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Tag Archives: financial markets

Inversion!

Of the 10yr-3mo spread. Source: Bloomberg. For context, see what has happened each time an inversion of 10yr-3mo has occurred. Figure 1: 10 year-3 month Treasury term spread (blue), 10 year-2 year Treasury term spread (red), March 2019 observations for 3/22 noon, all in %. Three month rate is secondary market. NBER defined recession dates shaded gray. Source: Federal Reserve via FRED, Reuters, NBER and author’s calculations.  For the implications, see Chinn and Kucko (2015). See also Klein...

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MMT for the ADD

I’ve written up a draft set of notes for my undergraduate macro students. Here is my interpretation of Modern Monetary Theory for them. Comments welcome. This post is for those who are unable to read an entire completely verbal exposition regarding Modern Monetary Theory (MMT). MMT has been the source of some debate recently. Instead of critiquing the literature, I attempt to illustrate the approaches for “paleo-Keynesians” relying on Wray (2011), Bell (1998), and the interpretations by...

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“Unconventional” Fiscal Policies

This commentary discusses heterodox fiscal policies that can be considered when use of conventional tools is precluded. Until the eruption of the Global Financial Crisis, macroeconomists agreed that fiscal policy was essentially unsuitable to manage aggregate demand and thus assigned to monetary policy the role to stabilize the business cycle (Bean et al 2010). The reasons invoked for rejecting fiscal policy as a stabilization tool typically included implementation lags, larger permanent...

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“International Spillovers of Monetary Policy: Conventional Policy vs. Quantitative Easing”

That’s the title of a fascinating new paper with important policy implications. This paper evaluates the popular view that quantitative easing exerts greater international spillovers than conventional monetary policies. We employ a novel approach to compare the international spillovers of conventional and balance sheet policies undertaken by the Federal Reserve. In principle, conventional monetary policy affects bond yields and financial conditions by affecting the expected path of short...

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“A Third of a Century of Currency Expectations Data: The Carry Trade and the Risk Premium”

That’s the title of a new paper, coauthored with Jeffrey Frankel, using data extending back to August 1986. For four decades economists have been finding that the forward discount is a very biased forecast of future changes in the exchange rate. The carry trade makes money, on average. For just as long, they have been debating the appropriate interpretation of the bias. Is it evidence of an exchange risk premium? Under that interpretation, a currency that sells at a forward discount does...

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Happy New Year!

Figure 1: Baker Bloom and Davis Economic Policy Uncertainty index, centered 7 day moving average (gray, left scale), and ten year – three month Treasury spread, % (blue, right scale) and ten year – two year spread, % (red, right scale). Source: policyuncertainty.com, FRED and author’s calculations.

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Perspective on the stock market

Some people are getting a little spooked by recent stock market movements. Here I offer a few thoughts. Although there has been a dramatic drop in the S&P500 since October, the market had been up pretty significantly from the start of the year up to that point. As of Friday, the net change between the start of the year and now has been inconsequential. Cumulative change since start of year of U.S. S&P 500 (green), Shanghai composite (blue) and German DAX (purple). Source Yahoo...

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Who Could’ve Known “Crash Brexit” Would Be Problematic?

In the aftermath of the Salzburg summit, where the Chequers plan was dismissed by the EU, and PM May demanded “respect”, the pound has plunged. Source: TradingEconomics.com. Deutsche Bank (Harvey, et al., “Deep impact: DB forecasts in a crash Brexit”) yesterday lays out why: In our analysis, we calculate that UK growth will be around 4% cumulatively lower than under our baseline scenario by end-2020. The UK will enter a two year recession, with output shrinking -0.3% and -0.6% in 2019 and...

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