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Research

Monetary Policy as a Carry Trade

Marvin Goodfriend | SOMC | October 31, 2014

Quantitative monetary policy at the zero interest bound should be understood as a “bond market carry trade.” Net interest earnings on the front end of the monetary carry trade should be retained—to guard against the central bank having to create reserves (or borrow) to pay interest on reserves or managed liabilities on the back end, and to show that interest expenses are paid for in large part by earnings from the front end. In the United States, the Federal Reserve balance sheet reflects the front end of a carry trade in that by the end of 2014.

Bitcoin Issues

Bennett T. McCallum | SOMC | October 31, 2014

The appearance of the Bitcoin system, which offers a radically new type of asset that is intended to be used not only as an investment but also as a medium of exchange—and whose operation lies entirely outside the domain of the Federal Reserve—is an extremely interesting recent development in the area of monetary institutions. As matters stand now, the quantitative magnitude of Bitcoin is extremely small in comparison with traditional assets. It must be said, nevertheless, that the development of the system reflects an extremely impressive intellectual achievement. 

Can We Trust the Fed?

Gregory D. Hess | SOMC | October 31, 2014

“In God We Trust” was first emblazoned on U.S. paper currency in 1957, and was steadily introduced to all U.S. paper currency by August of 1966.   How has this demonstrative, articulated trust in God underpinned the value of our currency? Trust in God, sadly it seems, has led to an over two-fold increase in the rate of deterioration in the value of our currency. Trust in God alone has not preserved the value of our currency – so in the spirit that we “render unto Caesar that which is Caeser’s” , trust in the Fed is likely more important to underpin the value of a dollar.

Federal Reserve Credibility and Reputation in Historical Perspective

Michael D. Bordo | SOMC | October 31, 2014

The Federal Reserve and many other central banks have achieved remarkable credibility in the two decades preceding the financial crisis of 2007-2008. However, the recent financial crisis and the call for central bankers to focus more on financial stability and especially the tools of macro prudential regulation may pose significant challenges for central banks to preserve their credibility in the future.

The Classical Theory of Inflation and Its Uses Today

Peter Ireland | SOMC | October 31, 2014

The classical theory of inflation attributes sustained price inflation to excessive growth in the quantity of money in circulation. For this reason, the classical theory is sometimes called the “quantity theory of money,” even though it is a theory of inflation, not a theory of money. More specifically, the classical theory of inflation explains how the aggregate price level gets determined through the interaction between money supply and money demand. 

Phony Deflation Worries

Charles W. Calomiris | SOMC | October 31, 2014

These days deflation risk is a concern that many central bankers, pundits, and journalists voice regularly.  Concern may be the wrong word; it might be better called an obsession. Central bankers – we are told – must battle deflation risk today at all costs because deflation slows growth, and may cause recessions and financial system collapses. As I will show in this essay, the economic risks associated with disinflation or deflation are being exaggerated by central bankers and others. 

Rate Hike Fears are Unwarranted

Mickey D. Levy | SOMC | October 31, 2014

How often have we heard the phrase “if the Fed hikes rates too early, the economic recovery will be derailed”?  It’s ingrained into the Fed’s mindset and statements like it appear frequently in the media.  Yet the history of Fed rate hikes during prior economic expansions suggest that such fears are unwarranted, and the current 5 ½ year old expansion is on sound footing and would fare just fine and even be enhanced if the Fed began hiking rates.  Normalizing interest rates should be welcomed, not feared by the Fed.

http://www.manhattan-institute.org/pdf/e21_01.pdf

Inequality Does Not Reduce Prosperity: A Compilation of the Evidence Across Countries

Scott Winship | October 29, 2014

My findings cast doubt on claims that rising inequality is responsible for slowed income growth in America—and they suggest that attempts to reduce income inequality, in the U.S. and elsewhere, may not produce higher living standards among the poor and the middle class.

http://www.economics21.org/files/pdf/Nothing%20Unpatriotic%20About%20Doughnuts%20to%20Dollars.pdf

Nothing Unpatriotic About Doughnuts to Dollars

Diana Furchtgott-Roth | Tax Analysts | September 15, 2014

Obama can threaten corporations ad infinitum, but he can only stop inversions by encouraging Congress to reform the code so that U.S. multinationals have the same tax and investment advantages as foreign ones. By inverting, corporations are only acting in their best interests and in the interests of their shareholders, and they should be praised for doing that.

http://www.economics21.org/files/pdfs/JEC.NaturalGasExports062414.pdf

The Benefits of Natural Gas Exports

Diana Furchtgott-Roth | June 24, 2014

Honorable Members of Congress, you could immediately assist Ukraine and other countries by amending the Natural Gas Act to ensure that the Energy Department approves LNG export applications within a short period of time. 

You could also pass legislation allowing LNG to be exported to all World Trade Organization members, irrespective of whether they have free trade agreements with the United States. You could go still further, and cease to require approval for LNG exports.

http://www.economics21.org/files/pdfs/JEC.WorkingWomen.061814.pdf

Testimony before the Joint Economic Committee: Empowerment in the Workplace

Diana Furchtgott-Roth | June 18, 2014

Employment for women 16 years and older only reached December 2007 levels (68 million) in January of this year. The slow growth of the economy is reducing employment opportunities for men and women alike. In addition, women face particular barriers to employment in their role as secondary workers and as family caregivers. It is important to make sure that labor markets are flexible so that women can have the choice of jobs that they want.

http://www.economics21.org/files/e21ib_1.pdf

Income Inequality in America: Fact and Fiction

e21 | June 4, 2014

The presence of—and, in some countries, increase in—household income inequality has become a flash point in public policy and political discussion. 

For Winston Churchill, such inequality was an unavoidable part of economic life in capitalist societies. “The main vice of capitalism,” remarked the British Prime Minister, “is the uneven distribution of prosperity. The main vice of socialism is the even distribution of misery.”

But for President Barack Obama, income equality is not only a pressing problem, it is "the defining challenge of our time." Against this backdrop, e21 brought together leading economists to provide a primer on ways to think about income inequality. 

The Financial Times Is Blowing Piketty's Data Issues Out Of Proportion, Part One

Scott Winship | May 28, 2014

This article originally appeared in Forbes on May 28, 2014.

On Friday, the Financial Times published allegations by its economics editor Chris Giles that Thomas Piketty’s wealth inequality data in his heralded Capital in the Twenty-First Century gives a suspiciously skewed impression of trends and cross-national rankings. I will confess that I clicked on the link full of schadenfreude; I believe that Piketty’s book is irresponsibly speculative, that his inequality estimates sometimes give the wrong impression, and that his policy preferences would prove harmful to the middle class and poor in the long run.

Is Inequality Growing Out of Control?

Scott Winship | April 24, 2014

Has income concentration soared in the United States in recent decades? To ask the question is to sound like some sort of inequality truther in today’s post-Occupy world. Many believe the evidence leaves no doubt that income concentration has increased dramatically. Thomas Piketty devotes most of Part Three of his celebrated Capital in the Twenty-First Century to an examination of the inequality trendlines he and others have produced over the past fifteen years.

Making Central Banks More Resistant to Political Pressures and Fads

Charles W. Calomiris | April 14, 2014

This paper was presented April 13, 2014 at the International Monetary Fund’s Spring 2014 Meetings, in the session entitled “Can or Should Central Banks Remain Fully Independent Despite a Wider Mandate and Considerable Fiscal Pressure?”

Over the first 100 years of Federal Reserve System history, the United States enjoyed both price stability and the absence of banking crises in only about a quarter of those years. Allan Meltzer’s (2003, 2009, 2010) three volume history of the Fed (and the voluminous literature on Fed history published before and since)[1] document that two main influences explain persistent Fed failure: politicization of Fed decisions (especially to elicit Fed assistance in accomplishing short-term fiscal or electoral objectives of the Administration), and model misspecification (reflecting the limits of Fed knowledge about the economy).


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