Both instruments are needed in emerging economies that are at risk of financial instability because of large capital inflows. Undervaluation through Foreign Reserve Accumulation: Reserve accumulation may trigger positive learning-by-doing externalities in the tradable sector and improve welfare.
Financial deregulation allows the financial sector to extract larger rents from the rest of society. From Sudden Stops to Fisherian Deflation: Provides an introduction to quantitive models and the empirics of sudden stops, with ample online resources. A primer that develops a simple formal model of emerging market balance sheet crises, externalities and capital flow regulation. An introduction to the emerging new literature on prudential capital controls in emerging economies, cited in the FT's Economists' Forum and the Economist's Free Exchange.
Crises in one area of the world economy cause "hot money" to flow into other areas and create the risk of serial financial crises. Excessive Volatility in Capital Flows: Stiglitz , Journal of Public Economics 93 , pp. I'm posting it as it comes alone for anyone who is interested, and in the hope of getting feedback. Warning, it's incomplete, not well written, and will be revised many times.
But it is still potentially interesting if you want to read about fiscal theory. Michelson-Morley, Fisher, and Occam: Parker and Michael Woodford Eds. The fact that inflation is quiet and stable at zero rates cleanly invalidates the standard old-Keynesian model, which predicts a deflation spiral, and almost as cleanly invalidates new-Keynesian sunspots. New Keynesian price stickiness plus fiscal theory selection works well, and solves the puzzles of new-Keynesian models with selection by post-bound active policy.
Stable inflation suggests a higher rate will raise inflation. That conclusion is hard to escape, even temporarily. The fiscal theory with long term debt does it. Even that does not rescue traditional views of monetary policy. A shortish nontechnical summary. Published version pdf at the University of Chicago Press website. Full text html of the published version. Stepping on a Rake: European Economic Review , The fiscal theory of the price level can describe monetary policy: With long term debt, a higher interest rate can produce temporarily lower inflation.
The paper starts with a completely frictionless environment, and then replicates Chris Sims's "stepping on a rake" paper, which has the latter result along with elaborations that smooth out the impulse-response functions. I boil Sims down to the central ingredient,long term debt. The replication is useful if you want to know how Sims derived his model or solved it; also useful as a guide to solving continuous-time sticky-price models with jumps.
Journal of Monetary Economics. First link includes the online appendix. In standard solutions, new-Keynesian models produce a deep recession with deflation at the zero bound. Useless government spending, technical regress, and capital destruction have large positive multipliers. The recession, deflation and policy paradoxes are larger when prices are less sticky, and news has larger effects for events further in the future.
These features are all artifacts of equilibrium selection. For the same interest-rate policy, equilibria that limit a downward jump of inflation on news of the trap, for the same interest rate policy, reverse all these predictions. They predict mild inflation, little output variation, and negative multipliers during the liquidity trap.
Their predictions approach the frictionless model smoothly, and promises in the far-off future have less effect today. A big deflation requires that the government raise taxes or cut spending a lot to pay a windfall to bondholders. Such fiscal considerations suggest the equilibria with limited jumps and effects.
ScienceDirect link to published version, html and pdf I analyze monetary policy with interest on reserves and a large balance sheet. I argue for the desirability of this regime on financial stability grounds. I show that conventional theories do not determine inflation in this regime, so I base the analysis on the fiscal theory of the price level.
I find that monetary policy -- buying and selling government debt with no effect on surpluses -- can peg the nominal rate, and determine expected inflation.
With sticky prices, monetary policy can also affect real interest rates and output, though not with the usual signs in this model. Figures 2 and 3 are the best part -- the effects of monetary policy with and without fiscal coordination.
I address theoretical controversies, and how the fiscal backing of monetary policy was important for the s disinflation. A concluding section reviews the role of central banks. Inflation and Debt National Affairs 9 Fall The danger is best described as a "run on the dollar.
I also talk about the conventional Keynesian Fed and monetarist views of inflation, and why they are not equipped to deal with the threat of deficits. This essay complements the academic equations "Understanding Policy" article see below and the Why the budget matters today WSJ oped on oped page. Determinacy and Identification with Taylor Rules. Journal of Political Economy , Vol. JSTOR link , including html, pdf, and online appendix.
Manuscript with Technical Appendix The technical appendix documents a few calculations. Don't miss starting on Technical Appendix page 6 a full analytical solution to the standard three equation model. I include the manuscript just so equation references in the Technical Appendix will work, the previous links to the published version are better.
A response to Sims January Understanding fiscal and monetary policy in the great recession: Some unpleasant fiscal arithmetic.
Why there was a big recession; will we face inflation or deflation, can the Fed do anything about it? Many facets of the current situation and policy make sense if you ask about joint fiscal and monetary policy. A fiscal inflation will look much different than most people think. Slides that go with the paper. Appendix with the algebra for government debt valuation equations.
Journal of Monetary Economics 56 — I think McCallum got it backwards -- the bounded equilibrium is not learnable, the explosive ones are learnable. The fiscal theory of the price level made simple. I reopen the security market at the end of the day in a cash in advance model, and show that the price level is still determinate. I also resolve the criticism that the fiscal theory mistreats the "government budget constraint. The fiscal theory with long term debt, and how to match the fiscal theory with business-cycle variation in debt and inflation.
We typically write fiscal theory models with one-period debt, but the maturity structure turns out to matter a lot. I also resolve the empirical puzzle that inflation and deficits seem not to commove. The choice of monetary regime — interest rate rule, exchange rate peg, currency board, dollarization, etc. There's a beautiful Taylor rule in interest rate forecasts. A Frictionless model of U. Inflation, in Ben S. Bernanke and Julio J. My first foray into the fiscal theory.
It includes a proof that you can't test for regimes -- the government debt valuation equation and the money demand equation hold in both equilibria, and there is no Granger causality prediction. I also explain the intuition of the fiscal theory.
The goal was to write a "Fiscal history", to understand the path of US inflation via the fiscal theory. That turns out to be harder than I thought, and is still an ongoing project. What do the VARs Mean? Responses to monetary policy shocks seem long and drawn out. Do we need models with extensive frictions? No, because the response of policy to policy shocks is also drawn out. If you allow expected policy to affect output and inflation, you can make sense of drawn out impulse-response functions with a very short structural response, but a long-lasting impulse.
Realities of Reform , Edward Lazear Ed. Imagine for a moment that the Federal Reserve imposed the following policies in the United States: Every company must pay for all its inputs before they are shipped, and taxes must also be prepaid. But there is no trade credit, and banks do not make working capital loans to purchase inputs. Checks take 90 days to clear… Chaos would result… This is roughly what happened in Russia during the summer of The story… points to the importance of macroeconomic policies, and the unintended macroeconomic effects of policy, in understanding developments in Russia and the Former Soviet Union.
It also suggests that many macroeconomic problems are not inevitable consequences of the transition to a market economy, but rather that they are avoidable unintended effects of partial liberalizations. None of the above accounts for much of economic fluctuations or inflation. Monetary policy shocks in particular account for very little output fluctuation and zero inflation variation.
Inflation Stabilization in the Reforming Socialist Economies: I test for insurance using regressions of consumption growth on exogenous variables.
Thinking through the specification of the regressions is not easy. I reject full insurance for long illness and involuntary job loss, but not for spells of unemployment, loss of work due to a strike and an involuntary move. Many tests of the permanent income model or consumption based asset pricing models exploit predictions that imply trivial utility costs. The Return of the Liquidity Effect: This was my job market paper, many years ago.
Do something fun in your job market talk, like demonstrate bandpass filters by swinging your keys. Have Lars Hansen discover a really interesting mistake in technical Appendix C of your job market paper.
Schill, p , University of Chicago Press. Most of the policy discussion is focused on health insurance. But the health care market is dysfuctional, and needs to be fixed as well. Where are the Southwest Airlines, Walmart and Apple of health care, bringing cost saving, efficiency, and innovation? I argue that we need a big freeing up of health care markets. I also focus more than usual on supply restrictions. It doesn't do much good for people to pay with their own money if suppliers cannot respond to that demand.
Last manuscript in case of copyright problems with the published version above. In Cato's Policy Analysis No If you get sick and lose health insurance you are stuck -- your premiums skyrocket or you may not be able to get insurance at all. The article shows how private markets can solve this problem. If you get sick, your health premiums go up but a separate "premium increase insurance contract" pays a lump sum so that you can afford the higher health premiums. The big advantage is freedom and competition: This piece is written for a nontechnical popular audience, with a lot of policy discussion.
This paper explains the basic framework of Time-Consistent Health Insurance next and thinks through lots of real-world issues and answers to "what ifs. None of us has health insurance, really. You get sick, you lose your job or get divorced, and now you have a preexisting condition. If you get sick, you get a lump sum that allows you to pay higher insurance premiums.
It allows a private-market solution to the main problem of health insurance attracting regulation. I needed to teach myself these tricks in order to solve a Linear-quadratic asset pricing economy with complex habits and durability.
It didn't, but now I, and I hope you, know how to do all the discrete-time tricks in continuous-time models. I use bivariate autoregressions of consumption and GNP, and of dividends and stock prices.
Consumption and dividend growth are unpredictable, so act as stochastic trends for GNP and stock prices. Alas, there is no substitute for plotting the data and thinking about what makes sense. If you are willing to be contacted in the future to help us improve our website, please leave your email address below. Which of the following best describes your career field or organization?
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