Finance Basic To Advance Level Knowledge

In the United States, there has been  existential angst over Phillips curves for the past few years. Fed officials and other observers have been engaged in deep soul searching as they try to reconcile a falling unemployment rate with stubbornly low inflation. The Phillips curve says this development should not be happening--inflation should rise as the economy nears full employment. And yet, it has been happening for several years.  Various attempts have been made to reconcile the apparent breakdown in the Phillips curve relationship. Some, like Joe Gagnon , say there is a non-linear relationship that comes into play when inflation is really low. Others, like Adam Ozimek and Ernie Tedeschi  claim there is no Phillips curve mystery if one simply uses the correct measure of slack: the prime-age employment rate. Another group, including Paul Krugman , points to monopsony power as explaining the breakdown in the relationship. Still others point to a variation of Milt...

Today, I interviewed Nick Timiraos  of the Wall Street Journal for the Macro Musing podcast. He is on the Fed beat now, but covered the GSEs during and after the financial crisis for the paper. Consequently, he has an encyclopedic knowledge of Fannie Mae, Freddie Mac, and the other GSEs. His knowledge and experience were the basis of our conversation today. It was a fun show and should be out in about a month. I wanted to share some figures I collected on the U.S. mortgage market in preparation for the show. They come from an amazing monthly report on housing from the Urban Institute called  Housing Finance at a Glance . These figures provide a peak into my conversation with Nick. Consider first  the historical share of mortgage debt outstanding by type of institution. This chart is actually mine from a few years ago. There are three key takeaways from it. First, the GSEs gain most of their market share in the wake of the S&L crisis. Second, the GSEs actually...

The Fed claims it has a symmetric two percent inflation target. From  its 2017 and 2018  Statements on Longer Run Goals and Monetary Policy , the FOMC states: The Committee reaffirms its judgment that inflation at the rate of 2 percent... is most consistent over the longer run with the Federal Reserve’s statutory mandate. The Committee would be concerned if inflation were running persistently above or below this objective. Communicating this symmetric i nflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored... Numerous Fed officials have repeated this point as well. They too  see the inflation target as a symmetric one , an understanding that allows for an occasional inflation overshoot. Despite these claims, however, the Fed has persistently undershoot its inflation target. If one acknowledges the Fed implicitly targeted two percent long before the explicit target was adopted in 2012, then the undershooting has ...

Macro Musings has now hit its 100th episode. It was a great show with Heather Long, Ryan Avent, and Cardiff Garcia where we look back at the past decade and look ahead to the next one. Below are a few pictures from the show. Thanks to Patrick Horan who has been a great sound engineer for most of the show. It could not have happened without him. Take a listen!

Some assorted macro musings: New NGDP Paper My colleague Scott Sumner and Ethan Roberts have a new primer on NGDPLT . It is a very accessible introduction to the topic, but one that also gets into NGDPLT futures targeting. Check it out. JEC Report on the Slow Recovery The Joint Economic Committee of Congress has a new report where, among other things, it lays out a monetary explanation for the slow recovery.  A key excerpt on why QE did not create a robust recovery (page 61): The Fed was clear from the outset that it would undo its LSAPs eventually (i.e., remove from circulation the money it created in the future). The temporary nature of the policy discouraged banks from issuing more long-term loans. Alternatively, as economist Tim Duy pointed out during the inception of the Fed’s first LSAP program:  " Pay close attention to Bernanke’s insistence that the Fed’s liquidity programs are        intended to be unwound. If policymakers truly i...

Paul Krugman looks back on the past twenty years  of macroeconomic policy and finds that his 1998 paper was more prescient than he or anyone could have imagined. Back then many observers assumed that central bankers--particularly those at the Bank of Japan--need only increase the monetary base to increase the price level. It was that simple. Ken Rogoff, for example, said the following in commenting on Krugman's 1998 article: No one should seriously believe that the BOJ would face any significant technical problems in inflating if it puts it mind to the matter, liquidity trap or no. For example, one can feel quite confident that if the BOJ were to issue a 25 percent increase in the current supply and use it to buy back 4 percent of government nominal debt, inflationary expectations would rise. Krugman disagreed in his 1998 paper. He showed, using a New Keynesian model, that it was more complicated than many imagined. It depended on whether the monetary injections were expe...

Jay Powell went to Capitol Hill today for his first congressional testimony  as Fed Chair. In addition, he submitted the Federal Reserve's annual Monetary Policy Report to Congress.  A lot of ground was covered in his testimony, follow-up questions, and in the report. Here, I want to highlight one very interesting and potentially significant part of his testimony. And that is Jay Powell's endorsement of monetary policy rules. At the end of his written testimony, Jay Powell had this to say: In evaluating the stance of monetary policy, the FOMC routinely consults monetary policy rules that connect prescriptions for the policy rate with variables associated with our mandated objectives. Personally, I find these rule prescriptions helpful. Careful judgments are required about the measurement of the variables used, as well as about the implications of the many issues these rules do not take into account. I would like to note that this Monetary Policy Report provides furth...