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In Memory of Bob Rossana

July 6, 2020

Robert “Bob” Rossana died back in February of this year. I was inadvertently left off of the university announcement email and did not hear about it until much later. Bob was my dissertation advisor. He meant a lot to me and so I want to share some thoughts.
In graduate school, there were four macroeconomics courses. Two core classes and two field classes. Bob was instrumental in getting this four-course system started, as well as a “macro lunch,” in which any graduate student interested in macro was required to attend and present.
Many of my fellow classmates found him intimidating. I cannot say for certain why other students felt this way, but I suspect that it was Bob’s high standards. He expected a lot of us, but he was always fair. Above all, he wanted us to push the boundaries

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Macroeconomic Policy and the Coronavirus

March 13, 2020

(The post is also going to be cross-posted at Lars Christensen’s Market Monetarist blog.)
As the coronavirus spreads across the world, there is growing concern about the economic implications of the virus and what, if any, policy action is required of governments. Some have proposed traditional stimulus measures to counteract the virus while others have proposed more targeted measures. However, before one can offer policy solutions, one needs to diagnose the problem. In this post, I will outline what the potential economic consequences of the coronavirus are and the corresponding policy implications.
The Diagnosis
There are three main consequences of the coronavirus that we should be concerned about. The first is part of a flight to safety. In the face of uncertainty, people often

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Podcast on Maritime Policy

February 28, 2020

I recently recorded an episode of The Economics Detective podcast with Garrett Petersen. The subject of the podcast is my paper, “U.S. Maritime Policy and Economic Efficiency.” A link to the paper is here. A link to a blog post I recently wrote about the paper is here.

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Some Links

January 6, 2020

A couple of links to things I have been working on…
My paper entitled, “The Riksbank, Emergency Finance, Policy Experimentation, and Sweden’s Reversal of Fortune” is now forthcoming at the Journal of Economic Behavior and Organization. The paper includes a lot of background on Swedish governance and fiscal capacity, as well as information about the early Swedish monetary system and the Riksbank. I argue that the constraints on the Riksbank left Sweden unable to use its central bank in the same way that Britain did during times of war. I also argue that policy experimentation at the Riksbank had a negative effect on economic activity. I really enjoyed working on this paper, so I hope that others find some value in it.
I have also written a review of Saez and Zucman’s new book, The

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On Maritime Policy

December 10, 2019

Some time ago, I was listening to NPR and the hosts were discussing the Jones Act. For those who are unaware, the Jones Act requires that any shipping done from one U.S. port to another U.S. port must be carried by a U.S.-flagged ship with a U.S. crew that was built in the U.S. The hosts claimed that they could not find an economist who could explain why this sort of law existed. The policy seemed like a run-of-the-mill protectionist giveaway. My reaction was much different.
Here we have this law that is nearly 100 years old and no economist can explain why it exists? The only plausible explanation is that this 100-year-old law is a protectionist giveaway? This seems unlikely. One would have to believe that democracy is incredibly inefficient. This is especially true when one hears

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On Drawing the Wrong Lessons from Theory: The Natural Rate of Unemployment

October 9, 2019

Economic theory is important. Theory provides discipline. Economists write down a set of assumptions and follow those assumptions to their logical conclusions. The validity of a particular theory is then tested against observed data. Modern economic theory is often mathematical, but theory comes in a variety of forms. Sometimes theory is used to develop and test specific empirical predictions. Other times, economic theory acts as a type of sophisticated thought experiment. These thought experiments generate broader empirical predictions. In fact, some of these sophisticated thought experiments contain important lessons for monetary policy.
In the late 1960s, Milton Friedman suggested that monetary policy was limited in its ability to influence the unemployment rate. Friedman argued

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On Exhaustible Resources, Part 2

September 25, 2019

Yesterday’s post on exhaustive resources has drawn a lot of ire from critics. Some have argued that I didn’t address the problem of economic growth. In short, the argument is that there are two sources of economic growth. The first is that increased efficiency of resources allows us to produce more stuff with the same amount of resources. The second is that because resources are more productive we tend to use more of them. Others have argued that algebra is irrelevant to the problem.
I’d like to address both of these concerns because they are wrong. First, let’s address the algebra issue. The model I presented in my previous post is an example of using formal economic theory to make a point that is apparently not obvious to people. If society has exhaustible resources, will markets

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On Exhaustible Resources

September 24, 2019

Yesterday, George Monbiot wrote in the Guardian that the survival of capitalism relies on persistent economic growth and persistent economic growth is impossible in the long-run because there are finite resources in the world. In response, I made the following popular, but sarcastic tweet.

Economists: economic growth results from finding ways to produce the same amount of stuff with fewer resources.
You, an intellectual: economic growth requires infinite resources.
— Josh Hendrickson (@RebelEconProf) September 23, 2019

The tweet was meant to be funny. The format itself is a meme. Nonetheless, it does drive home the point that the source of economic growth is finding more efficient uses of resources. With this being the internet, however, I started receiving

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A Simple Lesson About Money and Models

October 12, 2018

Imagine you are in your high school algebra class and you are presented with the following two equations:

Two linear equations with 2 unknowns. This is a simple problem to solve.
Now suppose that your teacher gives you the following three equations:

Note that this is still a simple problem to solve. The first two equations are identical to the previous example. You can use those first two equations to solve for x and y. Then, knowing x, you can solve for z. The central point is that the third equation is not important for determining the value of x. The first two equations are sufficient to solve for x and y.
So why am I bringing this up?
This is precisely how the New Keynesian model deals with money. The baseline New Keynesian model does not include money. The model is complete

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Macro Musings

August 21, 2018

This week I was a guest on David Beckworth’s Macro Musings podcast. We discussed my policy brief on the labor standard as well as monetary policy more generally. Here is a link for those interested.

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August 10, 2018

A couple of updates:
The topic of this month’s Cato Unbound is J.P. Koning’s proposal for the U.S. to issue a large denomination “supernote” and to tax that note as a way of punishing illegal activity. I will be contributing to the discussion this month along with James McAndrews and Will Luther. You can read J.P.’s lead essay here. The response essays will be linked below the lead essay. My response essay will appear next week.
My paper with Alex Salter and Brian Albrecht entitled “Preventing Plunder: Military Technology, Capital Accumulation, and Economic Growth” has been accepted at the Journal of Macroeconomics. I think that this paper is based on a really interesting idea (biased, I know). The basic idea is that military technology is a limiting factor for economic growth. We

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Monetary Policy as a Jobs Guarantee

July 31, 2018

Today, the Mercatus Center published my policy brief on the idea of a “labor standard” for monetary policy that was first proposed by Earl Thompson and David Glasner.

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How Did the Gold Standard Work? Part 1: The Efficiency of the Gold Standard

July 18, 2018

Sebastian Edwards has written an interesting new book about FDR’s devaluation of the dollar and the legal and economic consequences thereof. This post is not about the book, although I do recommend it. What I would like to write about is motivated by some of the reaction to this book that I’ve seen and heard regarding gold and the gold standard. In recent years, I have become convinced that what I thought was the conventional wisdom on the gold standard is not widely understood. So I’d like to write a series of posts on the gold standard and how it worked. My tentative plan is as follows:
Part 1. The efficiency of the gold standard.
Part 2. The determination of the price level under the gold standard.
Part 3. The Monetary Approach to the Balance of Payments vs. the Price-Specie Flow

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Towards an Alchian-type Approach to Political Economy

July 16, 2018

In my previous post, I discussed what I called the sleight of hand of an Olson-approach to political economy. The basic idea of that post was that Olson’s theory of concentrated benefits and dispersed costs is often used to malign policies deemed to be inefficient. The sleight of hand aspect is as follows. First, the economist deems a particular policy to be inefficient using a standard theoretical model. Second, the economist hypothesizes that the reason we have such an inefficient policy is due to special interests getting what they want because the costs are dispersed. Third, the economist examines either in historical detail or through regression analysis the role of special interests in getting the policy implemented. Fourth, if special interests are found to have had an effect

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The Sleight-of-Hand of Olson-esque Public Choice

July 13, 2018

“Long-surviving democracies could therefore hardly have been dominated by the charlatans, simpletons or crooks that economists typically portray in characterizing democratic representatives.” — Thompson and Hickson (2000)
The early days of public economics (at least as a distinct field) were essentially normative. The basic idea was that economists could use economic theory to examine market failures and devise policies that correct for those failures. A quintessential example is the case of externalities. Suppose, for example, that a particular type of production produces pollution. This cost is not limited to the firms or those working for firms. This cost affects (potentially) all members of society. The social cost of production is therefore greater than the private cost. Since

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In Memory of John Murray

April 2, 2018

This post is a bit different than normal. Most of my posts are about the minutiae of economic theory or controversies. Today’s post is personal. All of us in academia have a number of important people who have helped us in our intellectual journey and career. I have been fortunate enough to have a number of such people in my short career. One of these people was John Murray.
I first met John as an undergraduate. At the time I was a history major, but I had started to take an interest in economics. I went to see John in his office, he being the undergraduate adviser at that time. We had not met before that day. In fact, I could not have taken more than 3 courses in economics at that time. I remember that he was delighted that I was interested in economics given that I was currently a

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The Phillips Curve and Identification Problems

March 28, 2018

Frequent readers of the blog (can you be frequent if I only write about 5 or 6 times a year?) will know that I often criticize the Phillips Curve. One counterargument that I receive to my complaints about the Phillips Curve is that my critiques are unfair because they ignore the role of countercyclical monetary policy. For example, suppose that the following two things are true:
1. The central bank responds to a positive output gap by tightening monetary policy.
2. Inflation is caused by positive output gaps.
If these two things are correct, the critics say, then you might fail to see an empirical relationship between inflation and the output gap (or even a negative relationship). However, this violates point (2) which we’ve assumed to be true. Thus, we have an identification problem.

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A Theory of Tariffs as a Method of Promoting Long-Run Free Trade

March 26, 2018

Tariffs have been in the news lately. As is typically the case, economists have come to the rescue on social media and op-ed pages to defend the idea of free trade and to discuss the dubious claims that politicians make about protectionist policies. I have no quarrels with these ardent defenses of free trade (although I would note that claims about the supposed importance of New Trade Theory and New New Trade Theory and claims about the global optimality of free trade are potentially contradictory; perhaps economists don’t like NTT or NNTT as much as they claim, but I digress). Despite my general support of free trade, I also think we should take a step back and try to understand the motivations of politicians who embark on protectionist policies. In addition, I think that we should

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On Prediction

January 29, 2018

Suppose that you are a parent of a young child. Every night you give your child a glass of milk with their dinner. When your child is very young, they have a lid on their cup to prevent it from spilling. However, there comes a time when you let them drink without the lid. The absence of a lid presents a possible problem: spilled milk. Initially there is not much you can do to prevent milk from being spilled. However, over time, you begin to notice things that predict when the milk is going to be spilled. For example, certain placements of the cup on the table might make it more likely that the milk is spilled. Similarly, when your child reaches across the table, this also increases the likelihood of spilled milk. The fact that you are able to notice these “risk factors” means that,

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Allan Meltzer

January 22, 2018

Earlier this month, I had the privilege of speaking at a conference in honor of Allan Meltzer. It was a great conference with a number of excellent speakers (how I got on the list is anyone’s guess). Meltzer had an incredible influence on the profession through his work on monetary policy and the history of the Federal Reserve.
I was on a panel discussing Meltzer’s views on the monetary transmission mechanism. Anyone who is familiar with Meltzer’s work knows that this was a topic that he thought was of the utmost significance. For those not familiar with economic jargon, this line of research examines the various possible channels through which monetary policy affects economic activity. On the one hand, this research has been pretty influential in the sense that Ben Bernanke often

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The Quantity Theory of Money: Lessons from Sweden’s Age of Freedom

December 27, 2017

Throughout the 17th and early 18th century, Sweden had a significant empire in northern Europe. In 1700, an alliance of Denmark-Norway, Russia, and others attacked the Swedes. While Charles XII, then the king of Sweden, had initial success against this alliance, he was eventually wounded and the Swedes never really recovered. Charles died in 1718. Charles had taken power at the age of 15 and spent virtually his entire adult life at war. He never married nor did he have children. When he died, there was uncertainty about who had the rightful claim to the throne. Charles’s sister Ulrika claimed that she was the rightful heiress since she was the closest living relative. Ultimately, the Swedish Riksdag agreed to recognize Ulrika in exchange for eliminating the absolute monarchy and

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The Phillips Curve, Again

December 4, 2017

The Phillips Curve is back. In saying so, I do not mean to imply that being “back” refers to a sudden reappearance of a stable empirical relationship between unemployment (or the output gap) and inflation. The Phillips Curve is back in the same way that conspiracy theories about the assassination of JFK are back after the recent release of government documents. In other words, the Phillips Curve is something that people desperately want to believe in, despite the lack of evidence.
The Phillips Curve is all the rage among central bankers. Since the Federal Reserve embarked on quantitative easing, they have been ensuring the public that QE would not be inflationary because of the slack in the economy. Until labor market conditions tighten, there would be little threat of inflation.

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The Law of Reflux Returns

October 17, 2017

One could make the case, quite convincingly, that all of the major monetary debates are between those whose arguments are based on classical monetary theory and those whose arguments are based on the quantity theory of money. This would be fine if one theory or the other was always correct. However, the model that is appropriate for any given debate depends on the particular monetary institutions in place. For example, if money is convertible into some commodity, such as gold, then classical monetary theory is appropriate. If we have a system of inconvertible paper money, then the quantity theory is appropriate. Thus, to put my original point differently, the history of thought in monetary economics essentially consists of one side using the appropriate model and the other side

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Economists Say the Darndest Things, Gold Standard Edition

August 30, 2017

I often hear economists say things like “look, the vast majority of economists think the gold standard is terrible.” I have no idea if this is true (many economists outside of macro likely have no opinion on the gold standard), but it is incredibly misleading even if we believe the quote to be true. The reason I say that this quote is misleading is that whether or not the gold standard is a good or bad institutional regime depends on the precise institutional characteristics of the gold standard. In other words, which gold standard are we talking about? Are we talking about a free banking regime in which banks issue their own notes that are redeemable in gold? Are we talking about a system in which there is a central bank that has a monopoly over currency issuance that redeems its

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Free Banking and the Friedman Rule

August 7, 2017

Imagine that there are two types of people in the world — recognizable and unrecognizable. Recognizable people can develop reputations, which can have either positive or negative effects. If a recognizable person develops a reputation for being trustworthy, then he or she will likely be able to issue debt to finance the purchase of goods and services. If the person is not trustworthy, but is easily recognized, then he or she will not be able to issue debt. All else equal, people who are recognizable will have an incentive to be trustworthy so that they can issue IOUs to pay for stuff. People who are not recognizable don’t have the same incentives. Since nobody can recognize them, they will never be able to issue IOUs.
Let’s think about this in the context of general equilibrium theory

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Some Myths About Interest on Reserves

April 25, 2017

There are two myths that I see repeated about interest on reserves that I would like to address:
1. “Of course the banking system is holding more reserves. They have no choice. The quantity of reserves is set by the Federal Reserve.”
That last sentence is correct. However, the relevant question is why banks are holding these reserves as excess reserves rather than as required reserves.
The typical way that we teach students about open market operations is as follows. Suppose that each component of the bank’s balance sheet is consistent with profit-maximization given a binding reserve requirement. The central bank conducts open market operations by buying bonds from the bank and crediting the reserve account of the bank. The bank now finds itself holding excess reserves. If the central

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The Bullionist Controversy

January 30, 2017

My paper entitled, “The Bullionist Controversy: Theory and New Evidence” has been accepted at the Journal of Money, Credit, and Banking. Here is the abstract:

The Bullionist Controversy in the United Kingdom is one of the first debates about the determination of the price level and the exchange rate under a paper money standard. Despite the importance of the debate in the development of monetary theory, there remains little empirical evidence that uses modern, multivariate time series techniques. The evidence that does exist provides support for the Anti-Bullionist position. The purpose of this paper is to review the debate and develop a dynamic general equilibrium model that is capable of capturing key features of the 19th-century British financial system. The model is estimated

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On Why It is Important to Distinguish Between Consumption and Expenditures When Testing the Permanent Income Hypothesis

January 13, 2017

A central idea in modern macroeconomics is the permanent income hypothesis. The basic idea is as follows. Suppose that you could dichotomize your income into a permanent component and a temporary component. The permanent income hypothesis suggests that you would base your consumption decisions on the permanent component.
Why would people behave this way?
Well, individuals want to smooth the marginal utility of their consumption over time. To understand this, consider the following example. Suppose that you varied your consumption proportionately with your current income and that your income fluctuated significantly from year to year. This would imply that your consumption would be high in years when your income was high and low in years when your income was low. However, if

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Are Helicopter Drops a Fiscal Operation?

November 29, 2016

This is meant to be a quick note on what I think is a common misconception about helicopter drops. I am not advocating that the Federal Reserve or any other central bank undertake the actions I am going to describe nor do I care about whether it is legal for the Federal Reserve or any other central bank. All I am concerned with is helicopter drops on a theoretical level. With that being said, let me get to what I believe is a misconception.
First, some context. Typically, when the Federal Reserve wants to increase the money supply, they buy assets on the open market in exchange for bank reserves. These are called open market operations. One potential problem is that the Federal Reserve is typically purchasing short-term government debt. When short term nominal interest rates are near

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