Tag Archives: Michael Woodford

QE3 and the FED: State-contingency and commitment emphasized

Today the Board of Governors of the Federal Reserve System published its decision to start a new round of quantitative easing and a revised announcement concerning the Federal Funds rate. Both legs of this decision have some interesting new aspects that show a central bank continually trying to expand the toolbox of monetary policy, and to be honest about its limitations when acting in an uncertain world. More specifically, the Fed re-introduces purchases of mortgage-backed securities (MBS) at a rate of $40 billion per month. No end date for the purchases is specified—at the contrary, it is emphasized that it will be extended if the economy does not pick up. … Continue reading

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Temporary and Permanent Ricardian Confusion: Going Comfortably Numb

Spurred by the heated debates about the need for fiscal stimulus in the US, the issue of Ricardian Equivalence has taken center stage in the economic blogging sphere recently. While it is an impossible task to identify any exact line of events on the net (and possible also irrelevant), this round appears to have been initiated by an article by Justin Yifu Lin (pdf), Chief Economist of the World Bank, who got criticized here by a balanced Antonio Fatás. Fatás notes, among other things, that Lin’s fears that fiscal stimulus could be caught by the “Ricardian trap” (i.e., neutralized by offsetting increased private savings) are unwarranted. While Lin’s endorsement of … Continue reading

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A Credible Anti-Inflationary Central Bank Ignores Inflation

Today, the European Central Bank decided to keep its policy rate unchanged. I am not particularly surprised. In recent empirical work, Morten Aastrup and I estimate what determines the ECB’s interest-rate changes. It turns out that inflation or expectations thereof play no role. Instead, changes in economic activity as measured by Euro-area unemployment is an important determinant. Americans who cling to the idea that good monetary policymaking is characterized by an adherence to a variant of John B. Taylor’s rule that carries his name, may find this surprising. However, consistent with modern New-Keynesian theory (cf. Michael Woodford’s Interest and Prices, Princeton University Press, 2003), a credible anti-inflationary central bank can … 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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