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David Andolfatto

David Andolfatto

Construction worker turned academic turned central banker. Opinions expressed here are my own, not St. Louis Fed nor U.S. Fed Reserve System.

Articles by David Andolfatto

What economic model produces the Fed’s inflation forecast?

April 7, 2022

John Cochrane’s blog has always been a favorite of mine. It’s provocative. It’s entertaining. And it invariably leads me to reflect on a variety of notions I have floating around in my head. In his latest piece,  he asks an interesting question: How does the Fed come up with its inflation forecast? What sort of model might be embedded in the minds of FOMC members? I like the question and the thought experiment. My comments below should not be construed as criticism. Think of them more as thoughts that come to mind in a conversation. (It’s more fun to do this in public than in private.)John begins with the observation that while the Fed evidently expects inflation to decline as the Fed’s policy rate is increased, at no point in the transition dynamic back to 2% inflation is the real rate

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The Inflation Blame Game

January 29, 2022

Inflation is back together with a new season of America’s favorite sport: zero-contact, finger-pointing. I thought I’d sit back and share a few thoughts with you on the subject on this cold Saturday afternoon. Use the comments section below to let me know what you think.In one corner, I see some pundits somehow wanting to blame the 2021 inflation on workers. Workers are somehow forcing their improved bargaining positions on employers, raising the costs of production, with some or all of these costs passed on to consumers. Then, as workers see their real wages erode, the cycle begins anew begetting the dreaded "wage-price spiral." Those pesky workers. There’s no doubt something to the idea that wage demands can lead to higher prices (and why shouldn’t workers want cost-of-living

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Some Thoughts on the Fed’s CBDC Report

January 29, 2022

Economists within the Federal Reserve System have been musing about central bank digital currency for a while now. For example, yours truly provided a few thoughts on the possibility way back in 2015 (see here) and most recently here. But the views of individual Fed researchers are simply our own personal views. What people are really interested in is an official view–namely the view of the Board of Governors of the Federal Reserve. At long last, their report is now available here). The report makes it clear that the Fed has no immediate plans to issue a CBDC. The main purpose of the report is to provide some background information, discuss the potential costs and benefits of a CBDC, and solicit feedback from the general public. It is a very nice educational piece. There was nothing

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On the Necessity and Desirability of CBDC

November 30, 2021

Remarks prepared for P2PFISY
Panel Discussion, December 1, 2021

At a
conceptual level, CBDC is a compelling idea. It envisions everyone having an
account with the central bank consisting of a direct claim against digital fiat
currency that can be used as a safe and efficient form of payment. Since all
debiting and crediting of accounts occurs on the central bank’s balance sheet,
all the costs and counterparty risks associated with intermediated payments is
eliminated. All individuals and businesses would have access to secure,
low-cost real-time payment services. Moreover, concerns over data privacy and
ownership can be dealt with directly and in a manner consistent with societal

I have
nothing against a retail CBDC per se. Indeed, there may even be some merit to
the idea

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Run-Proof Stablecoins

November 11, 2021

A stablecoin (SC) is a financial structure that attempts to peg the value of its liabilities (or a tranched subset of its liabilities) to an object outside its control, like the USD. To do this, the SC must effectively convince its liability holders that SC liabilities can be redeemed on demand (or on short notice) for USD at par (or some fixed exchange rate). The purpose of this structure is to render SC liabilities more attractive as a payment instrument. Pegging to the USD is attractive to people living in the U.S. because the USD is the unit of account. Non-U.S. holders may be attracted to the product because the USD is the world’s reserve currency. This structure serves to increase the demand for a SC pegged to the USD. To a macroeconomist, an SC looks like a unilateral fixed

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EEA-ESEM Panel: Macroeconomic Consequences of the Pandemic

September 29, 2021

I was recently asked whether I’d like to share my thoughts on monetary policy in a post-pandemic world. Sure, why not? Thanks to Jan Eckhout for thinking of me. The panel was hosted by the European Economic Association last month and moderated by Diane Coyle. I was honored to speak alongside Ricardo Reis and Beata Javorcik, both of whom provided riveting presentations. For what it’s worth, I thought I’d provide a transcript of my remarks here. Lunch Panel EEA-ESEM CopenhagenAugust 25, 2021I want to focus my discussion on the U.S. economy
and from the perspective of a Fed official concerned with the challenges the
Fed may face in fulfilling its Congressional mandates in a post-pandemic world.

First, to provide a bit of context, let me offer
a bit of history on policy and, in particular,

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Labor Force Participation Gaps Between the U.S. and Canada

April 27, 2021

Am hearing some talk about whether the U.S. labor market can fully recover to its pre-Covid19 levels. Is it possible that a sizeable number of workers with marginal attachment to the workforce decide to remain out of the labor force? For example, this crisis, unlike the one that preceded it, has been associated with large increases in personal wealth. Workers on the cusp of retiring may now choose to do so earlier? (This is just one of the many stories I hear.)For what it’s worth, I thought I’d update my labor market participate blog post from 2013 which compared participation rates across Canada and the U.S., for males and females, and across different age categories. You can find my old post here along with some links to related posts. Below I report the updated data.Remember, an

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On the Role and Future of Cryptocurrencies

April 23, 2021

My former colleague Howard Wall asked me to join Lawrence White yesterday evening to discuss the role and future of cryptocurrencies at an event hosted by the Hammond Institute for Free Enterprise. It was a great honor to share the stage with Larry. I’ve been thinking about cryptocurrencies for a long time; many of my writings and talks on the subject can be found here. My thoughts on the subject are evolving as I learn more about the phenomenon. For what it’s worth, I thought I’d share my opening remarks with interested readers below. As usual, any feedback is welcome. The Role and Future of CryptocurrenciesA money and
payments system is about managing databases containing the money accounts of
individuals and organizations. Any database management system must necessarily
define read and

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A Natural Rate of Interest

March 31, 2021

This post was motivated by a conversation with Eric Lonergan. It began with a simple question: what should be the interest rate paid on reserves? I answered that according to theories I’m familiar with, reserves should earn the "natural" rate of interest, which I defined as the sum of population and productivity growth. So, assuming 2% "real" growth and 2% inflation, reserves (and government debt more generally) should be yielding around 4%. I think it’s fair to say most people did not find my answer very satisfying. So I thought I’d take a moment to explain how I arrived at it. I want to do so in the context of a model economy. Let me describe the model first. We can discuss its limitations and possible extensions later on. Consider an economy where people live for two periods; they are

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Is it time for some unpleasant monetarist arithmetic?

March 4, 2021

The title of this post alludes to a paper written by Tom Sargent and Neil Wallace 40 years ago "Some Unpleasant Monetarist Arithmetic." The startling conclusion of this paper is that a central bank (limited to interest rate policy and/or open market operations) does not have unilateral control over the long-run rate of inflation. The result is made all the more powerful by the fact that it relies mostly on arithmetic and only minimally on theory. So, what’s the basic idea? First, begin with the fact that monetary and fiscal policy are inextricably linked via a consolidated government budget constraint. This implies that monetary policy will have fiscal consequences. In particular, interest-rate policy affects the interest expense associated with rolling over any given amount of government

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A Journey in Macroeconomic Thinking

February 21, 2021

I’ve been thinking a bit lately about theories of the business cycle (a lot of time for reflection in these days of COVID-19). At least, I’ve been thinking of the way some of these theories have evolved over my lifetime and from the perspective of my own training in the field. From my (very narrow) perspective as a researcher and advisor at a central bank, the journey beginning c. 1960 seems like it’s taken the following steps: (1) Phillips Curve and some Natural Rate Hypothesis; (2) Real Business Cycle (RBC) theory; (3) New Keynesian theory. It seems like we might be ready to take the next step. I’ll offer some thoughts on this at the end, for whatever they’re worth. There’s no easy way to summarize the state of macroeconomic thinking, of course. But it seems clear that, at any given

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Cochrane on debt II

September 9, 2020

Yesterday, I posted a reply to John Cochrane’s Sept 4 post on the national debt. John alerted me to his Sept 6 update, which I somehow missed. Given this update (together with some personal correspondence), let me offer my own update. John begins with an equation describing the flow of government revenue and expenditure. With a debt/GDP ratio of one, the sustainable (primary) deficit/GDP ratio is given by g – r, where g = growth rate of NGDP and r = nominal interest rate on government debt (I include Federal Reserve liabilities and currency in this measure). John assumed g – r = 1% (so about $200B). In a post I published last year, I assumed g – r = 3% (so about $600B); see here: Is the U.S. Budget Deficit Sustainable? Two things to take away from these calculations. First, this

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Cochrane on why debt matters

September 8, 2020

The stock of national debt is now larger than our annual national income in the United States. Is this something to worry about? Does it matter how big the debt-to-GDP ratio gets? Is there any limit to how large it can grow and, if so, what is it this limit and what factors determine it? A lot of people have been asking these questions lately. John Cochrane is the latest to opine on these questions here: Debt Matters. I’m not even sure where to begin. I suppose we can start with the famous debt clock pictured on the right. Whenever I look at the debt clock, I’m reminded of James Tobin who, in 1949 remarked:   The peace of mind of a conscientious American must be disturbed every time he is reminded that his government is 250 billion dollars in debt. He must be shocked by the frequent

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The Fed’s new monetary policy framework

September 4, 2020

The Fed’s much-anticipated new monetary policy framework is now public. Fed Chairman Jerome Powell outlined the policy framework last week in Jackson Hole; you can view his speech here. Overall, I thought Powell’s delivery was very good. While there’s room for improvement, I think the new framework is a step in the right direction (George Selgin provides a good critique here). There were three things in Powell’s speech that stuck out for me. I discuss these below. Shortfalls vs. DeviationsAt the 22:30 mark, Powell reports what may very well be the most substantive change to the monetary policy statement. Here, he states that the FOMC will now interpret important macroeconomic time-series like GDP and unemployment as exhibiting "shortfalls" instead of "deviations" from some ideal or

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Some thoughts on yield curve control

August 29, 2020

There’s been a lot of talk about "yield curve control" (YCC) as of late. I found the recent exchange between Joe Weisenthal and David Beckworth (with many others chiming in) very interesting:I normally enjoy Joe’s hot takes, but this one… yikes. It is a good example, in my view, of why relying too heavily on the "money view" (i.e.liquidity preference view) of interest rates can cause one to miss the forest for the trees. Let me explain…1/n https://t.co/EjUltLb4dF— David Beckworth (@DavidBeckworth) August 9, 2020 A number of us gathered on Zoom to discuss the subject. What follows is my own take on YCC and some of the issues involved. If you’re interested in joining in on a future Zoom discussion, let me know.  One thing I learned from the people I talked to is that my notion of YCC

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Why the Fed Should Create a Standing Repo Facility

June 24, 2020

I was invited recently to take part on a panel discussion
on Modernizing Liquidity Provision as part of a conference hosted jointly by CATO and the Mercatus Center entitled A Fed for Next Time: Ideas for a Crisis-Ready Central Bank.  My post today is basically a transcript of the presentation I gave in my session. I’d like to thank George Selgin and David Beckworth for inviting me to speak on why the Fed should create a standing repo facility, an idea that Jane Ihrig and I promoted early last year in a pair of St. Louis Fed blog posts here and here.In those posts, Jane I argued that the Fed should create a standing repo facility that would be prepared to lend against U.S. Treasury securities and possibly other high quality liquid assets (HQLAs). We distinguished the facility we

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Kalecki on the Political Aspects of Full Employment

February 6, 2020

Michal Kalecki 1899 – 1970Sam Levey reminded me of Kalecki’s 1943 article on the political aspects of full employment. This a very interesting and thought-provoking paper. I enjoyed it enough to offer my critique of it.The paper starts by taking as given what Kalecki calls the doctrine of full employment. The basic idea is that the private sector, left to its own devices, is prone to Keynesian aggregate demand failures (see here for game-theoretic interpretation). The remedy for these spontaneously-occurring "coordination failures," is a government spending program that acts, or stands ready to act, as private demand begins to falter.Kalecki starts his paper off by asserting that by 1943, the doctrine was widely accepted by most economists. It seems clear that Kalecki views the doctrine

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A conversation with Eric Tymoigne on MMT vs SMT

September 5, 2019

There are a lot of moving parts to the MMT program. I want to focus on one of these parts today: the relation between monetary and fiscal policy.
One thing I find appealing about MMT scholars is their attention to monetary history and
institutional details. I’ve learned a lot from them in this regard.
But as is often the case with details, one has to worry about whether they help
shed light on a specific question of interest, or whether they sometimes let us not see
the forest for the trees. And in terms of the broader picture, since I grew up
in that branch of macroeconomics that tries to take money, banking, and debt
seriously (i.e., not standard NK theory), I sometimes have a hard time understanding what all the fuss is
about. Much of standard monetary theory (SMT) seems perfectly

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Blanchard and Farmer on the Phillips Curve

July 27, 2019

In case you missed it, there’s an interesting (and slightly wonkish) debate going on between Olivier Blanchard and Roger Farmer concerning the theoretical relevance of the Phillips curve. Roger fired the opening salvo by presenting a macroeconomic model he claims fits the data well and yet makes no use of the Phillips curve. Farmer, in Laplace-like fashion, declared "he had no use for that hypothesis." Blanchard predictably, and understandably, came to the defense of the orthodoxy:

On Farmer. One cannot just ignore an equation (the Phillips curve), and replace it by another. ? Does anybody doubt that if the Fed decreased u rate down to 1%, it would not lead to more inflation? P curve relation is complex and shifting, but it is there. Sorry Roger… https://t.co/ewy09sTg7i
— Olivier

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Does the Phillips Curve Live in Europe?

July 15, 2019

There’s been much talk about the Phillips curve lately, especially in the wake of Jay Powell’s recent testimony before Congress. Many people are proclaiming the death of the Phillips curve. I think that many people making these proclamations are probably wrong–or, more likely–they are correct, but for the wrong reasons.What exactly is being proclaimed dead here? Are people referring to the absence of any statistical correlation between inflation and unemployment? Or are they referring to the theory that the unemployment rate (beyond some "natural" rate) causes inflation? These are two conceptually different notions of the Phillips curve. The fact that the Phillips curve is "flat" does not in itself negate the Phillips curve theory of inflation. This is because monetary policy and other

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The Phillips Curve in Recession and Recovery

June 21, 2019

The Phillips curve can mean one of two conceptually distinct things (which are sometimes confused). First, the Phillips curve may simply refer to a statistical property of the data–for example, what is the correlation between inflation and unemployment (either unconditionally, or controlling for a set of factors)? Second, the Phillips curve may refer to a theoretical mechanism–why does inflation and unemployment exhibit the statistical properties it does?The presumption among many is that statistical Phillips curves tend to be negatively sloped, suggesting a trade-off between inflation and unemployment. A standard theoretical interpretation of this negative relationship is that a high level of unemployment means that aggregate demand is low, so that firms feel less inclined to increase

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Is the U.S. budget deficit sustainable?

May 26, 2019

The U.S. federal budget deficit for 2018 came in just shy of $800 billion, or about 4% of the gross domestic product (the primary deficit, which excludes the interest expense of the debt, was about 3% of GDP).

As the figure above shows, the present level of deficit spending (as a ratio of GDP) is not too far off from where it was in the late 1970s and early 1980s. It’s also not too far off from where it was in the early 2000s.Of course, the question people are asking is whether deficits of this magnitude can be sustained into the foreseeable future without economic consequences (like higher inflation). In this post, I suggest that the answer to this question is yes, but just barely. If I am correct, then any new government expenditure program will have to come at the expense of some

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Is the ZLB an economic or legal constraint?

March 27, 2019

The so-called zero-lower-bound (ZLB) plays a prominent role in modern (and even older) macroeconomic theories. It is often introduced in a paper or at conference as a fact of life — an unavoidable property of the physical environment, like gravity. But is it correct to view it in this way? Or is the ZLB better thought of as legal constraint–something that can potentially be circumvented by policy?The Financial Services Regulatory Relief Act of 2006 allows the U.S. Federal Reserve (the Fed) to pay interest on reserve accounts that private banks hold at the Fed. Specifically, the Act states that:
Balances maintained at a Federal Reserve bank by or on behalf of a depository institution may receive earnings to be paid by the Federal Reserve bank at least once each calendar quarter, at a

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The Chicago Booth Survey on MMT

March 14, 2019

I want to say a few things about Chicago Booth’s recent survey questions posed to a set of economists; see here. The survey asked how strongly one believes in the following two statements:
Question A: Countries that borrow in their own currency should not worry about government deficits because they can always create money to finance their debt.

Question B: Countries that borrow in their own currency can finance as much real government spending as they want by creating money.

Not surprisingly, most economists surveyed disagreed with both statements. Fine. But, not fine, actually. Because the survey prefaced the two questions with 

Modern Monetary Theory

as if the the two statements constitute some core belief of MMT.  

Was any MMT proponent included in the survey? Don’t be

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Sustainable deficits

March 12, 2019

There’s been much welcome discussion of late concerning the sustainability of government budget deficits and whether the size of the public debt is anything to worry about. I’m not going to answer this question for you here today. But what I would like to do is describe a framework that economists frequently employ to help organize their thinking on the matter. I want to begin with some simple arithmetic and then move on to a bit of theory. I’ll let you judge whether the framework has any merit.Let’s start with some standard definitions.
G(t) = government spending (purchases and transfers) in year t.
T(t) = government tax revenue in year t.
R(t) = gross nominal interest rate on government debt paid in year t+1.
D(t) = nominal government debt in year t (including interest-bearing central

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Is Neo-Fisherism Nuts?

February 18, 2019

According to my friend and former colleague Steve Williamson, inflation is low in Japan because of the Bank of Japan’s policy of keeping its policy rate low. Accordingly, if the BOJ wants to hit its 2% inflation target, it should raise its policy rate and keep it persistently higher. This is what I’ve called the NeoFisherian proposition. It’s a provocative idea because it flies in the face of conventional wisdom. But is it correct? Does it serve as a practical guide for monetary policy? My feeling is that the answers to these questions are "no" and "no." In what follows, I explain why.At some point in their undergraduate career, students of macroeconomics are introduced to the Fisher equation. The Fisher equation usually stated as R = r + π or, in words:
Nominal Rate of Interest = Real

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When is more competition bad?

January 11, 2019

Contrary to popular belief, standard economic theory does not provide a theoretical foundation for the notion that "competition is everywhere and always good." It turns out that legislation that promotes competition among producers may improve consumer welfare. Or it may not. As so many things in economics (and in life), it all depends.I recently came across an interesting paper demonstrating this idea by Ben Lester, Ali Shourideh, Venky Venkateswaran, and Ariel Zetlin-Jones with the title "Screening and Adverse Selection in Frictional Markets," forthcoming in the Journal of Political Economy.The paper is written in the standard trade language. Like any trade language, it’s difficult to understand if you’re not in the trade! But I thought the idea sufficiently important that I asked Ben

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Racial Diversity in the Supply of U.S. Econ PhDs

December 25, 2018

This post is motivated by Eshe Nelson’s column "The Dismal Cost of Economics’ Lack of Racial Diversity." I was especially struck by this data — out of the 539 economics doctorates awarded to U.S. citizens and permanent residents (by U.S. institutions), only 18 of the recipients were African-American.

I thought it would be of some interest to see what the data looks like more broadly over other groups and over a longer period of time. I thank my research assistant, Andrew Spewak, for gathering this data (from the National Science Foundation). Let’s start with the raw numbers first. The data is aggregated into 5-year bins beginning in 1965 and up to 2014. The orange bars represent the number of econ PhDs awarded to U.S. citizens and permanent residents (by U.S. institutions) over a

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Does the Fed have a symmetric inflation target?

December 23, 2018

It’s well-known that the Fed has been undershooting its inflation 2% target every year since 2012 (ironically, the year it formally adopted a 2% inflation target). This has led some to speculate whether 2% is being viewed more as a ceiling, rather than a target, as it is with the ECB. The Fed, however, continues to insist that not only is 2% a target, it is a symmetric target.  But what does this mean, exactly? And how can we judge whether the Fed has a symmetric inflation target or not?These questions came to me while listening to Jay Powell’s recent press conference following the FOMC’s decision to follow through with a widely anticipated rate hike. At the 16:15 mark, reporter Binyamin Appelbaum (NY Times) asked Powell the following question:
BA: You’re about to undershoot your

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Working More for Less

December 6, 2018

I had an interested chat with a colleague of mine the other day about the labor market. In the course of conversation, he mentioned that he used to teach a class in labor economics. Naturally, an important lesson included the theory of labor supply. Pretty much the first question asked is how the supply of labor can be expected to change in response to a change in the return to labor (the real wage). My colleague said that for years he would preface the theoretical discussion with a poll. He would turn to the class and ask them to imagine themselves employed at some job. Then imagine having your wage doubled for a short period of time. How many of you would work more? (The majority of the class would raise their hands.) How many of you would not change your hours worked? (A minority of

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