Tools of monetary policy

I just finished a new paper on current U.S. monetary policy operating procedures. Here’s the abstract:

The Federal Reserve characterizes its current policy decisions in terms of targets for the fed funds rate and the size of its balance sheet. The fed funds rate today is essentially an administered rate that is heavily influenced by regulatory arbitrage and divorced from its traditional role as a signal of liquidity in the banking system. The size of the Fed’s balance sheet is at best a very blunt instrument for influencing interest rates. In this paper I compare the current operating system with the historical U.S. system and the procedures of other central banks. I then examine strategies for transitioning from the current system to one that would give the Federal Reserve better tools with which to achieve its strategic objective of influencing inflation and output.

Here’s a link to a video of my presentation of the paper at a conference at Stanford last week.

Caligula Trump Asks Who Will Rid Me of These Troublesome Economists

I have been remiss in not bringing people’s attention to this purge. From Politico:

Economists in the Agriculture Department’s research branch say the Trump administration is retaliating against them for publishing reports that shed negative light on White House policies, spurring an exodus that included six of them quitting the department on a single day in late April.

If you do not see a pattern in the bullying of Census, the extreme nontransparency of rules at BIS (Bureau of Industry and Security), and the attempt at Board-stuffing at the Fed, then you are blind.

A Re-Run: “Who Will Relent – Xi or Trump? On Actual and Perceived Payoff Matrices”

“Re-run” is an archaic phrase from my generation. It means to replay a previously recorded and broadcast television show. Here, this “rerun” seems appropos. I think that the cost to Xi of backing down is even greater given Trump’s tariff threat came close to the day of the 100th Anniversary of the May 4th Movement — a sensitive occasion for the CCP. From an August 2018 post.

Notable differences. US GDP fundamentals less robust than in August. Chinese growth fundamentals (in the short run) are stronger. Remember this despite the fact that that Liu He is joining the negotiating team coming to Washington, D.C.

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If Campbell Harvey’s Specification Is Right, We’re (Still) in Trouble

Robust GDP growth, employment rising on pace, perceived recession risk declining… as in this headline. The latest issue of the Economist has an article entitled Fears of recession have faded. But I’m reminded that Campbell Harvey, who wrote early papers on the subject of yield curve predictors, relies on the 5yr-3mo spread (for growth, not recession). And that implied specification signals 44% probability of recession in 2020M04.

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Winning: US Agriculture Edition

Figure 1: Real proprietor farm income with inventory valuation adjustment and capital consumption allowance (dark blue), and 4 quarter trailing moving average (red), both in billions of Ch.2012$, SAAR. Deflated using GDP deflator. Source: BEA 2019Q1 advance release, and author’s calculations. 

Demented Things People Write

From reader JBH today:

Trump may well be Patton reincarnated as he was born ½ earth revolution after Patton nearly to the day. Enemies of America off balance and greatly confused by Trump’s classic Art of War style. Massive infrastructure rebuilding project coming. Trump will build that… along with the Wall.

I have seen this abbreviation “TDS” for “Trump Derangement Syndrome”. I’ll just say seems like plenty of people have just plain “DS”.

This is by way of alerting readers to the following: I will not censor any comments on reincarnation, George S. Patton, and sealed indictments. However, comments giving credence to Q-anon, racist jokes and misogynistic observations, and arguments that there were indeed “fine people on both sides” of the Charlottesville protests of 2017 will be censored.