Today we remember September 11, 2001 and all that has happened in the 18 years since then.
I was in a hotel room in Tokyo when the first plane hit the World Trade Center, recently sworn in as Under Secretary at Treasury. We immediately cancelled our meetings and by the next morning we were on a C-17 military jet Flying Back to Treasury on 9/11. When we got back, the city was on alert. DC was a logical place for another attack, and the secret service was particularly concerned about security around the White House. The United States then launched its first post-9/11 attack on terrorists from a very unusual Financial Front in the War on Terror. As President George W. Bush put it, “the first shot in the war was when we started cutting off their money, because an Al Qaeda organization

Two weeks from today, I start teaching Economics 1, Stanford’s introductory economics course, and the namesake of this blog and my twitter account.   I am looking forward to it, and for the same three reasons that I gave years ago when I started teaching the course: (1) “I love to teach.” (2) “I love to do economic research” and teaching is “a natural extension of research.” (3) “I love economic policy—the application of economics to government as well as to decision-making in business.”
But things have changed dramatically since I started teaching this course decades ago.  In many ways, it is like a whole new course. And that’s exciting for me and for students.  Economics 1 is more important now than ever as the world becomes more computerized and quantified. The course now shows

Last week Raghu Rajan and I coauthored an article for the Financial Times. We argued that the IMF should no longer continue the tradition that the Managing Director of the International Monetary Fund be a European. Instead, it should “break the mould by appointing the best possible candidate to the job, regardless of nationality,” and “hold an open competition” for the position.
As the G20 Eminent Persons Group on Global Financial Governance (on which we served) recommended, the IMF’s role needs to change to meet the requirements of a different word than existed in the year of its founding 75 years ago.
On this the 75th anniversary of the founding of the IMF and the World Bank, we need to recommit recommit to the spirit of Bretton Woods.  Indeed, this was the main message of the

A few days ago, an amazing thing happened when Thomas Brand (@thlbr) tweeted about a short article I posted on my blog EconomicsOne.com. My post was old–posted 10 years ago on October 3, 2009–and I titled it “A Beautiful Model, A Clear Prediction.”
It was about the effect of the minimum wage on employment and the wage. The basic supply and demand model was displayed with the following graph. It was drawn from the Principles of Economics (Economics 1) course that I taught at Stanford in the Fall of 2009, and will still be teaching at Stanford in the Fall of 2019 (and in online form this summer).
The amazing thing was that Brand’s tweet resulted in a huge amount of renewed traffic and hits to the blog, many more in 2019 than in 2009.  Also, unlike 2009, much of the traffic in 2019

Four former chairs of the Fed  wrote in the Wall Street Journal today about the importance of Fed independence. I agree, but their article should have emphasized that independence is not enough.  Economic performance has been affected by large shifts between more rules-based and less rules-based policy by the Fed without any concomitant change in the legal basis for independence. De jure independence has not prevented the Fed from harmful departures from rules-based policies.
The absence of a rules-based policy at the Fed in the 1970s was accompanied by high inflation and high unemployment. The move to rules-based policy during the two decades starting in the early 1980s was accompanied by improved price stability and output stability. And a move away from rules-based policy

I just spent a wonderful few days at the 2019 Africa Meeting of the Econometric Society held in Rabat, Morocco with the central bank, the Bank Al-Maghrib, providing an excellent venue.  Congratulations to the Bank Al Maghrib for its 60th anniversary year and also to the Econometric Society for its upcoming 90th anniversary in 2020.
One sees positive economic changes coming to this part of Africa, and it is good that the Econometric Society is meeting here. Morocco is looking to join the Economic Community of West African States (ECOWAS) which includes, among other countries, Nigeria, Senegal, Côte d’Ivoire, Ghana, Liberia, Mali, Niger, Benin and Togo. I have travelled to these countries and worked on the US-Moroccan Free Trade Agreement a while back. The idea of an expanding free

Starting a decade ago, I’ve charted on Independence Day the most recent long-term projection of the federal debt by the Congressional Budget Office (CBO). Over the years the chart has continued to look much like the Fourth of July fireworks, as you can see here 2010, 2011,  2012, 2013, 2016, 2017, 2018 .
The CBO just released its 2019 Long-Term Budget Otutlook  on June 25, and so it’s time for a July 4th update. The chart of the total deficit on the front cover of the report (reproduced here) is a sight to behold.  As CBO says: “If current laws generally remained unchanged, large budget deficits would boost federal debt to unprecedented levels over the next 30 years.”
What about the debt? I plotted in the next chart the forecast of the debt as share of GDP (solid blue line) along

Last week, after attending monetary policy conferences at Stanford, Chicago and Frankfurt, I put forth evidence in EconomicsOne.com of a revival of research on monetary policy rules for the instruments, whether at the conferences, in research papers, or in Fed publications. I offered possible explanations for the revival, also with evidence, including revealed preference by policymakers, the need to deal with the effective lower bound, disappointments with past departures from rules, threats of legislation, and concerns about political pressure.
This week, Peter Ireland posted an article with a carefully worked-through analysis of recent actual monetary decisions, which takes the idea of the Fed using policy rules for the instruments a significant step further, well beyond research

This summer we will be offering Stanford’s Principles of Economics course online.  As explained in this Wall Street Journal article, “A Twist in Online Learning at Stanford,” the twist again is that we’ll offer it both (1) to the general public and (2) for credit to matriculated Stanford students, incoming freshman, and visiting students in the Stanford Summer School.
Those seeking credit can register here for the for-credit course, which is just starting with the first week’s videos and other course content posted on Monday, June 24. This is the same as the on-campus course, Economics 1, which I give at Stanford during the academic year, and it fulfills all the same requirements. Getting credit requires regular homework, a mid-term exam, and a final exam, all of which are taken

Recently I had the opportunity to participate in several conferences on monetary policy: the annual Hoover monetary policy conference at Stanford in May, the 2019 Fed Review conference in Chicago in June, and the Macro Model Comparison Conference in Frankfurt also in June.  There are many takeaways, but one was very evident.  I will call it a “Revival of Research on Monetary Policy Rules for the Instruments.” Policy rules were the subject of much research in the 1970’s, 1980’s and 1990’s, but in recent years there was a lull.  Now there’s a big pickup. Here are some examples, with the many links found at the conference web pages.
At Stanford, Mertens and Williams (2019) evaluated different interest rules with a new Keynesian model and Cochrane, Taylor and Wieland (2019) evaluated

The most recent book, Currencies, Capital, and Central Bank Balances, in a series on monetary policy has just been published. As the line-up of covers below shows, it is the 5th in a series of volumes emerging from conferences on monetary policy held each spring at the Hoover Institution. The series started during the Federal Reserve Centennial. The conferences at that time did not, in our view, portray a full range of views about policy. So we decided to start a conference series with a bigger range of views, and it has been popular. Next May 3 we will have the 6th conference and a book will likely emerge.

Currencies, Capital and Central Bank Balances focuses on several pressing issues in monetary policy with a tilt toward international issues. One issue concerns the international

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