Forecasting Trend Growth: Living with Uncertainty
“Negative capability … is when a man is capable of being in uncertainties, mysteries, doubts, without any irritable reaching after fact and reason…” John Keats, 1817.
Will growth be high in the future? Or, will it be low? Everyone is preoccupied with this question in one way or another. Individuals worry about whether their real incomes will grow. Fiscal policymakers wonder what will happen to tax revenues and required expenditures. And central bankers are trying to figure out whether they should ease or tighten monetary policy...
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The Congressional Reserve Board: A Really Bad Idea
What would you think if you were to open your morning newspaper to find the following headline?
“Congress Closes Down Fed, Takes Over Monetary Policy”
If you’re like us, you’d panic. In short order, you’d think that long-term inflation expectations would rise, pushing bond yields higher. You’d anticipate an increase in the volatility of growth, employment and inflation. That more volatile environment would drive up the risk premium required on new investments, hindering long-term economic growth. Finally, you'd be very worried about how these Congressional policymakers would manage the next financial crisis.
This is not a pretty picture. Why would anyone want it to become a reality? Well, these are surely not the intended goals, but they are the likely outcomes should lawmakers ever replace the Federal Reserve Board with what we would call a Congressional Reserve Board...
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Interview with Timothy Geithner
Interview with Timothy Geithner
President, Warburg Pincus; former Secretary of the Treasury of the United States; former President of the Federal Reserve Bank of New York.
Has the experience of the crisis changed your view of the central bank policy tool kit?
Secretary Geithner: In the United States, we completely redefined the lender of last resort tool kit, and the Federal Reserve Board Chairman redefined the frontiers of how to think about monetary policy at the zero bound. So yes. Absolutely.
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Negative nominal interest rates: back to the future?
Goldsmiths were the forerunners to modern bankers. Originally, they would issue receipts to certify gold was deposited in their vaults. These eventually gave rise to fractional reserve banking, as goldsmiths used a portion of the gold to make loans.
Well, we might be on our way back to the original version, but instead of keeping our gold safe, banks will be keeping our dollar, Swiss franc, yen, and euro notes safe!
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Interview: Jeremy Stein
Interview with Jeremy Stein
Moise Y. Safra Professor of Economics at Harvard University; former member of the Board of Governors of the Federal Reserve System; former senior advisor to the Treasury Secretary.
Has the experience of the crisis changed your view of the central bank policy toolkit?
Governor Stein: Yes, on two dimensions. First, on the toolkit insofar as it has to do with crisis prevention; and second, insofar as it has to do with what you do in the aftermath, when the economy is very weak and you are stuck at the zero lower bound...
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A Big Mac Update
If you have been abroad, at some point you probably had the same reaction we did: How can things be so expensive? Or, how can things be so cheap? Go out for pizza in Zurich, or a beer in Oslo, and you will have the first reaction. Try buying a cup of coffee in Mexico City or a souvenir in Buenos Aires, and you are likely to have the second...
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ECB Paddles Both Ways in the Rubicon
On January 22, the ECB crossed the Rubicon twice – but in opposite directions. In an effort to combat deflation and years of anemic growth, the central bank announced a sustained program of large-scale asset purchases. At the same time, it capped the amount of risk-sharing in the Eurosystem. Other central banks have done the first, but not the second. And, while outright balance sheet expansion helped ease euro area financial conditions somewhat, the limit on risk-sharing works in the other direction. Rowing toward both shores at the same time doesn’t move a boat far or fast...
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Interview: Donald Kohn
Interview with Donald Kohn
Robert S. Kerr Senior Fellow, Brookings Institution; Member of the Financial Policy Committee of the Bank of England; former Vice Chairman of the Federal Reserve Board.
Has the experience of the crisis changed your view of the central bank policy tool kit?
Vice Chairman Kohn: My answer is yes, to some extent. It changed my view on asset purchases. Before the crisis I was skeptical that asset purchases, particularly the possibility of U.S. Treasury bond purchases that we were talking about in the U.S. before the crisis, would have much effect. I thought that the Treasury market was extremely liquid and dominated by expectations about future Federal Reserve policy and other things, so that it would take massive purchases to change interest rates….
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A Swiss Lesson in Time (Consistency)
You can set your watch by the Swiss trains. They are the envy of the world in many ways. Everyone believes that the trains will run on time because they do.
Credibility is at the core of central banking as well. When a credible central banker speaks, households, businesses, and governments listen. And, because they expect the banker to do what she says, their response – measured in terms of how much they work, save, and invest – will reinforce the outcome policymakers seek.
But credibility is tough to earn and – as the Swiss National Bank (SNB) recently learned when it ended a three-year commitment to prevent a rise in the franc versus the euro – easy to lose....
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Interview: Jean-Claude Trichet
Interview with Jean-Claude Trichet
Chairman, Group of Thirty; Former President, European Central Bank; Honorary Governor, Banque de France.
Has the experience of the crisis changed your view of the central bank policy tool kit?
President Trichet: I would say say yes, of course. We had to invent in these exceptional circumstances new concepts that were difficult to think of or even unthinkable before the crisis. We had to cope with an absolutely dramatic situation, particularly after the Lehman Brothers collapse, which we did not foresee. The fragility of the financial system appeared to be much greater than anything we had in mind, even though we were convinced the system was fragile...
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