaus Masuch. Book draft, comments welcome. The euro started with a good monetary-fiscal framework. However, innovations in a series of unexpected crises changed the monetary-fiscal foundations of the euro dramatically. We tell the story, and suggest reforms. Read the book>

The Fiscal Theory of the Price Level

Updated Jan 21 2023. Now published by the Princeton University Press.

A book, trying to put the fiscal theory in one place, and with the clarity and simplification that hindsight brings. I stress how to use the fiscal theory, over theoretical controversies. And I had to extend what’s already published to stitch it all together.

I will eventually revise the book, so please continue to send typos, comments, things that seem unclear or wrong, places where I repeat too much or not enough, and more.

Additional resources:

Table of contents, sample chapters, and Online Appendix (Manuscript format, not as pretty as the final version. Includes Table of Contents, Preface, Chapters 1, 2, 8, 9, 11, 12, 13, 14, 15, 22, 23, 24, 25, Blbliography, and Online Appendix. Note: Table of contents links to the online appendix don’t work. You have to scroll to the bottom, but it’s there.) 1/21/2023.

Typos. 12/28/2022. For now a short, but sadly not empty, list.

Revised Chapter 5. 1/4/2023. Yes, the book is barely out, but I’m already revising. Giving talks over the last year, and writing some of the essays below, I’m understanding things better. This is a first draft of a much improved presentation of fiscal theory in sticky price models, which is really a central lesson of the book. I push the v vs. v* stuff to where it’s needed.

Fiscal theory with negative interest rates 4/4/2023, updated 10/1/2023. A short note, putting bonds in the utility function to show that fiscal theory can work with negative interest rates. Debt is the present value of surpluses plus the liquidity services of debt.

The Fiscal Theory of Inflation. A 6 page note. The basic story of fiscal theory is really best told with sticky prices; a period of inflation above the nominal rate slowly inflates away debt. I make this point in a continuous time model, which I now realize is the clearest way. This ended up in the new Ch 5, but this short note makes the basic point very simply.

Program and data archive. Warning: Not very clean.

Subsequent FTPL articles:

Fiscal narratives for US inflation. (Jan 2024) A short, nontechnical account of how fiscal theory explains the rise and easing of inflation 2021-2023, as well as the 1970-1980 rise and fall and the 2010 quiet.

Fiscal histories (June 2022). For the Journal of Economic Perspectives. This is a good place to start. With no equations, it tells a fiscal story of US inflation 1965-2022, as well as institutions including the gold standard, currency pegs and crashes, and the ends of inflations. Much is drawn from the book. Putting the stories all in one place and using them to exposit the workings of the theory is a useful way to see what FTPL is all about, and that it’s not nutty.

Expectations and the Neutrality of Interest Rates. (July 2023) Central banks set interest rate targets, not money supplies. What is our theory of inflation with interest rate targets, that expresses long-run neutrality and short-run non-neutrality? Will the new Lucas stand up?

Trio of blog posts on the effect of interest rates in VARs and New-Keynesian models. (Summer 2023). Takes up where “Expectations and Neutrality” leaves off.

The Fiscal Theory of Inflation. (August 2022). A short essay, emphasizing how fiscal theory picks the path of inflation, not the initial price level, with even slightly sticky prices. Now incorporated into the new Chapter 5.

Inflation Past, Present and Future: Fiscal Shocks, Fed Response, and Fiscal Limits. (May 2022) An essay and talk, presented at the Hoover Monetary Policy conference, and forthcoming in the conference volume. A simple rational expectations FTPL model fits the Fed’s views. I emphasize fiscal-monetary coordination to end inflation, with unpleasant interest-rate arithmetic.

Fiscal inflation (February 2022) An essay for Cato, thinking through the fiscal roots of 2022 inflation. The origin and somewhat longer version of the Covid-19 inflation chapter in FTPL.

A summary article (December 2021) with no equations, outlining how the theory works and how you might integrate it into macroeconomic models.

Most of my opeds lately have been about applying fiscal theory ideas. I won’t list them separately here.

Talks, video, interviews, selected podcasts

Uncommon Knowledge 2/28/2003. Interview with Peter Robinson. Starts with fiscal theory, then wide ranging.

AEI Panel 2/28/2003 on fiscal theory. A lightning 20 minute presentation by me, then insightful comments from Robert Barro, Tom Sargent and Eric Leeper, plus hard questions from Michael Strain.

Vance Ginn “Let People Prosper” podcast 1/17/2023. A nice 45 minute interview, to celebrate the book’s release. Lots of fiscal theory vs. monetarism.

O’Connor institute podcast with Liam Julian 6/14/2023.

Bootcamp/Policy Ed. 9/14/2022 Three short nontechnical videos, made for the Hoover Summer Bootcamp, and very well edited by Hoover’s Policy Ed team. Uses simple fiscal theory ideas to cover current events.

In May 2021 I gave a 1:15 lecture at the European University Institute summarizing the project at that point.

Current slides for FTPL talks (10/12/2022). Slides for “Expectations and the Neutrality of Money”

Selected Media and Reviews

Wall Street Journal Weekend interview (2/18/2022) with Tunku Varadarajan. Mostly about how one might use fiscal theory to think about inflation in real time.

To Solve Inflation, First Solve Deficits, This Theory Advises (11/2/2022) Wall Street Journal by Greg Ip.

Have economists misunderstood inflation? (1/26/2023) Book review in the Economist.

A flawed but useful economic model for a bleak age (4/14/2023). Review by Edward Chancellor at Reuters.

Review by Michael Ben-Gad, in Economic Affairs (7/9/2023)

Review by Melissa Davies, Society of Professional Economists (7/27/2023)

One of The Economist’s “Best Books of 2023”

The Squam Lake Report: Fixing the Financial System

Princeton: Princeton University Press 2010. With Kenneth R. French, Martin N. Baily, John Y. Campbell, Douglas W. Diamond, Darrell Duffie, Anil K. Kashyap, Frederic S. Mishkin, Raghuram G. Rajan, David S. Scharfstein, Robert J. Shiller, Hyun Song Shin, Matthew J. Slaughter, Jeremy C. Stein, and Rene M. Stultz

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Financial Markets and the Real Economy

Volume 18 of the International Library of Critical Writings in Financial Economics, John H. Cochrane Ed., London: Edward Elgar. March 2006. Edited volume of collected articles with an introduction surveying the field.

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Asset Pricing

Revised Edition. link gives you a sample chapter. Click here to go to the Princeton University press website where you can order the book. (It is sometimes cheaper at Amazon.com or Barnes and Noble.com. In Chicago, it’s available at the seminary COOP bookstore.)

Additional materials for Asset Pricing, lecture notes, new chapters, and the online class are now moved to their own page here, or via the Asset Pricing link at left.

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