Search Results
Conference Paper
Losing our marbles in the new century?: the great rebalancing in historical perspective
We focus on the two eras of globalization: then (the period 1870 to 1913) and now (the period since the 1970s). We look at the special position in the global macroeconomy of the hegemons in each era: Britain then, and the United States now. And adducing historical data to match what we know from the contemporary record, we proceed in the tradition of New Comparative Economic History to see what lessons the past might have for the present.
Working Paper
Macrofinancial History and the New Business Cycle Facts
In advanced economies, a century-long near-stable ratio of credit to GDP gave way to rapid financialization and surging leverage in the last forty years. This ?financial hockey stick? coincides with shifts in foundational macroeconomic relationships beyond the widely-noted return of macroeconomic fragility and crisis risk. Leverage is correlated with central business cycle moments, which we can document thanks to a decade-long international and historical data collection effort. More financialized economies exhibit somewhat less real volatility, but also lower growth, more tail risk, as well ...
Working Paper
Productivity, Tradability, and the Long-Run Price Puzzle
Long-run cross-country price data exhibit a puzzle. Today, richer countries exhibit higher price levels than poorer countries, a stylized fact usually attributed to the "Balassa-Samuelson" effect. But looking back fifty years, or more, this effect virtually disappears from the data. What is often assumed to be a universal property is actually quite specific to recent times. What might explain this historical pattern? We adopt a framework where goods are differentiated by tradability and productivity. A model with monopolistic competition, a continuum-of-goods, and endogenous tradability ...
Working Paper
Betting the House
Is there a link between loose monetary conditions, credit growth, house price booms, and financial instability? This paper analyzes the role of interest rates and credit in driving house price booms and busts with data spanning 140 years of modern economic history in the advanced economies. We exploit the implications of the macroeconomic policy trilemma to identify exogenous variation in monetary conditions: countries with fixed exchange regimes often see fluctuations in short-term interest rates unrelated to home economic conditions. We use novel instrumental variable local projection ...
Working Paper
Global Financial Cycles and Risk Premiums
This paper studies the synchronization of financial cycles across 17 advanced economies over the past 150 years. The comovement in credit, house prices, and equity prices has reached historical highs in the past three decades. The sharp increase in the comovement of global equity markets is particularly notable. We demonstrate that fluctuations in risk premiums, and not risk-free rates and dividends, account for a large part of the observed equity price synchronization after 1990. We also show that U.S. monetary policy has come to play an important role as a source of fluctuations in risk ...
Working Paper
Asset Prices and Credit with Diagnostic Expectations
Using long-run cross-country panel data, we document that (i) contemporaneous credit growth strongly predicts contemporaneous equity returns with positive sign, and (ii) lagged credit growth strongly predicts contemporaneous equity returns with negative sign. This correlation reversal is robust to added controls for contemporaneous and lagged consumption growth and these credit factors have greater explanatory power than the consumption factors. We find that a general equilibrium model with financial frictions and rational expectations fails to match the empirically estimated sign on ...
Journal Article
Private credit and public debt in financial crises
Recovery from a recession triggered by a financial crisis is greatly influenced by the government?s fiscal position. A financial crisis puts considerable stress on the government?s budget, sometimes triggering attacks on public debt. Historical analysis shows that a private credit boom raises the odds of a financial crisis. Entering such a crisis with a swollen public debt may limit the government?s ability to respond and can result in a considerably slower recovery.
Working Paper
State-Dependent Local Projections: Understanding Impulse Response Heterogeneity
An impulse response is the dynamic average effect of an intervention across horizons. We use the well-known Kitagawa-Blinder-Oaxaca decomposition to explore a response’s heterogeneity over time and over states of the economy. This can be implemented with a simple extension to the usual local projection specification that nevertheless keeps the model linear in parameters. Using our new decomposition-based approach, we show how to unpack heterogeneity in the fiscal multiplier, an object that at any point in time may depend on a number of potentially correlated factors, including existing ...
Working Paper
The Long-Run Effects of Monetary Policy
Is the effect of monetary policy on the productive capacity of the economy long lived? Yes, in fact we find such impacts are significant and last for over a decade based on: (1) merged data from two new international historical databases; (2) identification of exogenous monetary policy using the macroeconomic trilemma; and (3) improved econometric methods. Notably, the capital stock and total factor productivity (TFP) exhibit hysteresis, but labor does not. Money is non-neutral for a much longer period of time than is customarily assumed. A New Keynesian model with endogenous TFP growth can ...
Journal Article
Monetary Policy Medicine: Large Effects from Small Doses?
If inflation increases rapidly, how do we know that higher interest rates will bring prices under control? And how do we know how much of the monetary ?medicine? to administer? Economics relies primarily on observational data to answer such questions, while medical research uses randomized controlled trials to evaluate treatments. Applying that method to economics, the long history of international finance turns out to be an excellent laboratory to conduct monetary experiments. These experiments suggest that interest rates have sizable effects on the economy.