Research
Strategic Review and Beyond: Rethinking Monetary Policy and Independence
This was the 2020 Homer Jones Memorial Lecture at the Federal Reserve Bank of St. Louis. Video of the lecture and more here. The article, (html) (pdf) (local pdf) in the Federal Reserve Bank of St. Louis Review, Second Quarter 2020, 102(2), pp. 99-119. Many thanks to the St. Louis Fed, and gracious host Jim Bullard.
This was the 2020 Homer Jones Memorial Lecture at the Federal Reserve Bank of St. Louis. Video of the lecture and more here. The article, (html) (pdf) (local pdf) in the Federal Reserve Bank of St. Louis Review, Second Quarter 2020, 102(2), pp. 99-119. Many thanks to the St. Louis Fed, and gracious host Jim Bullard.
Rethinking Production Under Uncertainty
Published (advance access) Review of Asset Pricing Studies July 2020. I investigate a representation of technology in which producers can transform output across states of nature. This representation lets us write down a complete production-based asset pricing model, in which the discount factor equals marginal rates of transformation.
Published (advance access) Review of Asset Pricing Studies July 2020. I investigate a representation of technology in which producers can transform output across states of nature. This representation lets us write down a complete production-based asset pricing model, in which the discount factor equals marginal rates of transformation.
The Value of Government Debt
Here I apply an asset pricing style price/dividend variance decomposition to the government debt valuation equation, to break the debt / GDP ratio into expected future surpluses and expected growth-adjusted discount rates. Variation in the value of debt / GDP is about half future surpluses and half discount rates. Growth variation does not show up.
Here I apply an asset pricing style price/dividend variance decomposition to the government debt valuation equation, to break the debt / GDP ratio into expected future surpluses and expected growth-adjusted discount rates. Variation in the value of debt / GDP is about half future surpluses and half discount rates. Growth variation does not show up. Zip file with programs and data.
Michelson-Morley, Fisher, and Occam: The Radical Implications of Stable Inflation at the Zero Bound.
2018. NBER Macroeconomics Annual 32 (1) 113-226, Jonathan A. 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. Data and Programs. Last manuscript with online appendix. Published version (pdf) at the University of Chicago Press website. Full text html of the published version.
2018. NBER Macroeconomics Annual 32 (1) 113-226, Martin Eichenbaum and Jonathan A. Parker 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. Data and Programs. Last manuscript with online algebra appendix . Published version (pdf) at the University of Chicago Press website. Full text html of the published version. Video of the paper presentation at NBER.
Lessons of the long quiet zero bound
Comments for the session "Monetary Policy, Conventional and Unconventional" at the Spring 2018 Nobel Symposium on Money and Banking. A lightning summary of recent papers including "Fiscal theory of monetary policy" "Michelson-Morley" and "New Keynesian Liquidity Trap." Lots of pictures. Fun. Slides. Video of the presentation. Link to the whole conference including video and slides for all the presentations.
Comments for the session "Monetary Policy, Conventional and Unconventional" at the Spring 2018 Nobel Symposium on Money and Banking. A lightning summary of recent papers including "Fiscal theory of monetary policy" "Michelson-Morley" and "New Keynesian Liquidity Trap." Lots of pictures. Fun. Slides. Video of the presentation. Link to the whole conference including video and slides for all the presentations.
A Brief Parable of Overdifferencing
January 2012. This is a short note, showing how money demand estimation works very well in levels or long (4 year) differences, but not when you first-difference the data. It shows why we often want to run OLS with corrected standard errors rather than GLS or ML, and it cautions against the massive differencing, fixed effects and controls used in micro data. It's from a PhD class, but I thought the reminder worth a little standalone note.
January 2012. This is a short note, showing how money demand estimation works very well in levels or long (4 year) differences, but not when you first-difference the data. It shows why we often want to run OLS with corrected standard errors rather than GLS or ML, and it cautions against the massive differencing, fixed effects and controls used in micro data. It's from a PhD class, but I thought the reminder worth a little standalone note.
Stepping on a Rake: the Fiscal Theory of Monetary Policy
European Economic Review 101, 354-375. The fiscal theory of the price level can describe monetary policy: interest rate targets, quantitative easing, and forward guidance. 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. matlab program archive
European Economic Review 101, 354-375. The fiscal theory of the price level can describe monetary policy: interest rate targets, quantitative easing, and forward guidance. 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. matlab program archive
The New-Keynesian Liquidity Trap
Journal of Monetary Economics. 92, 47-63. Online appendix at the first link or here. matlab program. 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.
Journal of Monetary Economics. 92, 47-63. Online appendix available at the first link or here. matlab program. 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.
The Fama Portfolio
2017. University of Chicago Press. Edited with Toby Moskowitz. Collection of Gene Fama papers, with introductions by myself, Toby, Ken French, Bill Schwert, René Stulz, Cliff Asness, John Liew, Ray Ball, Dennis Carlton, Cam Harvey, Lan Liu, Amit Seru and Amir Sufi. The introductions explain why the papers are so important and how we think about the issues today. My essays are here, other essays may be on other authors' webpages. For everything else you'll have to buy the book or e book. My essays (most joint with Toby):
Preface;
Efficient Markets and Empirical Finance;
Luck vs. Skill;
Risk and Return;
Return Forecasts and Time Varying Risk Premiums;
Our Colleague.
2017. University of Chicago Press. Edited with Toby Moskowitz. Collection of Gene Fama papers, with introductions by myself, Toby, Ken French, Bill Schwert, René Stulz, Cliff Asness, John Liew, Ray Ball, Dennis Carlton, Cam Harvey, Lan Liu, Amit Seru and Amir Sufi. The introductions explain why the papers are so important and how we think about the issues today. My essays are here, other essays may be on other authors' webpages. For everything else you'll have to buy the book or e book. My essays (most joint with Toby):
Preface;
Efficient Markets and Empirical Finance;
Luck vs. Skill;
Risk and Return;
Return Forecasts and Time Varying Risk Premiums;
Our Colleague.
Inflating away our troubles?
April 22 2017 Comments on "Inflating away the public debt? An empirical assessment" by Jens Hilscher, Alon Aviv and Ricardo Reis. A little inflation will not likely help our debt problems. An interest rate rise could make matters much worse, and precipitate a debt crisis, which would cause a lot of inflation. Slides
April 22 2017 Comments on "Inflating away the public debt? An empirical assessment" by Jens Hilscher, Alon Aviv and Ricardo Reis. A little inflation will not likely help our debt problems. An interest rate rise could make matters much worse, and precipitate a debt crisis, which would cause a lot of inflation. Slides
Comments on 'the Fundamental Structure of the International Monetary System
By Pierre-Olivier Gourinchas. April 2017. In Rules for International Monetary Stability edited by Michael D. Bordo and John B. Taylor, p. 186-195, Stanford: Hoover Institution Press. (The link includes the final paper and my comment.) The comments, presented at the conference, "International Monetary Stability: Past, Present and Future," Hoover Institution, May 5 2016, refer also to the original paper 'Global Imbalances and Currency Wars at the ZLB,' by Ricardo J. Caballero, Emmanuel Farhi, and Pierre-Olivier Gourinchas. The papers model "Global imbalances," "savings gluts," "safe asset shortages," and so forth, with a dramatic "tipping point" at the zero bound. At the bound "inability to produce safe assets" in one country spills over to output gaps at another one. I outline a different world view and contrast the two worlds.
By Pierre-Olivier Gourinchas. April 2017. In Rules for International Monetary Stability edited by Michael D. Bordo and John B. Taylor, p. 186-195, Stanford: Hoover Institution Press. (The link includes the final paper and my comment.) The comments, presented at the conference, "International Monetary Stability: Past, Present and Future," Hoover Institution, May 5 2016, refer also to the original paper 'Global Imbalances and Currency Wars at the ZLB,' by Ricardo J. Caballero, Emmanuel Farhi, and Pierre-Olivier Gourinchas. The papers model "Global imbalances," "savings gluts," "safe asset shortages," and so forth, with a dramatic "tipping point" at the zero bound. At the bound "inability to produce safe assets" in one country spills over to output gaps at another one. I outline a different world view and contrast the two worlds.
Macro-Finance
2017. Review of Finance 21(3): 945-985. Links: Publisher (doi) , Last manuscript. This is a review paper. I survey many current frameworks including habits, long run risks, idiosyncratic risks, heterogenous preferences, rare disasters, probability mistakes, and debt or institutional finance. I stress how all these approaches produce quite similar results and mechanisms: the market's ability to bear risk varies over time, with business cycles. I speculate with some simple models that time-varying risk premiums can produce a theory of risk-averse recessions, produced by varying risk aversion and precautionary saving, rather than Keynesian flow constraints or new-Keynesian intertemporal substitution. The July 2016 manuscript contains a long section with thoughts on how to make a macro model based on time varying risk premiums, that got cut from the above final version. (This is the "manuscript" referenced in the paper.) The Data and programs (zip, matlab). The slides for the talk. A very nice post on the Review of Finance Blog summarizing the paper, by Alex Edmans, the editor. Typo: equation (17) is wrong. The same equation, (3) is right.
2017. Review of Finance 21(3): 945-985. Links: Publisher (doi) , Last manuscript. This is a review paper. I survey many current frameworks including habits, long run risks, idiosyncratic risks, heterogenous preferences, rare disasters, probability mistakes, and debt or institutional finance. I stress how all these approaches produce quite similar results and mechanisms: the market's ability to bear risk varies over time, with business cycles. I speculate with some simple models that time-varying risk premiums can produce a theory of risk-averse recessions, produced by varying risk aversion and precautionary saving, rather than Keynesian flow constraints or new-Keynesian intertemporal substitution. The July 2016 manuscript contains a long section with thoughts on how to make a macro model based on time varying risk premiums, that got cut from the above final version. (This is the "manuscript" referenced in the paper.) The Data and programs (zip, matlab). The slides for the talk. A very nice post on the Review of Finance Blog summarizing the paper, by Alex Edmans, the editor. Typo: equation (17) is wrong. The same equation, (3) is right.
Comments on "A Behavioral New-Keynesian Model"
Comments on "A Behavioral New-Keynesian Model" by Xavier Gabaix. Comments presented at the October 21 2016 NBER EFG meeting. The model is really important. It is an alternative to active Taylor rules in NK models, solving zero bound and other problems. But it puts a lot of irrationality deeply at the heart of monetary economics. Slides
Comments on "A Behavioral New-Keynesian Model" by Xavier Gabaix. Comments presented at the October 21 2016 NBER EFG meeting. The model is really important. It is an alternative to active Taylor rules in NK models, solving zero bound and other problems. But it puts a lot of irrationality deeply at the heart of monetary economics. Slides
Volume and information
Comments on "Random Risk Aversion and Liquidity: a Model of Asset Pricing and Trade Volumes" by Fernando Alvarez and Andy Atkeson. Comments presented at the Conference in Honor of Robert E. Lucas Jr., Becker-Friedman Institute, October 7 2016. Andy and Fernando have a nice paper, which I pretty much ignored and summarized some thoughts on the big puzzle of volume instead.
Comments on "Random Risk Aversion and Liquidity: a Model of Asset Pricing and Trade Volumes" by Fernando Alvarez and Andy Atkeson. Comments presented at the Conference in Honor of Robert E. Lucas Jr., Becker-Friedman Institute, October 7, 2016. Andy and Fernando have a nice paper, which I pretty much ignored and summarized some thoughts on the big puzzle of volume instead.
Michelson-Morley, Occam and Fisher: The radical implications of stable inflation at the zero bound
Slides for talk at the European Financial Association, August 2016. This turned in to the paper by the same name above. It's an evolution of the similar slides for my talk given at the Columbia-New York Fed conference honoring Michael Woodford May 18-19 2016. The ZLB is a deeply revealing moment for monetary economics, like Michelson-Morley's famous experiment. Nothing happened. Many theories say big things should have happened, and those theories are wrong. (Well, unless you add epicycles, ether drag, or other ugly complications. Hence Occam's razor.) In the new version I incorporate Sims' insight for how to get a temporary negative inflation out of a rate rise. In the same vein slides for a 1.5 hour MBA class covering all of monetary economics from Friedman, Sargent-Wallace, Taylor, Woodford, and FTPL.
Slides for talk at the European Financial Association, August 2016. This turned in to the paper by the same name above. It's an evolution of the similar slides for my talk given at the Columbia-New York Fed conference honoring Michael Woodford May 18-19 2016. The ZLB is a deeply revealing moment for monetary economics, like Michelson-Morley's famous experiment. Nothing happened. Many theories say big things should have happened, and those theories are wrong. (Well, unless you add epicycles, ether drag, or other ugly complications. Hence Occam's razor.) In the new version I incorporate Sims' insight for how to get a temporary negative inflation out of a rate rise. In the same vein slides for a 1.5 hour MBA class covering all of monetary economics from Friedman, Sargent-Wallace, Taylor, Woodford, and FTPL.
Equity-financed banking and a run-free financial system
Talk given at the Minneapolis Federal Reserve's "Ending too big to fail" symposium, May 16 2016.
Talk given at the Minneapolis Federal Reserve's "Ending too big to fail" symposium, May 16 2016.
The fiscal theory of the price level and monetary policy: An agenda
April 1, 2016. Slides for a talk at the Next Steps for the Fiscal Theory of the Price Level conference at the Becker-Friedman Institute, April 1 2016. The Fiscal Theory is that the real value of nominal debt equals the present value of primary surpluses. The agenda is making this fact come alive in the analysis of history, of data, of policy, and of better monetary and fiscal regimes. To that end, I argue we've paid to much attention to surpluses, and not enough to discount rates or to debt and monetary policy. I show how we need discount rates to understand the cyclical variation of inflation, and how monetary policy is quite strong in the fiscal theory, by the ability to control nominal interest rates and thus expected inflation.
April 1, 2016. Slides for a talk at the Next Steps for the Fiscal Theory of the Price Level conference at the Becker-Friedman Institute, April 1 2016. The Fiscal Theory is that the real value of nominal debt equals the present value of primary surpluses. The agenda is making this fact come alive in the analysis of history, of data, of policy, and of better monetary and fiscal regimes. To that end, I argue we've paid to much attention to surpluses, and not enough to discount rates or to debt and monetary policy. I show how we need discount rates to understand the cyclical variation of inflation, and how monetary policy is quite strong in the fiscal theory, by the ability to control nominal interest rates and thus expected inflation.
Comments on Bauer and Hamilton
Nov 5 2015. Comments on Robust Bond Risk Premia by Michael Bauer and Jim Hamilton, at the 5th Conference on Fixed Income Markets, San Francisco Federal Reserve, Nov 5 2015. I look at the evidence whether macro variables help to forecast bond returns. It turns out a trend does even better, pushing the R2 up to 62 percent! That finding suggests that specification issues rather than distribution theory are the central problems. I don't find that the Bauer-Hamilton effect size distortion is big. I document measurement errors in the data, which are a good target for econometric help. I opine we need to spend less attention on one asset at at time forecasting and more attention on the factor structure of expected returns across assets, and how that structure lines up with covariances of returns with shocks. There is also a little example of perfect non-spanning in a term structure model; bond yields have an exact one factor model, but a non-spanned factor drives expected returns. Programs and data (zip)
Nov 5 2015. Comments on Robust Bond Risk Premia by Michael Bauer and Jim Hamilton, at the 5th Conference on Fixed Income Markets, San Francisco Federal Reserve, Nov 5 2015. I look at the evidence whether macro variables help to forecast bond returns. It turns out a trend does even better, pushing the R2 up to 62 percent! That finding suggests that specification issues rather than distribution theory are the central problems. I don't find that the Bauer-Hamilton effect size distortion is big. I document measurement errors in the data, which are a good target for econometric help. I opine we need to spend less attention on one asset at at time forecasting and more attention on the factor structure of expected returns across assets, and how that structure lines up with covariances of returns with shocks. There is also a little example of perfect non-spanning in a term structure model; bond yields have an exact one factor model, but a non-spanned factor drives expected returns. Programs and data (zip)
A New Structure for U.S. Federal Debt
November 2015 In David Wessel, Ed., The $13 Trillion Question: Managing the U.S. Government's Debt, pp. 91-146. Washington DC: Brookings Institution Press. Last manuscript. I propose a restructuring of U. S. Federal debt. All debt should be perpetual, paying coupons forever with no principal payment. The debt should be composed of 1) Fixed-value, floating-rate, electronically transferable debt. Such debt looks like a money-market fund, or reserves at the Fed, to an investor. 2) Nominal perpetuities: This debt pays a coupon of $1 per bond, forever. 3) Indexed perpetuities: This debt pays a coupon of $1 times the current consumer price index (CPI). 4) All debt should be free of income, estate, capital gains, and other taxes. 5) long term debt should have explicitly variable coupons. 6) Swaps. The Treasury should adjust maturity structure, interest rate and inflation exposure of the Federal budget by transacting in simple swaps among these securities.
November 2015 In David Wessel, Ed., The $13 Trillion Question: Managing the U.S. Government's Debt, pp. 91-146. Washington DC: Brookings Institution Press. Last manuscript. I propose a restructuring of U. S. Federal debt. All debt should be perpetual, paying coupons forever with no principal payment. The debt should be composed of 1) Fixed-value, floating-rate, electronically transferable debt. Such debt looks like a money-market fund, or reserves at the Fed, to an investor. 2) Nominal perpetuities: This debt pays a coupon of $1 per bond, forever. 3) Indexed perpetuities: This debt pays a coupon of $1 times the current consumer price index (CPI). 4) All debt should be free of income, estate, capital gains, and other taxes. 5) long term debt should have explicitly variable coupons. 6) Swaps. The Treasury should adjust maturity structure, interest rate and inflation exposure of the Federal budget by transacting in simple swaps among these securities.
After the ACA: Freeing the market for health care
In The Future of Healthcare Reform in the United States Edited by Anup Malani and Michael H. Schill, p 161-201, University of Chicago Press. An essay on health care, first presented at the conference, The Future of Health Care Reform in the United States, at the University of Chicago Law School. 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 The Future of Healthcare Reform in the United States Edited by Anup Malani and Michael H. Schill, p 161-201, University of Chicago Press. An essay on health care, first presented at the conference, The Future of Health Care Reform in the United States, at the University of Chicago Law School. 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.