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David Andolfatto
The views and opinions expressed by me in this blog are my own and should in no way be attributed to the Federal Reserve Bank of St. Louis, or to the Federal Reserve System.

David Andolfatto: Macro Mania

David Andolfatto, Vice President of the St. Louis Fed, created MacroMania as a resource for people wanting a better understanding the Fed’s marcoeconomic policy. His commentary is incisive and thorough, particularly his thoughts on Bitcoin and blockchain technology.

Interpreting the yield curve

There's been a lot of talk lately about the flattening of the yield curve, what's causing it, and what it portends. In this post, I describe a simple "neoclassical" theory of the yield curve and ask to what extent it serves as a useful guide for our thinking on the matter.   Let's start by defining terms. Let I(m) denote the yield (market interest rate) on (say) a U.S. treasury bond with maturity m. So, I(1) denotes the yield on a one-year bond and I(10) denotes the yield on a ten-year...

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Tyler Cowen on Central Bank Cryptocurrencies

I enjoy reading Tyler Cowen and have learned a lot from his columns. So before I criticize his most recent effort, I want to thank him for all his fine contributions! Unfortunately, I think he drops the ball a little bit on his most recent effort. No worries--we all do sooner or later. What follows are some thoughts that came to my mind as I read his most recent article entitled "Cryptocurrencies Don't Belong in Central Banks." My (unedited/uncensored thoughts are recorded in blue...Tyler,...

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A monetary-fiscal theory of inflation

On December 17, 2015, the FOMC has raised its policy rate (IOER) from 25bp to 50bp. It has since raised the IOER rate three more times to 1.25%. Many on the committee seem convinced that further rate hikes are needed (in addition to actions designed to shrink the Fed's balance sheet, which is already shrinking relative to the size of the economy). What is the source of this enthusiasm for monetary policy tightening, given that the unemployment rate is close to target, and given a PCE...

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Where’s the inflation?

The PCE inflation rate in the United States has been consistently below the Fed's official 2% target for many years now. Equally persistent are the forecast errors of those who have expected inflation to rise to its target level (and possibly beyond). What accounts for the missing inflation? In a recent NYT article, Binyamin Appelbaum mentions four theories of inflation: (1) Monetarist, (2) Phillips Curve, (3) Expectations, and (4) Internationalist. Let me briefly describe and comment on...

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The St. Louis Fed’s Macroeconomic Outlook

St. Louis Fed president James Bullard recently gave this speech on the U.S. macroeconomic outlook. The key themes of his talk were:The U.S. economy has converged to a low-growth, low-safe-real-interest-rate regime, a situation that is unlikely to change dramatically over the near future; The Fed can afford to take a wait-and-see posture in regard to possible changes in U.S. fiscal and regulatory policies; The U.S. policy rate can remain relatively low for now and that doing so is consistent...

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Sectoral and Occupational Trends in the U.S. Labor Market

The labor market is back to normal. Or so we are told. Here's the prime-age unemployment rate for the United States beginning in 1960. Above we see the familiar cyclical asymmetry, in which the unemployment rate spikes up sharply at the onset of a recession and declines gradually during the recovery. As of today, the prime-age unemployment rate is at 4%, close to its recent historical norm.  Other measures of labor market activity, however, tell a slightly different story. Here is the...

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Fiscal over monetary policy?

The Economy May Be Stuck in a Near-Zero World (Justin Wolfers).Justin does a good job describing how many economists view the role of monetary and fiscal policy in the post Great Recession world of low interest rates and low inflation. I am curious to know where I agree and disagree with what he says. So, here goes.[T]he real (inflation-adjusted) interest rate consistent with the economy operating at its full potential has fallen...from around 2.5 percent to 1 percent, or lower.I think this...

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A reply to Lawrence White

People are generally not accustomed to the idea of a central bank altering the maturity structure of outstanding government debt in a manner that might confer a financial benefit to the government (and by extension, to the citizens it represents). The purpose of my previous post was to make people aware of this possibility, using the recent experience of the Federal Reserve's quantitative easing (QE) program as an example.The gist of my story went something like this. Suppose that the Fed...

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A public finance case for keeping the Fed’s balance sheet large

Former Fed Chair Ben Bernanke recently asked a question concerning the optimal long-run size of the Fed's balance sheet (Should the Fed keep its balance sheet large?). Bernanke comes down on the side of "keeping the balance sheet close to its current size in the long run." While he does not explicitly say how "size" is defined, I think it's clear he means the size of the balance sheet measured relative to the size of the economy (say, as measured by nominal GDP). According to this measure...

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Can the blockchain kill fake news?

Bloomberg View columnist Megan McArdle has an interesting article on fake news: Fact-Checking's Infinite Regress Problem. Fake news constitutes blocks of information fabricated either wholly or in part from falsehoods to serve a political end. It is an act of commission, as opposed to a related act of omission: reporting blocks of true information chosen selectively to serve a political end. A natural response to the problem of fake news is the emergence of fact-checkers. But on what...

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