Research
Expectations and the Neutrality of Interest Rates
April 25 2024. What is the basic theory of inflation under interest rate targets? Do higher interest rates lower inflation, and if so, how? The Paper> Slides>
April 24 2024. (Rewrite). The paper>
Abstract: Our central banks set interest rates, and do not even pretend to control money supplies. How do interest rates affect inflation? We finally have a complete economic theory of inflation under interest rate targets and unconstrained liquidity. Its long-run properties mirror those of monetary theory: Inflation can be stable and determinate under interest rate targets, including a peg, analogous to a k-percent rule.
Uncomfortably, stability means that higher interest rates eventually raise inflation, just as higher money growth eventually raises inflation. Sticky prices generate some short-run non-neutrality: Higher nominal interest rates can raise real rates and lower output. A model in which higher nominal interest rates temporarily lower inflation, without a change in fiscal policy, is a harder task. I exhibit one such model, but it paints a more limited picture than standard beliefs. Generically, without a change in fiscal policy, monetary policy can only move inflation from one time to another.
The last decade has provided a near-ideal set of natural experiments to distinguish the principal theories of inflation. Inflation did not show spirals or indeterminacies at the long zero bound. The large monetary-fiscal expansion of the covid era produced a temporary spurt of inflation. The same money unleashed in quantitative easing had no such effect.
This paper resulted from a talk at the “Foundations of Monetary Policy” conference celebrating 50 years since the publication of ``Expectations and the Neutrality of Money,'' Federal Reserve Bank of Minneapolis, September 2022. Slides Video of my presentation at the Hoover Economics Policy Working group, Dec 14 2022. Programs (updated 4/17/2024).
Fiscal Narratives for US Inflation
Fiscal Narratives for US Inflation. Jan 28 2024. Comments on Chris Sims “Origins of US Inflation Since 1950” at the 2024 AEA meetings. It is mostly a distillation previous writing and talks, trying to tell the story of US inflation episodes from a fiscal theory point of view. Slides here.
Fiscal Narratives for US inflation. Jan 29 2024. I wrote it as comments on Chris Sims “Origins of US Inflation Since 1950” at the 2024 AEA meetings. It is mostly a distillation previous writing and talks, trying to tell the story of US inflation episodes from a fiscal theory point of view. Slides here. Video of AEA presentation here.
Long-term bonds and new-Keynesian models.
Comments on “Downward Nominal Rigidities and Bond Premia” by François Gourio and Phuong Ngo, at the Fall 2023 NBER Asset Pricing meeting. (November 2023). My slides are here. A YouTube video of the conference is here, I start at 7:35. A bit of term premium, and a longer complaint about the continued use of NK models with known pathologies.
Comments on “Downward Nominal Rigidities and Bond Premia” by François Gourio and Phuong Ngo, at the Fall 2023 NBER Asset Pricing meeting. (November 2023). My slides are here. A YouTube video of the conference is here, I start at 7:35. The paper is really nice, using asymmetrical price adjustment costs to make the Phillips curve steeper at high inflation, thus change the inflation-output correlation and the risk premium in the term structure. Faced with a clean paper, my discussion talks about broader issues: how to think about term premiums (long term yields vs short term yields), and complaint about why we persist in using the same new-Keynesian models despite pathologies that have been known, and in some cases fixed, for 30 years. The latter is the most fun.
Inflation Past, Present and Future: Fiscal Shocks, Fed Response, and Fiscal Limits
May 23 2022. An essay, underlying my presentation at the Hoover Monetary Policy Conference May 6 20-22. There is a model by which the Fed is not behind the curve. Is it right? Stopping inflation will require coordinated fiscal and monetary policy.
Final, Oct 12, 2022. In Michael D. Bordo, John H. Cochrane, and Joyn Taylor, eds, How Monetary Policy Got Behind the Curve—and How To Get Back. Stanford, CA: Hoover Institution Press 2022 p. 63-114.
An essay, underlying my presentation at the Hoover Monetary Policy Conference May 6 20-22. There is a model by which the Fed is not behind the curve. Is it right? Stopping inflation will require coordinated fiscal and monetary policy.
Fiscal Inflation
April 22 2022. The covid inflation was a classic fiscal helicopter drop. It was not a monetary drop. Click on the title for more details.
April 22 2022. In Populism and the Future of the Fed, James Dorn, Ed. Washington DC: Cato Institute Press, 119-130. An essay prepared for presentation at the Cato Institute 39th annual monetary policy conference. Video of the conference presentation. The covid inflation was a classic fiscal helicopter drop. It was not a monetary drop. I explore why this fiscal event caused inflation, and previous ones did not; why people did not expect this one to be repaid. Future inflation will come from future fiscal and monetary policy, but future monetary policy will be constrained by fiscal affairs. I summarized this essay for the Ghost of Christmas Inflation in Project Syndicate and used part of it for Ch. 21 of Fiscal Theory of the Price Level. (Last manuscript here.)
Portfolios for long-term investors
Jan 13 2022. Review of Finance 2021 This is an essay on portfolios, based on a keynote talk at the NBER conference, ``New Developments in Long-Term Asset Management” Jan 21 2021. Read the paper. Slides for the talk
Jan 13 2022. Review of Finance, 26(1), 1-42 (2022). This is an essay on portfolio theory and practice, which evolved from a keynote talk at the NBER conference, ``New Developments in Long-Term Asset Management” Jan 21 2021. Portfolio practice looks almost nothing like portfolio theory. I offer two ideas: look at the stream of payouts or dividends directly, and ask what the function of asset markets is, and what your role in them is. The average investor holds the market portfolio. How are you different? A lot of fascinating asset pricing hasn’t yet made its way into portfolio theory, and I think about how to do that. Complete the model, and add interesting heterogeneity.
Read the paper (free access link to published version)
doi link. Last Manuscript (but the free access link should work)
The Dog and the Straw Man
The Dog and the Straw Man: Response to “Dividend Growth Does Not Help Predict Returns Compared To Likelihood-Based Tests: An Anatomy of the Dog”. Click title for longer summary
The Dog and the Straw Man: Response to “Dividend Growth Does Not Help Predict Returns Compared to Likelihood-Based Tests: An Anatomy of the Dog.” 2021. Critical Finance Review 10(3), 465-470. published version. Response to Erik Hjalmarsson and Tamás Kiss. Their paper is a critique of my “Dog that did not Bark: A Defense of Return Predictability” I respond to the critique.
Whither the Fed?
A talk given at the UCSD Economics roundtable June 11 2021. Inflation, Fed policy, fiscal pressures, and a quick tour of the Fed’s entrenchment of bailouts, and forays to climate change and social justice. Youtube video here, slides here, blog post with a bit more commentary here.
A talk given at the UCSD Economics roundtable June 11 2021. Inflation, Fed policy, fiscal pressures, and a quick tour of the Fed’s entrenchment of bailouts, and forays to climate change and social justice. Youtube video here, slides here, blog post with a bit more commentary here.
r<g
February 2021. r<g is an essay on why we still have to repay debts despite r<g. Based on comments on Ricdardo Reis’ r<g paper spring 2021 NBER EFG. Click the title for longer description. Read the essay>
February 28 2021. Updated July 28 2021. r<g is an essay on the topic of debt and deficits. Sorry, debts must be repaid. It’s based on comments on Ricardo Reis’ r<g paper given at the spring 2021 NBER EFG, and comments on Neil Mehrotra and Dmitriy Sergeyev’s paper at the summer institute.
Abstract:
A situation that the rate of return on government bonds r is less than the economy's average growth rate g seems to promise that borrowing has no fiscal cost. r<g is irrelevant for the current US fiscal problems. r<g cannot begin to finance current and projected deficits. r<g does not resolve already exponentially-growing debt. r<g can finance small deficits, but large deficits still need to be repaid by subsequent surpluses. The appearance of explosive present values comes by using perfect-certainty discount formulas with returns drawn from an uncertain world. Present values can be well behaved despite r<g. The r<g opportunity is like the classic strategy of writing put options, which fails in the most painful state of the world.
Low interest rates and government debt
Jan 11 2021. A debate with Olivier Blanchard, courtesy of IGIER at Bocconi. r<g is fun, but it is irrelevant to US fiscal issues. r<g of 1% of GDP does not finance perpetual 5% of GDP deficits, every decade 20% of GDP crisis borrowing, plus big new spending plans. And then unfunded entitlements kick in. The paper in pdf form, on my blog. Slides. Video of the event.
Jan 11 2021. A debate with Olivier Blanchard, courtesy of IGIER at Bocconi. r<g is fun, but it is irrelevant to US fiscal issues. r<g of 1% of GDP does not finance perpetual 5% of GDP deficits, every decade 20% of GDP crisis borrowing, plus big new spending plans. And then unfunded entitlements kick in. Also simple economics of why interest rates are low, and a warning of how it could all fall apart. The paper in pdf form, on my blog. Slides. Video of the event.
Challenges for central banks
This is a talk I gave at the European Central Bank (zoom) Oct 20 2020. I survey the broad challenges facing the ECB and other central banks in a policy review, from interest rates and inflation, to financial regulation, to a list of risks to worry about, and closing thoughts on the wisdom of central banks embarking on climate change policy. pdf here. conference website with other papers and video.
This is a talk I gave at the European Central Bank (zoom) Oct 20 2020. I survey the broad challenges facing the ECB and other central banks in a policy review, from interest rates and inflation, to financial regulation, to a list of risks to worry about, and closing thoughts on the wisdom of central banks embarking on climate change policy. pdf here. conference website with other papers and video.
Strategic Review and Beyond: Rethinking Monetary Policy and Independence
This was the 2020 Homer Jones Memorial Lecture at the Federal Reserve Bank of St. Louis. Video of the lecture and more here. The article, (html) (pdf) (local pdf) in the Federal Reserve Bank of St. Louis Review, Second Quarter 2020, 102(2), pp. 99-119. Many thanks to the St. Louis Fed, and gracious host Jim Bullard.
This was the 2020 Homer Jones Memorial Lecture at the Federal Reserve Bank of St. Louis. Video of the lecture and more here. The article, (html) (pdf) (local pdf) in the Federal Reserve Bank of St. Louis Review, Second Quarter 2020, 102(2), pp. 99-119. Many thanks to the St. Louis Fed, and gracious host Jim Bullard.
Lessons of the long quiet zero bound
Comments for the session "Monetary Policy, Conventional and Unconventional" at the Spring 2018 Nobel Symposium on Money and Banking. A lightning summary of recent papers including "Fiscal theory of monetary policy" "Michelson-Morley" and "New Keynesian Liquidity Trap." Lots of pictures. Fun. Slides. Video of the presentation. Link to the whole conference including video and slides for all the presentations.
Comments for the session "Monetary Policy, Conventional and Unconventional" at the Spring 2018 Nobel Symposium on Money and Banking. A lightning summary of recent papers including "Fiscal theory of monetary policy" "Michelson-Morley" and "New Keynesian Liquidity Trap." Lots of pictures. Fun. Slides. Video of the presentation. Link to the whole conference including video and slides for all the presentations.
Inflating away our troubles?
April 22 2017 Comments on "Inflating away the public debt? An empirical assessment" by Jens Hilscher, Alon Aviv and Ricardo Reis. A little inflation will not likely help our debt problems. An interest rate rise could make matters much worse, and precipitate a debt crisis, which would cause a lot of inflation. Slides
April 22 2017 Comments on "Inflating away the public debt? An empirical assessment" by Jens Hilscher, Alon Aviv and Ricardo Reis. A little inflation will not likely help our debt problems. An interest rate rise could make matters much worse, and precipitate a debt crisis, which would cause a lot of inflation. Slides
Comments on 'the Fundamental Structure of the International Monetary System
By Pierre-Olivier Gourinchas. April 2017. In Rules for International Monetary Stability edited by Michael D. Bordo and John B. Taylor, p. 186-195, Stanford: Hoover Institution Press. (The link includes the final paper and my comment.) The comments, presented at the conference, "International Monetary Stability: Past, Present and Future," Hoover Institution, May 5 2016, refer also to the original paper 'Global Imbalances and Currency Wars at the ZLB,' by Ricardo J. Caballero, Emmanuel Farhi, and Pierre-Olivier Gourinchas. The papers model "Global imbalances," "savings gluts," "safe asset shortages," and so forth, with a dramatic "tipping point" at the zero bound. At the bound "inability to produce safe assets" in one country spills over to output gaps at another one. I outline a different world view and contrast the two worlds.
By Pierre-Olivier Gourinchas. April 2017. In Rules for International Monetary Stability edited by Michael D. Bordo and John B. Taylor, p. 186-195, Stanford: Hoover Institution Press. (The link includes the final paper and my comment.) The comments, presented at the conference, "International Monetary Stability: Past, Present and Future," Hoover Institution, May 5 2016, refer also to the original paper 'Global Imbalances and Currency Wars at the ZLB,' by Ricardo J. Caballero, Emmanuel Farhi, and Pierre-Olivier Gourinchas. The papers model "Global imbalances," "savings gluts," "safe asset shortages," and so forth, with a dramatic "tipping point" at the zero bound. At the bound "inability to produce safe assets" in one country spills over to output gaps at another one. I outline a different world view and contrast the two worlds.
Comments on "A Behavioral New-Keynesian Model"
Comments on "A Behavioral New-Keynesian Model" by Xavier Gabaix. Comments presented at the October 21 2016 NBER EFG meeting. The model is really important. It is an alternative to active Taylor rules in NK models, solving zero bound and other problems. But it puts a lot of irrationality deeply at the heart of monetary economics. Slides
Comments on "A Behavioral New-Keynesian Model" by Xavier Gabaix. Comments presented at the October 21 2016 NBER EFG meeting. The model is really important. It is an alternative to active Taylor rules in NK models, solving zero bound and other problems. But it puts a lot of irrationality deeply at the heart of monetary economics. Slides
Volume and information
Comments on "Random Risk Aversion and Liquidity: a Model of Asset Pricing and Trade Volumes" by Fernando Alvarez and Andy Atkeson. Comments presented at the Conference in Honor of Robert E. Lucas Jr., Becker-Friedman Institute, October 7 2016. Andy and Fernando have a nice paper, which I pretty much ignored and summarized some thoughts on the big puzzle of volume instead.
Comments on "Random Risk Aversion and Liquidity: a Model of Asset Pricing and Trade Volumes" by Fernando Alvarez and Andy Atkeson. Comments presented at the Conference in Honor of Robert E. Lucas Jr., Becker-Friedman Institute, October 7, 2016. Andy and Fernando have a nice paper, which I pretty much ignored and summarized some thoughts on the big puzzle of volume instead.
Michelson-Morley, Occam and Fisher: The radical implications of stable inflation at the zero bound
Slides for talk at the European Financial Association, August 2016. This turned in to the paper by the same name above. It's an evolution of the similar slides for my talk given at the Columbia-New York Fed conference honoring Michael Woodford May 18-19 2016. The ZLB is a deeply revealing moment for monetary economics, like Michelson-Morley's famous experiment. Nothing happened. Many theories say big things should have happened, and those theories are wrong. (Well, unless you add epicycles, ether drag, or other ugly complications. Hence Occam's razor.) In the new version I incorporate Sims' insight for how to get a temporary negative inflation out of a rate rise. In the same vein slides for a 1.5 hour MBA class covering all of monetary economics from Friedman, Sargent-Wallace, Taylor, Woodford, and FTPL.
Slides for talk at the European Financial Association, August 2016. This turned in to the paper by the same name above. It's an evolution of the similar slides for my talk given at the Columbia-New York Fed conference honoring Michael Woodford May 18-19 2016. The ZLB is a deeply revealing moment for monetary economics, like Michelson-Morley's famous experiment. Nothing happened. Many theories say big things should have happened, and those theories are wrong. (Well, unless you add epicycles, ether drag, or other ugly complications. Hence Occam's razor.) In the new version I incorporate Sims' insight for how to get a temporary negative inflation out of a rate rise. In the same vein slides for a 1.5 hour MBA class covering all of monetary economics from Friedman, Sargent-Wallace, Taylor, Woodford, and FTPL.
Equity-financed banking and a run-free financial system
Talk given at the Minneapolis Federal Reserve's "Ending too big to fail" symposium, May 16 2016.
Talk given at the Minneapolis Federal Reserve's "Ending too big to fail" symposium, May 16 2016.
The fiscal theory of the price level and monetary policy: An agenda
April 1, 2016. Slides for a talk at the Next Steps for the Fiscal Theory of the Price Level conference at the Becker-Friedman Institute, April 1 2016. The Fiscal Theory is that the real value of nominal debt equals the present value of primary surpluses. The agenda is making this fact come alive in the analysis of history, of data, of policy, and of better monetary and fiscal regimes. To that end, I argue we've paid to much attention to surpluses, and not enough to discount rates or to debt and monetary policy. I show how we need discount rates to understand the cyclical variation of inflation, and how monetary policy is quite strong in the fiscal theory, by the ability to control nominal interest rates and thus expected inflation.
April 1, 2016. Slides for a talk at the Next Steps for the Fiscal Theory of the Price Level conference at the Becker-Friedman Institute, April 1 2016. The Fiscal Theory is that the real value of nominal debt equals the present value of primary surpluses. The agenda is making this fact come alive in the analysis of history, of data, of policy, and of better monetary and fiscal regimes. To that end, I argue we've paid to much attention to surpluses, and not enough to discount rates or to debt and monetary policy. I show how we need discount rates to understand the cyclical variation of inflation, and how monetary policy is quite strong in the fiscal theory, by the ability to control nominal interest rates and thus expected inflation.