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Discussion Paper
Financial Repression: Evidence and Theory
?Financial repression??policies that allow a government to place its debt with financial institutions at relatively low interest rates?has been used widely for centuries. This essay focuses on one important form of repression: requiring financial intermediaries to hold more government bonds than they would if policies didn?t require it. We argue that this policy should only be used when the government has an urgent need to issue debt and has difficulty issuing new debt because of potential lender doubts about the government?s ability to repay. {{p}} This research suggests that policies that ...
Working Paper
Expectations, traps and discretion
We argue that discretionary monetary policy exposes the economy to welfare-decreasing instability. It does so by creating the potential for private expectations about the response of monetary policy to exogenous shocks to be self-fulfilling. Among the many equilibria that are possible, some have good welfare properties. But, others exhibit welfare decreasing volatility in output and employment. We refer to the latter type of equilibria as expectation traps. In effect, our paper presents a new argument for commitment in monetary policy because commitment eliminates these bad equilibria. ...
Conference Paper
Inside money, outside money and short-term interest rates
Discussion Paper
What assets should banks be allowed to hold?
Banks are vulnerable to self-fulfilling panics because their liabilities (such as demand deposits and certificates of deposit) are short term and unconditional, and their assets (such as mortgages and business loans) are long term and illiquid. To prevent wider financial fallout from such panics, governments have strong incentive to bail out bank debtholders. Paradoxically, expectations of such bailouts can lead financial systems to rely excessively?from a societal perspective?on short-term debt to fund long-term assets. Fragile banking systems thus impose external costs, and regulation may ...
Journal Article
Time consistency and optimal policy design
Working Paper
A critique of structural VARs using real business cycle theory
The main substantive finding of the recent structural vector autoregression literature with a differenced specification of hours (DSVAR) is that technology shocks lead to a fall in hours. Researchers have used these results to argue that business cycle models in which technology shocks lead to a rise in hours should be discarded. We evaluate the DSVAR approach by asking, is the specification derived from this approach misspecified when the data are generated by the very model the literature is trying to discard? We find that it is misspecified. Moreover, this misspecification is so great that ...
Discussion Paper
On the Ethics of Redistribution
Analysts of optimal policy often advocate for redistributive policies within developed economies using a behind-the-veil-of-ignorance criterion. Such analyses almost invariably ignore the effects of these policies on the well-being of people in poor countries. We argue that this approach is fundamentally misguided because it violates the criterion itself.
Discussion Paper
Thoughts on the Federal Reserve System's exit strategy
How can banks and similar institutions design optimal compensation systems? Would such systems conflict with the goals of society? This paper considers a theoretical framework of how banks structure job contracts with their employees to explore three points: the structure of a socially optimal compensation system; the structure of a compensation system that is privately optimal, given the reality of government-guaranteed bank debt; and policy interventions that can lead from the second structure to the first. Analysis reveals a potential policy option: providing proper incentives to banks by ...
Conference Paper
Optimal fiscal and monetary policy: some recent results
Report
New Keynesian models: not yet useful for policy analysis
Macroeconomists have largely converged on method, model design, reduced-form shocks, and principles of policy advice. Our main disagreements today are about implementing the methodology. Some think New Keynesian models are ready to be used for quarter-to-quarter quantitative policy advice; we do not. Focusing on the state-of-the-art version of these models, we argue that some of its shocks and other features are not structural or consistent with microeconomic evidence. Since an accurate structural model is essential to reliably evaluate the effects of policies, we conclude that New Keynesian ...