During the past few months, John Cochrane and I organized a series of workshops on the 2008 financial crisis. Monika Piazzesi, George Shultz, Niall Ferguson, Caroline Hoxby, and Darrell Duffie joined us in making presentations and, along with other colleagues who attended, turned the series into a vigorous and informative discussion. We defined each workshop by topic: Causes, Panic, Recession, and Lessons, and posted papers or summaries by each presenter as well as full transcripts of each of the four workshops:
Causes: Piazzesi, Taylor, Transcript of workshop
Panic: Shultz, Ferguson, Transcript of workshop
Recession: Hoxby, Taylor, Transcript of workshop
Lessons: Duffie, Cochrane, Transcript of workshop
An enormous amount of research on the crisis during the past ten years is found

Yesterday the Senate Judiciary Committee held an important hearing entitled “Big Bank Bankruptcy: 10 Years After Lehman Brothers.” Originally scheduled for October, but postponed because of the debate over the Kavanaugh confirmation, the hearing concentrated on legislation that would create a new “Chapter 14” of the bankruptcy code under which large financial institutions could go into bankruptcy without spreading the crisis to the rest of the financial system. The idea came out of research by the Resolution Project at Stanford’s Hoover Institution, books such as Bankruptcy Not Bailout: A Special Chapter 14, and many suggestions, including by the witnesses at this hearing.
The hearing was significant because there was so much support expressed in favor of Chapter 14.  Here is a

The IMF/World Bank meetings were held in Bali last week. In addition to the many good beaches there were many good panels including one I was on with Mark Carney and Agustin Carstens. It was organized by the Group of Thirty, led by Jacob Frenkel and Tharman Shanmugaratnam, and focused on “Sustaining an Open and Stable Global Order,” a broad topic, within which I focused on the global monetary and financial system in the following way:
A long-held view of mine—based on solid economic theory and much empirical evidence—is that a global monetary and financial system conducive to a stable global order has three attributes: (1) open capital markets, (2) flexible exchange rates between countries or blocs and (3) a predictable and transparent, or rules-based, monetary policy.
To be sure

Today is the first day of the fall quarter at Stanford, and I begin teaching Economics 1, the introductory economics course, and the course after which this blog is named. The first day is always exciting, especially with many first-year students in class as is the case with Economics 1.
With Tiger Woods just winning the Tour Championship, I have a wonderful example today of opportunity costs. Tiger took my course in 1996. He was the best economics student: As I have often said, he learned opportunity costs so well that he left Stanford and joined the pro tour.
On the first day, I of course focus on the central idea that economics is about choices people make when faced with scarcity and the interaction between people when they make these choices. That interaction is emphasized as

Joe Stiglitz recently published an attack, “The Myth of Secular Stagnation,” on Larry Summers’ hypothesis of secular stagnation, a revival of a term used by Alvin Hansen decades ago. Larry first presented his secular stagnation hypothesis at a conference jointly hosted by the Brookings Institution and the Hoover Institution on October 1, 2013, during the fifth anniversary of the financial crisis. It has gone viral since then.
In his critique, Stiglitz argues that Summers was wrong to say that the slow growth was secular; there was nothing secular about it, Stiglitz argued: if there had been a counterfactual larger demand-side stimulus package, there would have been a faster recovery without stagnation.  In his response, Summers lumps the Stiglitz  critique in with earlier critiques

Today we remember September 11, 2001 and all that has changed in the past 17 years. In his speech today at Shanksville President Trump was right to speak of incredible security challenges and sacrifices: “Since September 11th, nearly 5.5 million young Americans have enlisted in the United States Armed Forces. Nearly 7,000 service members have died” he said, adding “And we think of every citizen who protects our nation at home, including our state, local, and federal law enforcement.  These are great Americans.  These are great heroes.  We honor and thank them all.” There is a plaque at Stanford’s Memorial Auditorium honoring Stanford Alumni killed in Iraq and Afghanistan.
The past 17 years have also brought large changes in the way economics interacts with national security.  This

The annual Hoover Institution Summer Policy Boot Camp is now underway with a great group of college students and recent graduates from around the world.  The one-week program consists of lectures, workshops, and informal discussions, but it’s best described as a good “policy workout” on today’s top national and international issues grounded with data and theory.
I led off with the first session on “Monetary Policy: What Works and What Doesn’t.” The session began with a short review of monetary economics including the functions of money, the effect of money on inflation, and the role of central banks such as the Fed. It then examined monetary history—both old and recent—and explained how good monetary policy results in a smooth operating economy with low inflation and low

Many have been talking about possible international contagion of the financial crisis in Turkey, and Peter Coy touched on the key issues in yesterday’s Bloomberg piece. Recent economic history and theory offer powerful lessons about contagion. Most important is that contagion isn’t automatic, but rather depends crucially on economic policy. And that lesson is fortunately showing up in virtually all the market commentary during the past few days
Consider in contrast the situation exactly twenty years ago on August 17, 1998 when Russia—in the middle of its own financial crisis—defaulted on its debt and the impact spread instantaneously around the world. The three charts on my bookmark, shown here, illustrate that experience. The emerging market bond index (EMBI) spread jumped in Asia,

The Fed’s Monetary Policy Report released last Friday devotes a lot of space to monetary policy rules. This is the third time in a row that the monetary policy report has included such discussions, the first being in July 2017 and the second in February 2018.  Compared with the previous two monetary policy reports, this Report adds new material on policy rules, and is joined with a helpful discussion of policy rules now integrated into the Monetary Policy Principles and Practice section of the Fed’s web page.
All this represents progress in my view. It would be good if the new material generates some questions and answers in the Senate and House hearings with Fed Chair Jay Powell this week. Having such a discussion is one of the purposes of the bills in Congress under which the Fed

For the past nine years on Independence Day (see here and here for example), I’ve plotted the most recent long-term projection of the federal debt by the Congressional Budget Office as a reminder that it’s as explosive as the Fourth of July fireworks seen all over America. The CBO just released its latest long-term forecast, and while their shortening of the horizon and eliminating the alternative fiscal scenario may blur the underlying problems, the message, like the fireworks display, is still loud and clear: The debt is still exploding after all these years.
The figure shows three explosions: Net interest payments on the debt as a share of GDP and the debt as a share of GDP before and after the “Tax Cuts and Jobs Act of 2017.” The chart is constructed from CBO forecasts for 2018

A big question addressed at this year’s annual Hoover monetary conference was “The Future of the Central Bank Balance Sheet,” including the amount of reserve balances that banks hold at the Fed. The issue is one that “the [Federal Reserve] Board and the FOMC are in the process of observing and evaluating” as Vice-Chair Randy Quarles put it at the conference.
There are two basic approaches to the question. One is for the Fed to aim for a supply of reserve balances in which the interest rate is determined by the demand and supply of reserves—in other words, by market forces.  Sometimes called the corridor approach, it’s what Fed used for decades before financial crisis. The second approach is for the Fed to aim at a supply of reserves well above quantity demanded, and then set the

This summer we will again offer Stanford’s Principles of Economics course online for free.  You can register now for the course on Stanford’s open on-line platform Lagunita. We will start on Monday June 25 and go through August 24. I will be teaching the course with the help of Ryan Triolo, an experienced and excellent teaching assistant who I am happy to say is back for summer 2018
The course is based on the on-campus course at Stanford. Each day after giving a 50-minute lecture, I recorded the same lecture divided into smaller segments for online viewing. We added graphs, photos, and other illustrations–just as in the on-campus course; we captioned and indexed the videos–an attraction not in the on-campus course; and we added study material, reviews, quizzes, and a discussion

Yesterday I was talking to a friend in my office about the great benefit to students from writing undergraduate honors theses in their senior year.  I have long advised students to do so, perhaps because of the rewarding experience I had years ago.  It got me thinking, so I pulled my undergraduate thesis off the shelf, and I noted that it was dated April 5, 1968–submitted exactly 50 years ago to the day. The thesis was all about policy rules, and, yes, I am still working on that topic, “still crazy after all these years.”
I got the idea from Phil Howrey who was then on the Princeton faculty. Phil was doing research with Michio Hatanaka, who had just published Spectral Analysis of Economic Time Series with Clive Granger who had visited Princeton.  They were all interested in dynamic

Thanks for a little humor about two of the most important economic topics of the day: monetary policy at the Fed and bankruptcy policy at Tesla. I am sure there are others, but these two are my favorites:
Monetary Policy
F 🌐 🌮 ☪ @fmn13  April 1, 2018
Marvel: ‘Infinity War is the most ambitious crossover event in history’ Me:

________________________________________
Bankruptcy Policy

In many ways, the Fed has begun to bring monetary policy back on track as it emphasizes a strategy and the use of monetary policy rules:
On January 18 of last year, former Chair Janet Yellen described the Fed’s strategy for the policy instruments, saying that “When the economy is weak…we encourage spending and investing by pushing short-term interest rates lower….when the economy is threatening to push inflation too high down the road, we increase interest rates…”  In a speech the following day, she compared this strategy with the Taylor rule and other rules, and she explained the differences.
On February 11 of last year, former Vice-Chair Stanley Fischer gave a talk with a similar message, comparing actual policy with monetary rules and explaining how rules-based analyses feed into

David Skeel and I wrote the following on an important report on bankruptcy reform just released by the U.S. Treasury:
Yesterday the U.S. Treasury released its official response to President Trump’s memorandum of last April asking for a review of whether an improved bankruptcy law “would be a superior method for the resolution of financial companies” compared to the regulator-run resolution process embodied in the Dodd-Frank Act.  After a year of hearings, consultations, and study, Report to the President on Orderly Liquidation Authority and Bankruptcy Reform states “unequivocally” that bankruptcy should be the preferred method of resolution. The Report calls for a “more robust, effective, bankruptcy process for financial companies” along the lines of the “Chapter 14” proposal of the

After a very successful launch last summer, Stanford’s Hoover Institution is again offering a one-week public policy boot camp this coming August 19-25. This “residential immersion program” is aimed at college students and recent graduates. It consists of lectures, workshops, informal discussions, and active collaboration with study groups outside of class.  It covers the essentials of today’s national and international policy issues. It requires a 100% time commitment for the whole one-week program, but if last year is any indicator both faculty and students will find it to be rewarding and fun.

As with last year the teachers in the program are faculty and fellows from the Hoover Institution, which includes scholars in economics, government, political science, and related fields.

This week marks the 20-year anniversary of a “notable conference” on monetary policy as Ed Nelson, who reminded me, puts it.  The conference took place at the Cheeca Lodge in the Florida Keys on January 15-17, 1998, and it resulted in the book  Monetary Policy Rules published by the University of Chicago Press for the NBER.
It was an unusual conference.  As stated on the back of the book jacket shown below, it was a “unique cooperative research effort between nearly thirty monetary experts and policymakers.” The purpose was to evaluate alternative monetary policies, all of which were described by policy rules for the interest rate. It was unique because the participants in the conference not only evaluated the performance of their own proposed policy rules with their own models,

The Brookings Institution held an interesting conference yesterday organized by David Wessel on “Should the Fed Stick with the 2 Percent Inflation Target or Rethink It?” Olivier Blanchard and Larry Summers argued, as they have elsewhere, that the Fed should increase its inflation target—say from 2% to 4%. Others—such as John Williams—argued that the Fed should change the target in some other way such as by focusing on the price level. Sarah Binder, Peter Hooper and Kristen Forbes were on a panel to answer questions about political, market, and international issues, respectively. I was on that panel to answer questions  about monetary policy rules, and the first question posed by David Wessel was about the inflation target in the Taylor rule. Here’s a summary of my answer and later

The Great Recession began exactly one decade ago this month, as later determined by the NBER business cycle dating committee chaired by my colleague, Bob Hall. There is still a great debate about the causes of the Great Recession, its deepness, its length, and the Not-So-Great Recovery that followed. But there is no question that the economic growth rate over the past ten years has been dismal—only 1.4 percent per year on average. A chart of the ten-year moving average of growth rates tells the story. Let’s hope the new decade that begins tomorrow will be a happier new decade for economic growth in the United States.
I still think the explanation in my 2009 and 2012 books Getting Off Track: How Government Actions and Interventions Caused, Prolonged, and Worsened the Financial Crisis

Each year the Wall Street Journal asks friends for their favorite books of the year. Two years ago I chose Thomas Sowell’s history of income distribution in Wealth, Poverty, and Politics and Brian Kilmeade’s history on Thomas Jefferson and the Tripoli Pirates. Last year I chose The Man Who Knew, Sebastian Mallaby’s biography of Alan Greenspan, and War by Other Means by Bob Blackwill and Jennifer Harris.
This year I chose two amazingly relevant  books on U.S. economic history: John Cogan’s The High Cost of Good Intentions: A History of U.S. Federal Entitlement Programs and Doug Irwin’s Clashing over Commerce: A History of US Trade Policy. My reasons in brief are found in the passage below from the printed December 16 WSJ edition. In these days of big economic policy changes,

Ed Nelson sent me a nice note today saying that the past two days (November 20-21) mark “the twenty-fifth anniversary of the Carnegie-Rochester Conference at which you laid out your rule.” I had forgotten about the specific dates, but his note reminds me how much has changed in those 25 years.
Back then, research on monetary policy rules was indicating that rules needed to be very complex with many variables and many lags. There were serious doubts about the usefulness of the research, and some expressed doubts that the results would ever be applied in practice. I had been conducting research at Stanford in the 1980s with a number of graduate students including Volker Wieland and John Williams. So Allan Meltzer (who organized the Conference Series with Karl Brunner) called me and

This week I gave the Swiss National Bank’s  Annual Karl Brunner Lecture in Zurich, and I thank Thomas Jordan who introduced me and the hundreds of central bankers, bankers, and academics who filled the big auditorium. Karl was a brilliant, innovative economist who thought seriously about both policy ideas and institutions. For the lecture, I focused on ideas and institutions for international monetary policy.
Since Karl died in 1989, we can only wonder what he would think about monetary policy in the past dozen years. But we can get some hints from his former student, collaborator, friend, and great economist Allan Meltzer, who died earlier this year.
About one year ago at the annual monetary conference in Jackson Hole, Meltzer argued that the Fed’s “quantitative easing” was in

We can still learn much from Milton Friedman, as we celebrate his 105th birthday today.  Here I consider what we can learn from his participation in the monetary policy debates in the 1960s and 1970s. I draw from a 2002 paper that I presented to lead off his 90th birthday celebration in Chicago in 2002  and from two 2012 pieces: a paper I presented at the centennial of his birth in 2012 and an article written on his 100th birthday in 2012.The lessons are very relevant to the debates raging during the last 15 years and continuing today.
Back in the early 1960s, the Keynesian school first came to Washington led by Paul Samuelson who advised John F. Kennedy during the 1960 election campaign and recruited Walter Heller and James Tobin to serve on the Council of Economic Advisers. The

Today is the launch of the online version of my Economics 1 course (and namesake of this Blog and my Twitter handle) on the Principles of Economics for summer 2017. This year is also the tenth anniversary of the start of the Global Financial Crisis and the Great Recession which began in 2007.
During these ten years there has been great deal of hand-wringing among economists and others about the subject of Economics. This is an important debate, and the different positions deserve to be covered in the basic economics course.
As early as 2009, a cover of The Economist magazine showed a book titled “Modern Economic Theory” melting into a puddle to illustrate what the writers viewed as the problem with economics. It was the most talked about issue of the year.
Some economists have been

This summer I will be offering my Stanford course Principles of Economics online for free.  You can find out more and register for the course, Economics 1, on Stanford’s open on-line platform Lagunita.  The course starts at 8 am PT Monday July 17, when I will post the first week’s videos and reading material, and it goes through 11:59 pm PT September 18. It is possible to register and join the course at any time throughout this period.
The course is based on my on-campus course at Stanford. Each day after giving a 50-minute lecture, I recorded the same lecture divided into smaller segments for online viewing. We added graphs, photos, and other illustrations–just as in the on-campus course; we captioned and indexed the videos–an attraction not in the on-campus course; and we added

The Federal Reserve Board’s semi-annual Monetary Policy Report issued by Chair Janet Yellen last Friday contains a whole new section called “Monetary Policy Rules and Their Role in the Federal Reserve’s Policy Process.” The section contains new information and is well worth reading. Below is an excerpt which first lists three “key principles of good monetary policy” that the Fed says are incorporated into policy rules; it then lists five policy rules, including the Taylor rule and four variations on that rule that the Fed uses, with helpful references in notes which are also excerpted below.
The three principles sound quite reasonable: on the third–called the “Taylor Principle” by Mike Woodford and others–the Fed is quite specific in that it gives the numerical range for the

Every summer since 2010 I’ve charted the latest Congressional Budget Office (CBO) long-term projection of the federal debt, noting the similarity with the Fourth of July fireworks. But during these years, the CBO has changed its procedures several times, fogging up comparisons over time and lessons from experience.
Starting with my first post in 2010 on this topic, CBO reported projections of the debt as a percentage of GDP going out 75 years based on their “alternative fiscal scenario” which is more realistic than their “baseline scenario” that assumes no-change in current law. Here’s what CBO projections made in 2009 and 2010 looked like. You can see the explosions clearly as the debt to GDP ratio forecast reached 767% by 2083 in the 2009 estimate, and even higher in the 2010

Last week a new Macroeconomic Modelling and Model Comparison Network (MMCN) was launched with a research conference at Goethe University Frankfurt. Economists from the IMF, the Fed, the ECB, and other central banks presented and compared policy models along with academics from Chicago, Penn, Amsterdam and elsewhere.  Such collaboration and exchange will define the new network.  Judging from the first conference, it got off to a good start.
The conference led off with a critical review of macroeconomic models used for policy from a finance perspective by Winston Dou, Andrew Lo, Ameya Muley, and Harald Uhlig. The paper surveyed monetary models used at central banks, and it pointed out problems with current models, especially linearized versions, suggesting newer solution, estimation,

An important part of the Fed’s normalization policy is to reduce its holdings of securities and thereby reserve balances—deposits of banks at the Fed—used to finance these holdings. As I argued when quantitative easing began in 2009, this reduction should be predictable and strategic.  That view was given some empirical support by the “taper tantrum” in 2013, when Ben Bernanke abruptly said in a congressional hearing that the Fed’s purchases of securities would taper in “the next few meetings.” In contrast, when the tapering later became more predictable, markets digested it easily.
The Addendum to the Policy Normalization Principles and Plans recently issued by the Fed conforms to this gradual and predictable approach. The Fed said it intends to reduce its holdings of Treasury and