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Working Paper
Banking panics and deflation in dynamic general equilibrium
This paper develops a framework to study the interaction between banking, price dynamics, and monetary policy. Deposit contracts are written in nominal terms: if prices unexpectedly fall, the real value of banks' existing obligations increases. Banks default, panics precipitate, economic activity declines. If banks default, aggregate demand for cash increases because financial intermediation provided by banks disappears. When money supply is unchanged, the price level drops, thereby providing incentives for banks to default. Active monetary policy prevents banks from failing and output from ...
Working Paper
Mark Carlson’s The Young Fed: A Review Essay
Journal Article
Monetary policy in the United States: a brave new world?
This article is a reflection on monetary policy in the United States during Ben Bernanke?s two terms as Chairman of the Federal Open Market Committee, from 2006 to 2014. Inflation targeting, policy during the financial crisis, and post-crisis monetary policy (forward guidance and quantitative easing) are discussed and evaluated.
Journal Article
When Tight Is Too Tight: The Federal Reserve’s Response to the Post-World War II Spike in Inflation
With the end of World War II, the massive expansion of defense spending came to a halt, and the money supply financing it quickly stabilized. However, the real money supply declined further with the transitory inflationary upswing of 1946–47, which fueled deflationary expectations, passively pushing up real interest rates and triggering the 1949 recession. We compare the Fed’s current stance to this historical episode, concluding that the ongoing tightening is already sufficient to normalize monetary conditions to prepandemic trends. This article also discusses how fiscal policy might ...
Working Paper
The Anatomy of Single-Digit Inflation in the 1960s
Recently, the experience of the 1960s—when the U.S. inflation rate rose rapidly and persistently over a comparatively short period—has been invoked as a cautionary tale for the present. An analysis of this period indicates that the inflation regime that prevailed in the 1960s was different in several key regards from the one that prevailed on the eve of the pandemic. Hence, there are few useable lessons to be drawn from this experience, save that monetary policymaking remains a difficult undertaking.
Working Paper
Export-Led Decay: The Trade Channel in the Gold Standard Era
Flexible exchange rates can facilitate price adjustments that buffer macroeconomic shocks. We test this hypothesis using adjustments to the gold standard during the Great Depression. Using prices at the goods level, we estimate exchange rate pass-through and find gains in competitiveness after a depreciation. Using novel monthly data on city-level economic activity, combined with employment composition and sectoral export data, we show that American exporting cities were significantly affected by changes in bilateral exchange rates. They were negatively impacted when the UK abandoned the gold ...
Journal Article
Allan Meltzer and the Search for a Nominal Anchor
The author examines Allan Meltzer?s career in terms of the search of a nominal anchor for the U.S. Inflation targeting has provided a nominal anchor, in line with Meltzer?s view of inflation as a monetary phenomenon.
Working Paper
What drives the shadow banking system in the short and long run?
This paper analyzes how risk and other factors altered the relative use of short-term business debt funded by the shadow banking system since the early 1960s. Results indicate that the share was affected over the long-run not only by changing information and reserve requirement costs, but also by shifts in the impact of regulations on bank versus nonbank credit sources?such as Basel I in 1990 and reregulation in 2010. In the short-run, the shadow share rose when deposit interest rate ceilings were binding, the economic outlook improved, or risk premia declined, and fell when event risks ...
Working Paper
Did the Founding of the Federal Reserve Affect the Vulnerability of the Interbank System to Systemic Risk?
As a result of legal restrictions on branch banking, an extensive interbank system developed in the United States during the 19th century to facilitate interregional payments and flows of liquidity and credit. Vast sums moved through the interbank system to meet seasonal and other demands, but the system also transmitted shocks during banking panics. The Federal Reserve was established in 1914 to reduce reliance on the interbank market and correct other defects that caused banking system instability. Drawing on recent theoretical work on interbank networks, we examine how the Fed?s ...
Working Paper
Recovery of 1933
When Roosevelt abandoned the gold standard in April 1933, he converted government debt from a tax-backed claim to gold to a claim to dollars, opening the door to unbacked fiscal expansion. Roosevelt followed a state-contingent fiscal rule that ran nominal-debt-financed primary deficits until the price level rose and economic activity recovered. Theory suggests that government spending multipliers can be substantially larger when fiscal expansions are unbacked than when they are tax-backed. VAR estimates using data on "emergency" unbacked spending and "ordinary" backed spending confirm this ...