Wednesday , August 15 2018
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David Beckworth

David Beckworth

I am an associate professor of economics at Western Kentucky University, an adjunct scholar at the Cato Institute, and a former economist at the U.S. Department of Treasury.

Articles by David Beckworth

Closer to OCA Criteria: Eurozone or Dollarzone?

21 days ago

This is a quick follow-up to my recent article on the Eurozone. There I argued for more integration or separation in the Eurozone since ECB monetary policy is pushing regional economies further apart rather than together. I showed a version of the below chart in the article to illustrate this point:

ECB policy–and its response to the various shocks hitting the Eurozone–has effectively kept nominal demand growth in the core economies fairly stable while pulling it down in the periphery. This divergence suggest the Eurozone is quite far from being an optimal currency area (OCA). 

Someone asked on twitter what the chart would look like for the United States. So I made a similar chart that compares the top twenty states (ranked in terms of GDP per capita) to the bottom twenty:

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Will Australia Be the First Country to Try NGDPLT?

21 days ago

There is a new Brookings paper by Warwick J. McKibbin and Augustus J. Panton titled Twenty-five Years of InflationTargeting in Australia: Are There Better Alternatives for the Next 25Years? Here is how they answer the question in their title:

This paper surveys alternative monetary frameworks and evaluates whether the current inflation targeting framework followed by the RBA for the past 25 years is likely to be the most appropriate framework for the next 25 years. While flexible inflation targeting has appeared to work well in Australia in the past decades, the nature of future shocks suggests that some form of nominal income targeting is worth considering as an evolutionary change in Australia’s framework for monetary policy.

Put differently, this Brookings paper argues that

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The Future of the Eurozone

July 16, 2018

So we are live at NRO discussing the future of the Eurozone:
Albert Einstein is rumored to have quipped that doing the same thing over and over again and expecting different results is the definition of insanity. If he were alive today, Einstein might say this is the definition of some key euro-zone policymakers.
There I argue hard choices have to made in the Eurozone: further integrate or separate.
So where does this leave the euro zone? For now, euro-zone officials are still kicking the can down the road, but at some point they will face a fork. One path will force further integration upon the euro zone, along the lines of Emmanuel Macron’s proposal and better ECB monetary policy. The other path will lead to the separation of the euro zone. As Ashoka Mody shows in his new book, the

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The Treasury Yield Curve Blues

June 20, 2018

The Fed needs to start worrying more about the flattening treasury yield curve.  Bloomberg is reporting that bond traders are getting ready for a yield curve inversion as soon as next week.  One fixed income manager quoted in the article had this to say: 
If the Fed decides to move more this year, I think it’s inevitable that the curve inverts and I think it will be a mistake,” said Colin Robertson, managing director of fixed income at Northern Trust Asset Management… He sees greater than a 50 percent chance of the 2- to 10-year spread inverting if the Fed raises rates once more this year, and if the central bank follows its projections and hikes twice more, Robertson sees inversion as a lock.

Here is what the 10-year minus 2-year spread currently looks like: 

The yield

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The People’s Fed Chair

June 15, 2018

Ever since his confirmation hearings, Fed Chair Jay Powell has struck me as an ordinary, plainspoken person. This week I was reminded of this trait at his FOMC press conference and tweeted this statement:

This impression is consistent with reports from last year when he was being considered for Fed chair:
[F]riends and former colleagues of Powell’s describe him as “annoyingly normal.” He lives in Chevy Chase, Md., and often rides his bike about eight miles from home to the Fed. He doesn’t drink much, plays golf and the guitar, and has an odd ability to repeat people’s sentences backward to them, a quirk former colleagues say is a reminder of his smarts — and how closely he listens.
I bring this up because Jeanna Smialek of Bloomberg has a new article that nicely captures this feature

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Optimal Monetary Policy For the Masses: the James Bullard and Larry Summers View

June 13, 2018

James Bullard and Ricardo DiCecio have a new paper where they model wealth, income, and consumption inequality.  They also incorporate fixed-price nominal debt contracts.  They then derive the optimal monetary policy for the masses in such a model. Here is what they find:

This paper builds upon the risk-sharing view of NGDP targeting. The basic idea is that in a world of fixed-price nominal debt contracts (i.e. the real world), a NGDP level target provides better risk sharing among creditors and debtors against economic shocks than does a price stability target.  

This is because a NGDP level target makes inflation countercyclical. During recessions, inflation rises and causes creditors to bear some of the unexpected pain by lowering the real debt payments they receive from

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The Sovereign Money Blues

June 12, 2018

The Sovereign Money Referendum 

Sovereign banking will not happen in Switzerland. The referendum to end fractional reserve banking and turn all money creation over to the Swiss National Bank (SNB) central bank failed by a wide margin on Sunday. This rejection is not a surprising result, given the polls going into the vote. There never was much chance the so-called Vollgeld plan would would pass. 

Still, the sovereign money referendum was useful in that it generated new discussions on the benefits and costs of opening up the central bank’s balance sheet to the public. In the United States, there had already been some debate surrounding the opening up of the Fed’s balance sheet to non-bank financial firms in response to the financial crisis. Depending on who you asked, this "creeping

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A Tale of Three Nominal GDP Growth Paths

June 12, 2018

Check out the figure below. It has nominal GDP plotted for three countries, normalized to 100 in 2007. The first country (black line) has kept nominal GDP on  a stable growth path over the entire period. The second country (red line) saw its nominal GDP growth path permanently decline in 2008-2009 but has since stabilized its growth rate.  The third country (blue line) had its nominal GDP growth path collapse and has only recently seen it grow past its its 2008 peak value. 

So we see three very different paths of a nominal variable that should be controlled by monetary authorities over long periods, like that depicted in the chart. Consequently, not only are we seeing a tale of three different nominal GDP growth paths, we are also see a tale of three very different central banks

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What Can Argentina Teach Us about the Phillips Curve?

May 22, 2018

In the United States, there has been existential angst over Phillips curves for the past few years. Fed officials and other observers have been engaged in deep soul searching as they try to reconcile a falling unemployment rate with stubbornly low inflation. The Phillips curve says this development should not be happening–inflation should rise as the economy nears full employment. And yet, it has been happening for several years. 

Various attempts have been made to reconcile the apparent breakdown in the Phillips curve relationship. Some, like Joe Gagnon, say there is a non-linear relationship that comes into play when inflation is really low. Others, like Adam Ozimek and Ernie Tedeschi claim there is no Phillips curve mystery if one simply uses the correct measure of slack: the

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The U.S. Mortgage Market: Chart Edition

May 10, 2018

Today, I interviewed Nick Timiraos of the Wall Street Journal for the Macro Musing podcast. He is on the Fed beat now, but covered the GSEs during and after the financial crisis for the paper. Consequently, he has an encyclopedic knowledge of Fannie Mae, Freddie Mac, and the other GSEs. His knowledge and experience were the basis of our conversation today. It was a fun show and should be out in about a month.

I wanted to share some figures I collected on the U.S. mortgage market in preparation for the show. They come from an amazing monthly report on housing from the Urban Institute called Housing Finance at a Glance. These figures provide a peak into my conversation with Nick.

Consider first  the historical share of mortgage debt outstanding by type of institution. This chart is

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Why Yes, the FOMC Would Like Some Inflation Overshoot Now

April 13, 2018

The Fed claims it has a symmetric two percent inflation target. From  its 2017 and 2018 Statements on Longer Run Goals and Monetary Policy, the FOMC states:

The Committee reaffirms its judgment that inflation at the rate of 2 percent… is most consistent over the longer run with the Federal Reserve’s statutory mandate. The Committee would be concerned if inflation were running persistently above or below this objective. Communicating this symmetric inflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored…

Numerous Fed officials have repeated this point as well. They too see the inflation target as a symmetric one, an understanding that allows for an occasional inflation overshoot. Despite these claims, however, the Fed has persistently

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Macro Musing Hits the 100th Episode Mark

April 3, 2018

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Macro Musings has now hit its 100th episode. It was a great show with Heather Long, Ryan Avent, and Cardiff Garcia where we look back at the past decade and look ahead to the next one. Below are a few pictures from the show. Thanks to Patrick Horan who has been a great sound engineer for most of the show. It could not have happened without him. Take a listen!

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Assorted Macro Musings

March 27, 2018

Some assorted macro musings:

New NGDP Paper

My colleague Scott Sumner and Ethan Roberts have a new primer on NGDPLT. It is a very accessible introduction to the topic, but one that also gets into NGDPLT futures targeting. Check it out.

JEC Report on the Slow Recovery

The Joint Economic Committee of Congress has a new report where, among other things, it lays out a monetary explanation for the slow recovery.  A key excerpt on why QE did not create a robust recovery (page 61):

The Fed was clear from the outset that it would undo its LSAPs eventually (i.e., remove from circulation the money it created in the future). The temporary nature of the policy discouraged banks from issuing more long-term loans. Alternatively, as economist Tim Duy pointed out during the inception of the

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Paul Krugman on Temporary vs Permanent Monetary Injections

February 28, 2018

Paul Krugman looks back on the past twenty years of macroeconomic policy and finds that his 1998 paper was more prescient than he or anyone could have imagined. Back then many observers assumed that central bankers–particularly those at the Bank of Japan–need only increase the monetary base to increase the price level. It was that simple.

Ken Rogoff, for example, said the following in commenting on Krugman’s 1998 article:

No one should seriously believe that the BOJ would face any significant technical problems in inflating if it puts it mind to the matter, liquidity trap or no. For example, one can feel quite confident that if the BOJ were to issue a 25 percent increase in the current supply and use it to buy back 4 percent of government nominal debt, inflationary expectations

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Fed Chair Jay Powell on Monetary Policy Rules

February 27, 2018

Jay Powell went to Capitol Hill today for his first congressional testimony as Fed Chair. In addition, he submitted the Federal Reserve’s annual Monetary Policy Report to Congress.  A lot of ground was covered in his testimony, follow-up questions, and in the report. Here, I want to highlight one very interesting and potentially significant part of his testimony. And that is Jay Powell’s endorsement of monetary policy rules.

At the end of his written testimony, Jay Powell had this to say:

In evaluating the stance of monetary policy, the FOMC routinely consults monetary policy rules that connect prescriptions for the policy rate with variables associated with our mandated objectives. Personally, I find these rule prescriptions helpful. Careful judgments are required about the

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Assorted Macro Musings

February 23, 2018

Some assorted macro musings from the week

A Monetary Correction

Ramesh Ponnuru and I have a new article in the National Review where we make the contrarian case that monetary policy was actually tight over the past decade relative to its own inflation target and past trends in the growth of aggregate nominal spending. We note the following:

The economy seems largely to have adjusted to the new, lower pace of spending growth. The problem now is not that monetary policy is erring on the side of tightness and thus holding back the economy’s potential. It’s that the Fed’s apparent bias against letting spending and inflation drift higher, even temporarily, makes it more likely that the next economic downturn will again be severe and the next recovery will again be sluggish.

As evidence

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Summer Program on Monetary Policy for Students

January 24, 2018

Here is a great summer program for advanced undergraduate or beginning graduate student that are interested in monetary economics. Scott Sumner and I will be presenters and St. Louis Fed President Jim Bullard will be the keynote speaker. Your travel and lodging will be covered, but you need to apply by January 31. 

Alternative Money University (AMU) is an academic workshop for advanced undergraduate and beginning graduate students with a particular interest in monetary economics. During three days of intensive seminars, students will learn from leading scholars in the field about subjects not typically addressed in undergraduate or graduate economics courses — including topics in monetary history, the theory and practice of monetary policy, and the workings of unconventional monetary

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Do Changes in Potential Output and Data Revisions Make NGDP Targeting Impractical?

January 15, 2018

It’s Back…

Over the past few months there has been increasing chatter about the need for a new framework for U.S. monetary policy. The Peterson Institute for International Economics (PIIE), for example, recently had its Rethinking Macroeconomic Policy conference where, among other things, Ben Bernanke called for the Fed to adopt a temporary price-level target. PIIE also launched Angel Ubide’s new book  on reforming monetary policy. Similarly, at the AEA meetings there was a session titled Monetary Policy in 2018 and Beyond where Christina Romer again made the case for a NGDP level target. Likewise, the Brookings Institute held a recent conference on whether the Fed should abandon its 2 percent inflation target. There, Jeff Frankel shared the arguments for a NGDP level target and Larry

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Yes, IOER Continues to be Bad Political Optics

January 10, 2018

So the Federal Reserve is reporting that interest on excess reserves (IOER) payments hit $25.9 billion in 2017. This amount is more than double the dollar size of the IOER payments in 2016 as seen below. 

This increase is understandable given the rise in the Fed’s short-term interest rate target and the size of its balance sheet. But, as I have noted before, this is horrible optics. For the largest recipients of the IOER payments are large domestic banks and foreign banks. As seen in the figure below, they hold most of the excess reserves and therefore earn most of the IOER payments. 

Put differently, the systematically-important or "too-big-to-fail" banks that were bailed out during the crisis and are still implicitly subsidized by the government as well as foreign banks are the

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Christmas Economics 2017

December 25, 2017

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We are replaying our special Christmas podcast. The guest are Anna Goeddeke and Laura Birg, two economists from Germany. Together they coauthored an article in Economic Inquiry titled “Christmas Economics—a Sleigh Ride” that surveys the literature on the economics of Christmas. We covered a number of interesting topics like the seasonal business cycle, the deadweight loss of Christmas, and charitable giving during the holidays. 

Below is an excerpt from an earlier post when the episode first ran that touches on on the business cycle issues surrounding Christmas:

The seasonal business cycle discussion was particularly fascinating for me. There is a literature that starts with Barksy and Miron (1989) (ungated version) that shows most of the variation in aggregate

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Yes, Occupational Licensing is Making the U.S. Economy Less of an OCA

December 12, 2017

From a new working paper by Janna E. Johnson, Morris M. Kleiner:
Occupational licensure, one of the most significant labor market regulations in the United States, may restrict the interstate movement of workers. We analyze the interstate migration of 22 licensed occupations. Using an empirical strategy that controls for unobservable characteristics that drive long-distance moves, we find that the between-state migration rate for individuals in occupations with state-specific licensing exam requirements is 36 percent lower relative to members of other occupations. Members of licensed occupations with national licensing exams show no evidence of limited interstate migration.

Not only does this development have implications for workers, it also has macroeconomic implications. For the

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Clashing Over Commerce

December 7, 2017

Doug Irwin’s new book on the history of U.S. trade policy, Clashing Over Commerce, is now available for purchase. You may recall that I interviewed him about the book in this recent podcast. The podcast is embedded below. My colleague Dan Griswold has a nice review of the book over at National Review.  I learned a lot from the book and my conversation with Doug. I highly recommend it.

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Hypothermia, Inflation, and the Fed’s Epistemological Jam

November 29, 2017

Imagine you fall into a freezing lake and get hypothermia. You are rushed to the ER and receive good service initially, but your body temperature continues to remain below 98.6 Fahrenheit. The doctor says he is not sure why you are so cold. It is a puzzle to him and everything he thought he knew about body temperatures seems to be wrong. He says not to worry, though, as he turns on the air-conditioner. All should be well soon, he thinks, once the room starts to cool down. 

The doctor leaves your room and comes back to check on you after 15 minutes. He finds that your body temperature has dropped even more and that you are shivering. He concludes the room was not cool enough so he dials up the air conditioner even more to really get the cold air blowing. 

The doctor leaves and

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Abenomics Update

November 27, 2017

So a quick update on that grand monetary experiment in Japan known as Abenomics. 

Prime Minister Shinzo Abe and his party were returned to power in a decisive October election. This means the Bank of Japan will continue to expand the monetary base, peg the 10-year government bond at 0%, and strive for 2% inflation. 

I was an early fan of Abenomics, but have become a bit more skeptical over time. Others, like Noah Smith, are convinced it is working and are glad to see it continue. Mike Bird of the Wall Street Journal is also a fan. They make a reasonable argument that the real side of the economy has benefited from the Bank of Japan’s policies. 

Maybe so, but what about the nominal side of the economy? Yes, we ultimately care about the real side, but the central bank can only

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Monetary Regime Change Update

November 2, 2017

I recently made the case that we got a monetary regime change in 2008 that explains the stubbornly low inflation since that time:

A monetary regime change has occurred that has lowered the growth rate and growth path of nominal demand. Since the recovery started in 2009Q3, NGDP growth has averaged 3.4 percent. This is below the 5.4 percent of 1990-2007 period (blue line in the figure below) or a 5.7 percent for the entire Great Moderation period of 1985-2007. Macroeconomic policy has dialed back the trend growth of nominal spending by 2 percentage points. That is a relatively large decline. This first development can be seen in the figure below.

The figure above also speaks to the second part of this regime change: aggregate demand growth was not allowed to bounce back at a higher

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Financial Regulatory Laffer Curve

October 22, 2017

Lawrence J. White has an interesting article where he considers the optimal size of our financial regulatory structure. He acknowledges that the structure it is "maddenly complex" and that it "easy to make a case for drastic simplification." Larry also notes, however, that there are benefits to having some regulatory diversity. We need to recognize this tradeoff, he contends, when considering the simplification of our financial regulatory system. 

To help us better understand this tradeoff, Larry lays out the case for reducing the number of financial regulators:

Regulatory decisions could be made faster, especially in a crisis, when policymakers need timely access to sensitive, proprietary information, and must coordinate actions both domestically and internationally. There would be

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The Other Side of the Fed’s Balance Sheet

October 20, 2017

Who controls the Fed’s balance sheet? The answer may seem obvious. The Fed, after all, determines the size of its balance sheet. It also controls what happens to the asset side of its balance sheet. Its power over the liability side, however, is limited.

This diminished control arises because the public’s demand for currency, bank regulations, and U.S. Treasury cash balances all influence the composition of the Fed’s liabilities.1 These are exogenous forces that have the potential to create some economic bumps on the road ahead as the Fed normalizes the size of its balance sheet. 

So far, though, little attention has been paid to these liability-side issues. Most focus has been given to the asset side of the Fed’s balance sheet. This focus, in my view, is misguided. I see the

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From a Floor System to A Corridor System

October 9, 2017

So I was looking at the Fed’s 2016 annual report and was able to construct the following chart:

Several observations from this figure. First, the sharp growth in the Fed’s income is unsurprising as it is a natural consequence of the Fed’s QE programs. These large scale asset purchase programs expanded the Fed’s assets from around $900 billion in late 2008 to $4.5 trillion today. Moreover, the Fed’s portfolio has changed from being mostly short-term treasury securities to one of long-term treasury and agency securities. In addition, the Fed also started paying interest on excess reserves (IOER) to banks during this time. Together, these two developments have effectively turned the Fed into the largest fixed-income hedge fund in the world. Hence, the surge in the Fed’s income.

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The Future Path of the Monetary Base and Why It Matters

September 22, 2017

Now that the shrinking of the Fed’s balance sheet has been announced, I thought it worth nothing what it means for the future path of the monetary base. Drawing upon the Fed’s median forecast of its assets through 2025 that comes from the 2016 SOMA Annual Report, I was able to create the figures below. 

The figures show the trend growth path of currency and a series I call the ‘permanent monetary base’ extrapolated to 2025. The latter series is the monetary base minus excess reserves. This measure has been used by Tatom (2014) and Belongia and Ireland (2017) as a more reliable indicator of the monetary base that actually matters for monetary conditions. These two measures, which reflect the liability side of the Fed’s balance sheet, are plotted along side the projected path of the

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