Finance Basic To Advance Level Knowledge

It took the United States roughly 150 years to become an optimal currency area (OCA), according to economic historian Hugh Rockoff . This long journey meant that it was not until the late 1930s that a one-size-fits-all monetary policy made sense for the U.S. economy. Since then the U.S. economy has often been held up as the best example of a currency union that meets the OCA criteria. This especially was the case when comparisons have been made to the Eurozone, like in this classic Blanchard and Katz (1992) paper.  But all is not well in this land of the OCA. Declining Labor Mobility Since the 1980s there has been a decline in labor mobility across the United States.  This can be see in the figure below: Source: Molloy, Smith, and Wozniak (2014) A number of explanations have been given for this decline, but in my view the best one is found in David Schleicher's paper titled "Stuck! The Law and Economics of Residential Stability" . Schleicher makes the case t...

Here are some assorted macro musings from the past week: 1.  Been there, done that, and it did not end well China edition. Once again, China forgets there is a macroeconomic trilemma. From the Wall Street Journal : China’s central bank is effectively anchoring the yuan to the dollar, a policy twist that has helped stabilize the currency in a year of political transition and market jitters about China’s economic management....  The newfound tranquility may not last: The focus seen in recent weeks on stability against the dollar, whether it goes up or down, means pressure on the yuan to weaken could get dangerously bottled up, potentially bring bouts of sharp devaluation. Pegging an exchange rate, tinkering with domestic monetary policy, and allowing some capital flows can be a dangerous game to play. Chinese officials should stare long and hard at the picture below and recall how by ignoring it they created a crisis back 2015 .  2. St. Louis Fed Presi...

Despite the all Fed talk about shrinking its balance sheets, many observers are hoping the Fed keeps it large.  They want the Fed to maintain a large balance sheet for various reasons: it earns a positive return for the government ; it provides a financial stability tool via provisions of safe assets ; it needs to remain big and accommodative until the economy really starts roaring . There are also complications to shrinking the Fed balance sheet. Whatever you make of these arguments they all ignore an important political-economy consideration: a large Fed balance sheet makes for bad optics because of interest paid on excess reserve (IOER).  The figure below explains why. Using data from the Federal Reserve's H8 report, the figure shows the cash assets of "large domestically-chartered" banks and "foreign-related" banks.  The figure reveals the cash assets of these two bank categories combined tracks excess reserves fairly closely. They are, in other ...

Paul Krugman joined me for the latest Macro Musings podcast . It was a fun show and we covered a lot of ground from liquidity traps to secular stagnation to fighting the last war over inflation. Paul and I have had conversations in the blogosphere since the 2008 crisis so it was real treat to finally chat with him in person. In our conversation there were two issues brought up that deserved more time, in my view, than we could give on the show. So I want to address them in this post. The first one is the important distinction between temporary and permanent monetary base injections . This distinction came up up in our discussion on what it takes to reflate an economy in a zero lower bound (ZLB) environment. Krugman's 1998 paper  showed that to do so requires a permanent increase in the monetary base whereas a temporary one will not work. This 'irrelevance result' was further developed by  Eggertson and Woodford (2003)  who showed that QE programs that are temporary...

Some assorted musings: 1. From this week's podcast with Ethan Ilzetzki comes this amazing figure. It shows that approximately 70% of world GDP is tied to the dollar. The implication is staggering: the FOMC is setting monetary conditions for much of the world. Source 2.  Greg Ip argues our robot fears are misplaced . If anything, we do not have enough robots destroying jobs: From Silicon Valley to Davos, pundits have been warning that millions of individuals will be thrown out of work by the rapid advance of automation and artificial intelligence. As economic forecasts go, this idea of a robot apocalypse is certainly chilling. It’s also baffling and misguided. Baffling because it’s starkly at odds with the evidence, and misguided because it completely misses the problem: robots aren’t destroying enough jobs ...   This calls for a change in priorities. Instead of worrying about robots destroying jobs, business leaders need to figure out how to use them...

Allan Meltzer passed away this week. He is probably best known for his multi-volume history of the Federal Reserve, the ' Meltzer Commission'  that aimed to reform the IMF, and most recently his critique of Fed policy since the Great Recession. There was, however, much more to Allan Meltzer than just these developments. One of the most important contributions, in my view, was his work with Karl Brunner during the ' Monetarist Counterrevolution '. This counterrevolution took place in the 1960s and 1970s and pushed backed against the dominant view of the time that monetary policy did not matter. Milton Friedman and Anna J. Schwartz spearheaded this movement, but it was Meltzer and Brunner who did the most to show why money mattered. They worked hard to show the mechanism through which monetary policy could actually affect the economy. This was no small feat since at the time many economists did not believe in monetary policy. Their insights now permeate modern mac...