Thursday , September 21 2017
Home / David Beckworth
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

Is Larry Summers a Fan of Nominal GDP Level Targeting?

3 days ago

[embedded content]

You are going to have listen to my podcast with him to find out the answer. Here is a hint: we spent a portion of the show talking about NGDP level targeting (NGDPLT) and what it would take to actually get it implemented it at the Federal Reserve. So listen to the show to find out Larry’s thoughts on NGDPLT as well as his views on secular stagnation, Fed policy since the crisis, and macroeconomic policymaking in real time. It was a fun interview. 

P.S. You can also read the transcript of our interview.

Read More »

Will Shrinking the Fed’s Balance Sheet Matter?

3 days ago

This week the Fed is expected to announce it will begin shrinking its balance sheet. Will it matter? 

To answer that question it is useful to first recall how and why the Fed’s balance sheet was expanded. Between December 2008 and October 2014 the Fed conducted a series of large scale asset purchases (LSAPs) that expanded its balance sheet from about $900 billion to $4.5 trillion. That is an expansion of about 500 percent. 

The Fed turned to LSAPs for additional stimulus when its target for the federal funds rate—the traditional tool of U.S. monetary policy—hit the zero lower bound in late 2008. The main theory the Fed used to justify the LSAPs was the portfolio balance channel. It says that because of market segmentation the Fed’s purchase of safe assets would force investors to

Read More »

Monetary Regime Change: Mission Accomplished

6 days ago

Christina Romer, former CEA chair, called for a monetary regime change several times between 2011 and 2013. It is now several years later and it appears we did finally get a monetary regime change. Unfortunately, it is not the kind of regime change Christina advocated and actually goes in the opposite direction. 

Christina called for the Fed to adopt a nominal GDP level target that would restore aggregate demand to its pre-crisis growth path. Instead, we got a regime change that has effectively lowered the growth rate and the growth path of aggregate demand. This regime change, in my view, is behind the apparent drop in trend inflation that Greg Ip recently reported on in the Wall Street Journal. 

It is not easy to change trend inflation–just ask Paul Volker–but the Fed and other

Read More »

The IOER Debate Redux

August 23, 2017

Back in the glory days of macroeconomics blogging there was a lot of electronic ink spilled over interest on excess reserves (IOER). Commentators, including myself, debated whether IOER mattered to the recovery or if it was just another innocuous tool for the Fed to control interest rates. 

I generally argued that the IOER did matter for the economy–it was more than just a new tool. It began with a call I  made in October 2008 that the introduction of IOER that month was likely to be contractionary. In later conversations, I acknowledged that, yes, the Fed does sets the aggregate level of reserves. Even so, I retorted, banks could still influence the composition of all those reserves based on their investing decisions. These decisions, in turn, could be influenced by the level of

Read More »

Assorted Musings

July 21, 2017

Some Assorted Musings:

1.  I have a new policy brief at the Mercatus Center that makes the case for a Nominal GDP level target from the knowledge problem perspective. It is a non-technical paper meant to be accessible by policy makers and lay people. It echoes some of the  more technical arguments made in this paper by Josh Hendrickson and myself. 

 2. George Selgin testified this week before the House Financial Services Committee as part of the hearing Monetary Policy v. Fiscal Policy: Risks to Price Stability and the Economy. His testimony is a tour de force through the issue of interest on excess reserves. 

3.  Scott Sumner pushes back against all the macro moralists waving their finger at Germany for running current account surpluses. He argues it is mistaken to blame Germany’s

Read More »

An Alternative to Raising the Inflation Target

July 5, 2017

Ramesh Ponnuru and I have a new article in the National Review where we make the case that a better alternative to a higher inflation target is a NGDP level target:

Does the U.S. economy need more inflation? A group of 22 progressive economists has written a letter to the Federal Reserve urging it to appoint a blue-ribbon commission to study whether the central bank should raise its target for inflation above its current 2 percent. Fed chairman Janet Yellen, in her press conference following the latest interest-rate increase, called it “one of the most important questions” facing the organization. The economists’ advice shouldn’t be rejected out of hand, but it should be rejected. They make some valid points in their diagnosis of the ills of the current monetary regime. But the Fed can

Read More »

Monetary Disequilibrium

June 16, 2017

[embedded content]

This week on the podcast I had a great time talking the monetary disequilibrium view of business cycles with Steve Horwitz. This perspective sees the deviation between desired and actual money holdings as the cause of business cycles.  Since money is the one asset on every market, all one needs to do is disrupt monetary equilibrium and you have disrupted every other market. This is not true for any other asset. The monetary disequilibrium view, in short, takes money seriously.

This understanding is different than the dominant view today that sees business cycles being the result of deviations between the expected paths of the natural and actual real interest rate. After the show I asked Steve if there was mapping between these these two views and he said yes. The

Read More »

Musings on June’s FOMC Meeting

June 15, 2017

The FOMC decided today to raise its target interest rate so that it now sits in the 1.00-1.25 percent range. This move was largely expected and the FOMC continues to signal via its economic projections that it wants one more interest rate hike this year. Nothing terribly new here, but there were several developments today that caught my attention and are worth considering.

First, the FOMC released a surprisingly detailed plan of how it will unwind its balance sheet later this year. Fed chair Janet Yellen also said during the press conference these plans could be "put in effect relatively soon" if the data come in as expected. The announcement today can be seen as part of the FOMC’s ongoing efforts to get the markets ready for the shrinking of its balance sheet. 

To shed light on

Read More »

Is the United States Becoming Less of an Optimal Currency Area?

May 31, 2017

It took the United States roughly 150 years to become an optimal currency area (OCA), according to economic historian Hugh Rockoff. This long journey meant that it was not until the late 1930s that a one-size-fits-all monetary policy made sense for the U.S. economy. Since then the U.S. economy has often been held up as the best example of a currency union that meets the OCA criteria. This especially was the case when comparisons have been made to the Eurozone, like in this classic Blanchard and Katz (1992) paper.  But all is not well in this land of the OCA.Declining Labor Mobility

Since the 1980s there has been a decline in labor mobility across the United States.  This can be see in the figure below:

Source: Molloy, Smith, and Wozniak (2014)

A number of explanations have been

Read More »

China vs the Trilemma, Price Level Path, Balance Sheet Confusion, and FOMC Debates

May 26, 2017

Here are some assorted macro musings from the past week:
1.  Been there, done that, and it did not end well China edition. Once again, China forgets there is a macroeconomic trilemma. From the Wall Street Journal:

China’s central bank is effectively anchoring the yuan to the dollar, a policy twist that has helped stabilize the currency in a year of political transition and market jitters about China’s economic management…. 

The newfound tranquility may not last: The focus seen in recent weeks on stability against the dollar, whether it goes up or down, means pressure on the yuan to weaken could get dangerously bottled up, potentially bring bouts of sharp devaluation.

Pegging an exchange rate, tinkering with domestic monetary policy, and allowing some capital flows can be a

Read More »

Bad Optics: the Fed’s Balance Sheet Edition

May 19, 2017

Despite the all Fed talk about shrinking its balance sheets, many observers are hoping the Fed keeps it large.  They want the Fed to maintain a large balance sheet for various reasons: it earns a positive return for the government; it provides a financial stability tool via provisions of safe assets; it needs to remain big and accommodative until the economy really starts roaring. There are also complications to shrinking the Fed balance sheet.

Whatever you make of these arguments they all ignore an important political-economy consideration: a large Fed balance sheet makes for bad optics because of interest paid on excess reserve (IOER). 

The figure below explains why. Using data from the Federal Reserve’s H8 report, the figure shows the cash assets of "large

Read More »

Talking Monetary Policy with Paul Krugman

May 17, 2017

Paul Krugman joined me for the latest Macro Musings podcast. It was a fun show and we covered a lot of ground from liquidity traps to secular stagnation to fighting the last war over inflation. Paul and I have had conversations in the blogosphere since the 2008 so it was real treat to finally chat with him in person.In our conversation there were two issues brought up that deserved, in my view, more time than we could give on the show. So I want to address them in this post.

The first one is the important distinction between temporary and permanent monetary base injections. This distinction came up up in our discussion on what it takes to reflate an economy in a zero lower bound (ZLB) environment. Krugman’s 1998 paper showed that to do so requires a permanent increase in the monetary

Read More »

Macro Musings 56: Ethan Ilzetzki on the U.S. Dollar as an Anchor Currency

May 12, 2017

Some assorted musings:

1. From this week’s podcast with Ethan Ilzetzki comes this amazing figure. It shows that approximately 70% of world GDP is tied to the dollar. The implication is staggering: the FOMC is setting monetary conditions for much of the world.

Source

2.  Greg Ip argues our robot fears are misplaced. If anything, we do not have enough robots destroying jobs:

From Silicon Valley to Davos, pundits have been warning that millions of individuals will be thrown out of work by the rapid advance of automation and artificial intelligence. As economic forecasts go, this idea of a robot apocalypse is certainly chilling. It’s also baffling and misguided.

Baffling because it’s starkly at odds with the evidence, and misguided because it completely misses the problem:

Read More »

Remembering All of Allan Meltzer’s Work

May 12, 2017

Allan Meltzer passed away this week. He is probably best known for his multi-volume history of the Federal Reserve, the ‘Meltzer Commission’ that aimed to reform the IMF, and most recently his critique of Fed policy since the Great Recession. There was, however, much more to Allan Meltzer than just these developments.

One of the most important contributions, in my view, was his work with Karl Brunner during the ‘Monetarist Counterrevolution’. This counterrevolution took place in the 1960s and 1970s and pushed backed against the dominant view of the time that monetary policy did not matter. Milton Friedman and Anna J. Schwartz spearheaded this movement, but it was Meltzer and Brunner who did the most to show why money mattered. They worked hard to show the mechanism through which

Read More »

Macro Musings 54: Josh Zumbrun on Challenges and Angst Facing the Economics Profession

April 28, 2017

My latest Macro Musing podcast is with Josh Zumbrum. Josh is a national economics correspondent for the Wall Street Journal. He joined me to talk about the angst facing the economics profession in this current environment. We also talked about the future of economic journalism, economic facts, and what really drives inflation.

It was fascinating conversation throughout. You can listen to the podcast on Soundcloud, iTunes, or your favorite podcast app. You can also listen via the embedded player above. And remember to subscribe since more episodes are coming.
Related Links
Josh Zumbrum’s web page at the Wall Street Journal
Josh Zumbrum’s twitter account

Read More »

Macro Musings 53: James Bullard on Life as a Fed Bank President and Monetary Policy in 2017

April 21, 2017

My latest Macro Musings podcast is with James Bullard. James is the President of the St. Louis Federal Reserve Bank and an accomplished economic scholar. He joined me for a great conversation on macroeconomics that covered everything from the determinants of inflation to the Fed’s balance to the future path of monetary policy. We also discussed Jame’s work on imperfect credit markets and how it provides a another justification for NGDP level targeting. 

This was a fascinating conversation throughout and the transcripts for the show are here. You can listen to the podcast on Soundcloud, iTunes, or your favorite podcast app. You can also listen via the embedded player above. And remember to subscribe since more episodes are coming.

Related Links

James Bullard’s page at the St.

Read More »

Macro Musings Podcast: Tyler Cowen

April 14, 2017

[embedded content]

My latest Macro Musings podcast is with Tyler Cowen. Tyler is a professor of economics at George Mason University. He joined me to discuss his new book, The Complacent Class: The Self-Defeating Quest for the American Dream. In it, Tyler argues that the restlessness and willingness to take risks have been key traits throughout American history has been waning. In the last few decades, American society has become more risk-averse and this has led to less innovation and dynamism in the economy. 

Tyler notes that this risk aversion has bled over into macroeconomic policy and may be a contributor to the slow recovery following the 2008 crisis.

This was a fun and fascinating conversation throughout. You can listen to the podcast on Soundcloud, iTunes, or your favorite podcast app. You can also listen via the embedded player above. And remember to subscribe since more episodes are coming.

Read More »

Macro Musings Podcast: George Selgin

April 11, 2017

[embedded content]My latest Macro Musings podcast is with George Selgin. George the director of the Cato’s Institute for Monetary and Financial Alternatives and is a former professor of economics at the University of Georgia. 

 George joined me to talk about the normalization of Fed policy and his new proposal to reform open market operations.  It was interesting conversation throughout. 

You can listen to the podcast on Soundcloud, iTunes, or your favorite podcast app. You can also listen via the embedded player above. And remember to subscribe since more episodes are coming.

Read More »

A Challenge to the Fed’s Normalization Plans: the IOER-Treasury Yield Spread

April 4, 2017

Over at U.S. News and World Report, I have a new article up on the next big challenge facing the Fed: normalizing its balance sheet. Some excerpts:
This path to monetary policy normalization…. may be fraught with surprises and setbacks. Not only must the Fed avoid getting ahead of the recovery with its interest rate hikes, but it must delicately navigate the shrinking of a balance sheet that has grown fourfold since 2008.

This latter task may prove to be especially daunting since it puts the Fed in unchartered waters. Never before has the Fed had to shrink its balance sheet…
I go on to discuss some of the many challenges the Fed may face in attempting to shrink its balance sheet. One of them is dealing with the potential stresses caused by the new regulatory demands of the liquidity coverage ratio running up against the spread between IOER and treasury bills:
The second reason the scaling back of the Fed’s balance sheet may be challenging is that post-2008 regulation now requires banks to hold more liquid assets. Specifically, banks now have to hold enough high-quality liquid assets to withstand 30 days of cash outflow. This liquidity coverage ratio has increased demand for such assets of which bank reserves and treasury securities are considered the safest.

Read More »

Macro Musings 50: Steve Hanke on Hyperinflation

March 31, 2017

My latest Macro Musings podcast is with Steve Hanke. Steve is s a professor of applied economics at the Johns Hopkins University in Baltimore. He has advised many governments on economic policy, including helping the establishment of new currency regimes in Argentina, Estonia, Bulgaria, Bosnia-Herzegovina, Ecuador, Lithuania, and Montenegro.

Steve also is the director of the troubled currency project at the Cato Institute and is the author of the  Hanke-Bushnell hyperinflation table.

Steve joined me to talk about his work on hyperinflation. It was interesting conversation throughout. You can listen to the podcast on Soundcloud, iTunes, or your favorite podcast app. You can also listen via the embedded player above. And remember to subscribe since more episodes are coming.

Read More »

Macro Musings 49: Jeffrey Frankel on Recession-Dating, the Plaza Accords, and Globalization

March 27, 2017

[embedded content]

My latest Macro Musings podcast is with Jeffrey Frankel. Jeff is a professor and economist at Harvard University and directs the program on international finance and macroeconomics at the National Bureau of Economic Research.

Jeff joined me to talk about the future of globalization, the dollar, the Plaza Accord, and more. It was a fascinating conversation throughout. 

You can listen to the podcast on Soundcloud, iTunes, or your favorite podcast app. You can also listen via the embedded player above. And remember to subscribe since more episodes are coming.

Read More »

Macro Musings Podcast: Jason Furman

March 17, 2017

[embedded content]

My latest Macro Musings podcast is with Jason Furman. Jason is currently a Senior Fellow at the Peterson Institute for International Economics. Previously, Jason spent eight years serving on President Obama’s Council of Economic Advisers, including the chair position from 2013-2017. Jason also worked on the Council of Economic Advisers under President Clinton.

Jason joined me to talk about his time at the CEA. Among other things, we talk about fiscal policy, the fiscal multiplier, monetary policy offset, and the platinum coin. This was a super fun talk throughout. 

You can listen to the podcast on Soundcloud, iTunes, or your favorite podcast app. You can also listen via the embedded player above. And remember to subscribe since more episodes are coming.

Read More »

Monetary Policy Analysis is Hard: Inflation Edition

March 17, 2017

I have a new article at The Hill that responds to some of the buzz created  by the Cecchetti et al. (2017) paper that was delivered at the U.S. Monetary Policy Forum:

What causes inflation? Most people believe inflation is caused by central banks adjusting monetary conditions… But is this right? A recent study by some top economists has raised questions about this conventional wisdom.  

The study found that the standard indicators… [like] economic slack, inflation expectations, and money growth were, in fact, unrelated to inflation. These findings caused quite a stir and even led the Wall Street Journal to declare that “everything markets think they know about inflation might be wrong”. 

This understanding misses, in my view, the deeper and more important point of the Cecchetti et al. paper. As the authors note in a separate blog post, the lack of a relationship between the standard indicators and inflation is actually an indication that the Fed has done a good job in managing inflation:

While the USMPF report is titled Deflating Inflation Expectations, we do not conclude that expectations are unimportant. In fact, quite the opposite: the failure of measured inflation expectations to help forecast changes in inflation is probably a side effect of monetary policy’s success in stabilizing them.

Read More »

Macro Musings Podcast: Larry White

March 10, 2017

[embedded content]

My latest Macro Musings podcast is with Larry White. Larry is a professor of economics at George Mason University where he specializes in monetary economics and monetary history.

Larry joined me to talk about India’s demonetization’s efforts and Austrian macroeconomics. This was fun and fascinating conversation throughout.You can listen to the podcast on Soundcloud, iTunes, or your favorite podcast app. You can also listen via the embedded player above. And remember to subscribe since more episodes are coming.

Related Links

Larry White’s Homepage

Read More »

Macro Musings Podcast: Tim Duy

March 3, 2017

[embedded content]

My latest Macro Musing podcast is with Tim Duy. Tim is a professor of economics at the University of Oregon, a columnist for Bloomberg, and a former economist at the U.S. Department of Treasury. 

Tim is also a widely read Fed-watcher and he joined me to talk about Fed watching and the future of U.S. monetary policy. If you want to get into Fed watching this podcast is just for you. Tim shares his approach and what defines a successful Fed watcher. 

We also discussed some of Tim’s recent comments about the normalization of Fed monetary policy. The FOMC plans to return to normal monetary policy by first raising it interest rate target and then by reducing the size of its balance sheet. Tim thinks this is a bad idea, as he has written in several Bloomberg articles. He would like to see a simultaneous raising of interest rates and shrinking of the Fed balance sheet as the Fed returns to normalcy. We discuss why he favors this approach.

This was a fascinating conversation throughout. You can listen to the podcast on Soundcloud, iTunes, or your favorite podcast app. You can also listen via the embedded player above. And remember to subscribe since more episodes are coming.

Read More »

Macro Musings Podcast: Hester Peirce

February 24, 2017

[embedded content]

My latest Macro Musings podcast is with Hester Peirce. Hestor is a Senior Research Fellow and director of the Financial Markets Working Group at the Mercatus Center. She previously served on Senator Richard Shelby’s staff on the Senate Committee on Banking, Housing, and Urban Affairs. In that position, she worked on financial regulatory reform following the financial crisis of 2008 as well as oversight of the regulatory implementation of the Dodd-Frank Act. Hester also served at the Securities and Exchange Commission as a staff attorney and as counsel to Commissioner Paul S. Atkins.  Hester was also nominated by President Obama to be an SEC Commisioner.

Hester joined me to discuss a new book she co-edited with Ben Klutsey titled “Reframing Financial Regulation: Enhancing Stability and Protecting Consumers” This book covers a lot of topics on how to better regulate the financial system. 

We spent most of our time talking about how to improve the stability of the financial system. The laws and regulations emanating from Dodd-Frank (DF) were supposed to make the financial system safer, but a number of recent papers–Nissim and Calormiris (2014), Sarin and Summers (2016), Chousaks and Gorton (2017)–find the banking system weaker now and not meaningfully safer than pre-2008.

Read More »

Macro Musings Podcast: Sebastian Mallaby

February 17, 2017

[embedded content]

My latest Macro Musings podcast is with Sebastian Mallaby.
Sebastian is a senior fellow at the Council on Foreign Relations and a contributing columnist to the Washington Post. Previously, he worked with the Financial Times and the Economist magazine and is the author of several books. He joined me to talk about his latest book “The Man Who Knew: The Life and Times of Alan Greenspan”.

This was a fascinating conversation throughout. You can listen to the podcast on Soundcloud, iTunes, or your favorite podcast app. You can also listen via the embedded player above. And remember to subscribe since more episodes are coming.

Read More »

The Monetary Superpower: As Strong As Ever

February 14, 2017

In a forthcoming paper, Chris Crowe and I argue the Fed is a monetary superpower:

[A] defining feature of the US financial system is that its central bank, the Federal Reserve, has inordinate influence over global monetary conditions. Because of this influence, it shapes the growth path of global aggregate demand more than any other central bank does. This global reach of the Federal Reserve arises for three reasons. 

First, many emerging and some advanced economies either explicitly or implicitly peg their currency to the US dollar given its reserve currency status. Doing so, as first noted by Mundell (1963), implies these countries have delegated their monetary policy to the Federal Reserve as they have moved towards open capital markets over the past few decades. 

These “dollar bloc” countries, in other words, have effectively set their monetary policies on autopilot, exposed to the machinations of US monetary policy. Consequently, when the Federal Reserve adjusts its target interest rate or engages in quantitative easing, the periphery economies pegging to the dollar mostly follow suit with similar adjustments to their own monetary conditions.  

[…] 

The second reason for the global reach of US monetary policy is that a large and growing share of global credit is denominated in dollars.

Read More »

Macro Musings Podcast: Eswar Prasad

February 10, 2017

[embedded content] 
My latest Macro Musings podcast is with Eswar Prasad. Eswar is a professor of economics at Cornell University and a senior fellow at Brookings Institution. He joined me to talk about his new book, Gaining Currency: the Rise of the Renminbi. 

We began by reviewing the history of money in China. Many people know that China had the first paper currency, but few appreciate that China had the first debates over monetary theory and role of the state in money creation. China also had the first currency war–literally a physical war between two competing central banks in China–as well as its own interesting monetary history during the Great Depression of the 1930s. 

We then moved to China’s exchange rate regime and the thorny question of whether China’s currency being undervalued in the past and whether it was now overvalued. We also discussed how consequential was the past undervaluation of China’s currency to the huge trade surplus it ran with the United States. Our conversation also covered the role the Fed played in setting monetary conditions in China via its currency peg to the dollar. 

The interview wrapped up by considering the prospects of the Renminbi becoming a truly important currency. This was a fascinating conversation throughout.

You can listen to the podcast on Soundcloud, iTunes, or your favorite podcast app.

Read More »

Macro Musings Podcast: Jesus Fernandez-Villaverde

February 3, 2017

[embedded content]
 

My latest Macro Musing podcast is with Jesus Fernandez-Villaverde.  Jesus is a professor of economics the University of Pennsylvania, a research associate with the National Bureau of Economic Research, and a research affiliate with the Centre for Economic Policy Research. 

Jesus does theoretical macroeconomic modeling, econometrics, and economic history. He has several books coming out on those topics and recently coauthored a chapter in the Handbook of Macroeconomics titled "Solution and Estimation Methods for DSGE Models". He joined me to talk about European economic history and macroeconomic modeling on the show. 

Most of our conversation focused on German monetary history in the 20th century since it has been so consequential for the rest of the Europe. We began by discussing the Weimar hyperinflation of the early-to-mid 1920s and the Great Depression of the late 1920s-early 1930s. It is hard to appreciate the fact that Germany went from hyperinflation to painful deflation in a decade. Several interesting questions come out this experience. First, which is worse: hyperinflation or depression? Second, why do the Germans seem to remember the former more than the later? Third, is it true that the Great Depression brought the Nazis to power? Jesus provides good answers to these in the interview.

Read More »