Tag Archives: John Cochrane

One more time for the world: There is no simple relationship (if any) between Taylor-rule coefficients and policy preferences

The lack of a relationship between the size of the coefficients in a Taylor rule for monetary policy conduct and the underlying preferences for stabilization of macroeconomic goals is well known. I often have it as a check subject in my exams in monetary economics. When I present the result to students first time—it is fleshed out in Lars Svensson’s “Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets” (European Economic Review 41, 1997, 1111-1141) for a simple backward-looking IS/AS model—I often state that many tend to overlook this, and that it is a common misconception that, e.g., a relatively high coefficient on the output gap in the rule indicates a … Continue reading

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US Output Gap: Still negative

John Taylor recently showed how the United States is currently much farther away from returning to “potential output” compared with the recession of the early 1980s, where above-average output growth during the recovery secured a return to the potential output path. Apart from the obvious implications for the evaluation of the current US recovery, this has led to a deeper discussion about the dangers of extrapolating “potential” output from past values (e.g., maybe the 2007 value was just too high?). James Bullard of St. Louis Fed argues (pdf of speech) that the financial crisis lead to a very persistent negative wealth shock that has pushed potential output down. Hence, the … Continue reading

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New-Keynesian explosions: The Cochrane interpretation and explosive solution

John Cochrane has some interesting comments on New Keynesian economics in his latest blog post on “New Keynesian Stimulus“. The interesting is not the part of the blog-literature to which it also contributes; the part about mudslinging in fiscal stimulus discussions, about which prominent economist got basic theory wrong, about who is acting most disrespectful and whatnot. I.e., the extremely counterproductive style of “debate” that was basically initiated by he-who-shall-go-unmentioned for once. I normally find that Cochrane behaves quite academic and adhere to scientific arguments (which is not entirely unfair given that he is a professor of economics), but even he has to defend himself every once in a while, … Continue reading

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John Cochrane on QE2

I have previously mentioned John Cochrane on this blog as a good example of an economist who insists on using sound academic arguments in even the most heated debates. That this does not imply death by boredom, he shows in a recent commentary on quantitative easing at bloomberg.com : “Is QE2 a Savior, Inflator, or a Dud?: Business Class“. Ben Bernanke said the following about QE2 in March 2011: “Yields on 5- to 10-year nominal Treasury securities initially declined markedly as markets priced in prospective Fed purchases; these yields subsequently rose, however, as investors became more optimistic about economic growth and as traders scaled back their expectations of future securities … Continue reading

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The Fiscal Multiplier Wrestling Marathon

Welcome to the academic wrestling match of the recent years. In the left corner, Paul Krugman (with assistance from Bradford DeLong)! In the right corner, John Cochrane (with assistance from Eugene Fama)! They will fight over the size of the Fiscal Multiplier in a match where any trick may, can, and will be used. Both are heavyweights in the economics profession with one of them even with a Nobel Prize to his credit! This is a match not to miss. Well, this is actually not funny at all. But one of the most important questions in macroeconomics, how effective is expansionary fiscal policy in a recession, have recently been subject … Continue reading

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