Posts

Storytelling: Friday Chart Edition

Image
I have not posted here in awhile, so I thought it would be good to share a few recent charts that tell interesting stories. Central Bank Balance Sheets First up, are two charts that show the relationship between the size of the central bank balance sheets and inflation rates. The first one shows for the 2010-2019 period the average size of central bank balance sheets as a percent of NGDP plotted against the average core inflation rate. Since larger balance sheets are typically seen as adding more stimulus to the economy, one might expect to see a positive relationship between their size and the inflation rate over this long of an horizon. Instead, we see a negative relationship: One objection to the above chart is it may be misleading since it is the rate of change in central bank liabilities, not the level, that should drive the inflation rate. To that end, the next chart shows the change in the size of the central bank balance sheets over the same period. The same relationship ho...
Post a Comment
Read more

The Fed's New Framework

Image
I have a new article presenting my take on the Fed's new average inflation target (AIT). It includes an explanation of how it works compared to the Fed's previous inflation target and what it could mean for the recovery. I note that although AIT it is not quite a NGDP level target, it is a step in that direction. Moreover, it could lead other central banks to follow suit. Check it out . Also, here is an earlier piece I wrote on make-up policy and how it could be best implemented via a NGDP level target. It was published before the big announcement last week. Finally, here is St. Louis Fed President Jim Bullard's take on AIT. He explains how this new framework gets us fairly close to NGDP level targeting. 
Post a Comment
Read more

A Twitter Thread on Interest Rate Determination

Over in the twitterverse, this discussion on interest rate determination happened. 
Post a Comment
Read more

Make-Up Policy: Where Art Thou?

Image
As we head into the second half of the year, the swift recovery many were hoping for is facing an uncertain future. The resurgence of the COVID-19 virus and concerns about dwindling fiscal support have many worried. I submit that even in the absence of these worries, the recovery would still be on shaky grounds without the Fed explicitly committing to 'make-up' policy.  Make-up policy is an explicit framework that allows the Fed to correct for past misses in its target. In the case of a recession, this feature allows the FOMC to be fine with inflation temporarily overshooting its target while the economy bounces back. Tolerating this  overshoot implies a similar surge in nominal income that would restore it to the levels expected by household and business prior to the crisis. This restoration is important since many fixed-price nominal financial obligations like mortgages, loans, and leases were made based on these forecasts of nominal income.   Without make-up polic...
Post a Comment
Read more

NGDP Targeting in the United Kingdom

Image
Something interesting is happening in the United Kingdom. Some government officials there are pushing for the Bank of England to adopt an NGDP target. From the  Independent : Officials in the UK Treasury are “probably” considering whether to change the Bank of England’s inflation-targeting mandate due to the massive economic shock imparted by the coronavirus crisis, according to a former minister.  Lord Jim O’Neill, who was commercial secretary to the Treasury in 2015, wants the central bank to shift from its current target of keeping inflation at 2 per cent to targeting a steadily rising trend of nominal UK GDP growth instead. Since the U.K. Treasury determines the monetary policy target for the Bank of England, t hese rumblings are more than noise .  The U.K. Treasury's increased interest in an NGDP target is driven, in part, by the efforts of Jim O'Neil. He has written articles ,  done interviews , and made a forceful case for this approach to mo...
Post a Comment
Read more

The Public Finance Implications of COVID-19

Image
Peter Stella joined me on the podcast this week. He was back by popular demand and we touched on two important and related questions: how should the government finance its relief efforts and who should ultimately manage the public debt?  The U.S. Treasury may seem like the obvious answer to both questions, but it is not the whole story. The Federal Reserve can also finance the relief efforts and, in so doing, affect the structure of public debt. But is this a good thing?  Peter Stella says no, at least in the longrun. He makes the case that it  is economically and politically cheaper to return the financing and management of the public debt back to the U.S. Treasury once the COVID-19 recession is over. In other words, the Fed's expansion of its balance sheet, an understandable response to the crisis, needs to be unwound as the economy improves. Otherwise, we might end up with two government agencies with very different objectives trying to manage the public debt.  T...
Post a Comment
Read more

Extensions to the NGDP Gap

Image
The monetary policy program at the Mercatus Center recently released a new measure called the NGDP gap . We created it as an alternative way to gauge the stance of monetary policy and have provided a website that will update the measure as new data become available. In this post, I will briefly summarize the NGDP Gap and then highlight a few extensions that some readers may find useful.  Summary of the NGDP Gap   As mentioned above, the NGDP Gap provides a cross check on the stance of monetary policy. Its use does not require the Fed to adopt a NGDP target, but it does draw upon the fact that NGDP is comprised of  both real GDP and the price level and therefore captures both elements of the Fed’s dual mandate. Moreover, since NGDP is a nominal variable it can be shaped by the Fed over the medium to long run.  The basic idea behind this measure is to construct a  benchmark growth path for nominal GDP (NGDP) where monetary policy is neither expansionary ...
Post a Comment
Read more