Finance Basic To Advance Level Knowledge

The 10-year treasury yield reached an historic low this week, crossing the 1% barrier. For many observers, this was a troubling development  that confirms the U.S. economy is being sucked into the mire of  secular stagnation . For others, it was an unsurprising outcome given the long-run trajectory of interest rates and the ongoing safe asset shortage problem. Both views have some merit. The decline of the 10-year treasury yield does create problems for the U.S. economy, but it has been happening for some time. There is nothing magical about crossing the 1% barrier, though it does brings closer the day of reckoning for the Fed's operating framework. The  decline of the 10-year treasury yield, if sustained, means the  entire yield curve may soon run into its effective lower bound. This will render useless much of the Fed's toolbox. Fortunately, there is a fix for the Fed's operating framework that makes it robust to any interest rate environ...

The Hoover Press and the Mercatus Center have just released a new book on Allan Meltzer's contributions to economics. The book is comprised of papers that were presented at a 2018 conference commemorating his work on the monetary transmission mechanism, the history of the Fed, and his more general work on public policy. Below is the table of contents for the book: I happen to be the editor of the book and, as seen above, have two chapters in it: the introductory chapter and a chapter based on my podcast interview with Allan Meltzer.  So please  check it out. P.S. We had an event last week at the AEI highlighting the release of the book. It was hosted by Desmond Lachman and featured a panel discussion including John Taylor, George Selgin, Ed Nelson, and myself. I got to speculate on what Allan Meltzer would think of (1) the below-target inflation of the past decade and (2) the Fed's plans to incorporate 'make-up' policy in their monetary policy framewor...

I have a new policy brief out on NGDP level targeting. The article summarizes in an accessible manner the key arguments for NGDP level targeting while also addressing the main concerns of this approach. The policy brief also shows how one could implement a NGDP level target in practice. The article comes out now as part of the conversation the Fed is having this year in its review of monetary policy. Please check it out .  Related Links The Financial Stability Case for NGDP Targeting NGDP Targeting and the Taylor Rule on An Even Playing Field

Source The repo market hit some road bumps last week. Trading pressures in this key funding market pushed repo interest rates well above the Fed's target interest rate range. This development caused some observers to worry that it was a 2008-type run on the repo market  all over again.  Bill Dudley  and others , however, noted this was a technical blip, not the beginning of a financial crisis. Moreover it was something the Fed could easily fix with an old fashion tool, temporary open market operations, even if the Fed got off to a slow start doing so last week.  There have been great Twitter discussions and explanations of this repo market stress, including ones from Nathan Tankus , Bauhinia Capital , Guy LeBas , and George Selgin . There are also have been many good pieces from journalists and think tanks . Here, I want to echo a few of their points and speak to where I hope this experience takes the Fed's operating system in the long run.  Le...

Dollar Dominance I have been part of a dollar dominance conversation for the past few weeks. It started with my NRO article,   discussions   on the topic at the Jackson Hole conference, and a  follow-up blog post . Later, there were twitter conversations, an i nterview on Bloomberg TV , and several podcast recordings. This all culminated in an article I wrote for The Bridge that summarizes what I see as the main issues of dollar dominance and what realistically can be done about it. Check it out and also see the follow-up twitter thread I provided that documents some of the claims made in the piece. Paul Volcker is What the Public Wanted Back in May, I interviewed Robert Samuelson about his book on the Great Inflation of the early 1970s to early 1980s . One of the claims he makes is that inflation was a bigger deal than Watergate or Vietnam for most Americans during that time. Samuelson notes most histories of this period overlook this fact even tho...

I have a new article  where I make the case that the U.S. financial system acts as a banker to the world: it tends to issue safer assets to foreigners while acquiring claims to riskier assets abroad. As a result, the United States’ balance sheet with the rest of the world looks like a bank’s balance sheet. This banker-to-the-world role has becoming even more important over the past few decades as the financial integration of the world economy has not been matched by a proportional deepening of financial markets. This is not a novel idea. Charles Kindleberger f irst made this point in 1965. Subsequent work by Gorinchas and Rey (2007) , Caballero et al. (2008) , Caballero and Krishnamurthy (2009) , Mendoza et al. (2009) , Forbes (2010) ,  He et al. (2016) , Gourinchas et al. (2017) , Matteo (2017) , Krishnamurthy and Lustig (2019) , and others all build on this point. Here is my own contribution to this debate. So while some may find this view surprising, it is actually ...

Just a quick note on a couple of my papers that recently got published. First,  Josh Hendrickson and I published in the Journal of Money, Credit, and Banking  earlier this year with an article titled " Nominal GDP Targeting and the Taylor Rule on an Even Playing Field ". Here is the abstract: Some economists advocate nominal GDP targeting as an alternative to the Taylor Rule. These arguments are largely based on the idea that nominal GDP targeting would require less knowledge on the part of policymakers than a traditional Taylor Rule. In particular, a nominal GDP targeting rule would not require real‐time knowledge of the output gap. We examine the importance of this claim by amending a standard New Keynesian model to assume that the central bank has imperfect information about the output gap and therefore must forecast the output gap based on previous information. Forecast errors by the central bank can then potentially induce unanticipated changes in the short‐term nomin...