Wednesday , July 15 2020
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David Andolfatto: Macro Mania

David Andolfatto, Vice President of the St. Louis Fed, created MacroMania as a resource for people wanting a better understanding the Fed’s marcoeconomic policy. His commentary is incisive and thorough, particularly his thoughts on Bitcoin and blockchain technology.

Why the Fed Should Create a Standing Repo Facility

      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...

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Kalecki on the Political Aspects of Full Employment

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...

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A conversation with Eric Tymoigne on MMT vs SMT

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...

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Blanchard and Farmer on the Phillips Curve

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...

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Does the Phillips Curve Live in Europe?

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...

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The Phillips Curve in Recession and Recovery

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...

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Is the U.S. budget deficit sustainable?

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...

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Is the ZLB an economic or legal constraint?

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...

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The Chicago Booth Survey on MMT

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...

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Sustainable deficits

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...

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