Information disclosure and exchange media
When commitment is lacking, intertemporal trade is facilitated with the use of exchange media?interpreted broadly to include monetary and collateral assets. We study the properties of a model commonly used to motivate monetary exchange, extended to include a physical asset whose expected short-run return is subject to a news shock, but whose expected long-run return is stable. The nondisclosure of news enhances the asset?s property as an exchange medium, and generally improves social welfare. When a nondisclosure policy is infeasible, the framework admits a role for government debt, including ...
Revisiting GDP Growth Projections
Based largely on predicted trends for labor force participation, GDP is projected to grow at an average annual rate of 2.2 percent over the next decade.
Debt, inflation and central bank independence
Making the central bank more independent from political pressures lowers inflation and increases the primary deficit, persistently. In the long-run, however, fiscal considerations are paramount and inflation comes back up to accommodate the higher financial burden of accumulated public debt. Endowing instead the central bank with an explicit inflation target lowers long-run inflation and implies non-trivial welfare gains for private agents. Inflation-targeting has the added virtue of determining the primary deficit independently of political frictions. The theory helps explain several key ...
The U.S. Financial Landscape on the Eve of the Pandemic
During the 2007-08 financial crisis, the Federal Reserve stepped in to prevent a possible panic. How did this affect the U.S. financial system in later years?
A Perspective on Nominal Interest Rates
Interest rates are at historic lows. The U.S. effective federal funds rate was near zero between late 2008 and late 2015 and has remained low since ?liftoff? in December 2015.1 Other developed countries, such as Germany, Japan, and Switzerland, have recently sold new long-term debt at negative yields. This essay revisits some facts about interest rate behavior to provide context for the current situation.
Government policy in monetary economies
I study how the general and specific details of a micro founded monetary framework affect the determination of policy when the government has limited commitment. The conduct of policy depends on the interaction between the incentive to smooth distortions intertemporally and a time-consistency problem. In equilibrium, fiscal and monetary policies are distortionary, but long-run policy is not afflicted by time-consistency problems. Policy variables in specific applications of the general framework react similarly to variations in fundamentals. Nevertheless, resolving certain environment ...
How to Starve the Beast: Fiscal and Monetary Policy Rules
Societies often rely on simple rules to restrict the size and behavior of governments. When fiscal and monetary policies are conducted by a discretionary and profligate government, I find that revenue ceilings vastly outperform debt, deficit and monetary rules, both in effectiveness at curbing public spending and welfare for private agents. However, effective revenue ceilings induce an increase in deficit, debt and inflation. Under many scenarios, including recurrent adverse shocks, the optimal ceiling on U.S. federal revenue is about 15% of GDP, which leads to welfare gains for private ...
The Impact of the Fed’s Response to COVID-19 So Far
Since the end of February, the assets of the Federal Reserve have grown by $3 trillion as the Fed has taken measures to alleviate the economic impact of the pandemic.
Seigniorage and Sovereign Default: The Response of Emerging Markets to COVID-19
Monetary policy affects the tradeoffs faced by governments in sovereign default models. In the absence of lump-sum taxation, governments rely on both disortionary taxes and seigniorage to finance expenditure. Furthermore, monetary policy adds a time-consistency problem in debt choice, which may mitigate or exacerbate the incentives to accumulate debt. A deterioration of the terms-of-trade leads to an increase in sovereign-default risk and inflation, and a reduction in growth, which are consistent with the empirical evidence for emerging economies. An unanticipated shock resembling the ...
Sovereign debt: a modern Greek tragedy
The authors of this article provide a general introduction to the concept of sovereign debt?including the seductive nature of borrowing and the strategies associated with default?before analyzing the current debt crises in Europe. They focus on Greece?s current woes but also discuss Portugal, Ireland, Italy, and Spain. The authors also discuss the environment in the United States, which has a high debt burden of its own, and present fiscal choices for policymakers and taxpayers.