Category: Economics
The Fed and nominal GDP and income targets
I have been off the grid of late so I have limited blogging capacity. But I still wanted to present a different perspective on monetary policy here for a second given the recent Fed move to permanent zero. First, I should say that my view is that monetary policy is a blunt instrument and that low nominal rates lead to resource misallocation. However, with fiscal policy off the table in the US and Europe, what is the monetary agent to do? Post credit-crisis tight money and tight fiscal leads to depression. David Beckworth, an economics professor and blogger at “Macro and Other Market Musings”, argues the monetary agent needs to be accommodative by targeting nominal GDP and nominal income. What does that mean? I asked him to explain. Here’s what he wrote me
What About Currency Revulsion?
The normal case—let us say, in the US or the UK or Japan—is that anything for sale is for sale in the domestic currency. These sovereign governments never find that they cannot buy something by issuing their own currency. However, the situation can be different in developing nations in which foreign currencies might be preferred for “private” transactions (payments that do not involve the sovereign)
What is pro-cyclicality?
Procyclicality is fine for states as a constraint despite how they exacerbate the swings in the business cycle, creating deadweight losses. The federal government can always counter this pro-cyclicality and smooth out the cycle. This is one of the structural flaws of the euro zone; there is no federal agent to do this, and, thus, the business cycle will invariably be volatile
How credit crisis revealed weakness in US approach to epidemic of fraud
This column addresses the high price paid by the President’s Council of Economic Advisors’ failure to read Akerlof & Romer
Taxes Drive Money
The government is then able to issue a currency that is also denominated in the same money of account, so long as it accepts that currency in tax payment. It is not necessary to “back” the currency with precious metal, nor is it necessary to enforce legal tender laws that require acceptance of the national currency. For example, rather than engraving the statement “This note is legal tender for all debts, public and private”, all the sovereign government needs to do is to promise “This note will be accepted in tax payment” in order to ensure general acceptability domestically and even abroad
Why Italy and why not Japan?
At the weekend, I saw three articles asking essentially the same question about sovereign debt crisis contagion: why Italy and why not Japan (the US or Germany)? Here’s my answer
Why would anyone accept a ‘fiat’ currency?
There is, and historically has been, some confusion surrounding sovereign currency. So, many policy makers and economists have had trouble understanding why the private sector would accept currency issued by government as it makes purchases. This column dicusses some historical reasons given for doing so and the flaws in those analyses
How does fiscal consolidation affect the economy?
The research presented below from the IMF from October 2010 “finds that fiscal consolidation typically reduces output and raises unemployment in the short term. At the same time, interest rate cuts, a fall in the value of the currency, and a rise in net exports usually soften the contractionary impact.”
The Federal Reserve is a political organization
The Fed could do a number of things: rate easing, municipal easing, inflation targeting, nominal GDP targeting. It is just that “the forward-looking cost-benefit analysis has shifted away from the potential benefits and towards greater costs and risk” of more monetary stimulus. Unfortunately with fiscal policy also tightening, that spells economic weakness
How I think about the debt ceiling issue
I do not take the position that other writers on this blog do that Social Security and Medicare must be protected at all costs. In fact, as you can see above, I outlined very clearly two years ago what is happening politically right now. Let me give a more nuanced approach to this subject though
What is a sovereign currency
By L. Randall Wray This post appeared as the sixth blog post in a series on Modern Money at New Economic Perspectives. In recent weeks we have examined in some detail the three balances approach developed largely by Wynne Godley. In some sense all of that is preliminary to examining the nature of modern money.