“Governments are bigger than ever. They are also more useless”

Says The Economist. The authors argue that falling state capacity, incompetence, corruption, and transfer/entitlement spending, which crowds out public investment and services, are to blame.

Update: Related, in VoxEU, Martin Larch and Wouter van der Wielen argue that

[g]overnments lamenting a stifling effect of fiscal rules on public investment are often those that have a poor compliance record and, as a result, high debt. They tend to deviate from rules not to increase public investment but to raise other expenditure items.

The New Keynesian Model and Reality

To analyze the transmission from interest rate policies to output and inflation, many academics and central bank economists use the basic New Keynesian (NK) ‘three-equation model’ and its various extensions. A key factor responsible for the model’s success is the seeming alignment with conventional wisdom—some of the model features can be framed in the language of familiar business cycle narratives, as found in newspapers, central bank communication, or introductory macroeconomics courses. But the resemblance between model and narratives is deceptive and the framing misleading. Practitioners and journalists might think that they base their reasoning on the NK model, but typically that’s not what they do.

So, what does the NK model really say? Few writers have identified the model’s fundamental elements more clearly than Stanford’s John Cochrane. In the context of his work on the ‘Fiscal Theory of the Price Level’ (FTPL), which partly overlaps with the NK model, he has thoroughly scrutinized the latter framework and compared it to prevalent views among policy makers and commentators. His verdict is harsh. In a recent blog post he writes:

There is a Standard Doctrine, explained regularly by the Fed, other central banks, and commentators, and economics classes that don’t sweat the equations too hard: The Fed raises interest rates. Higher interest rates slowly lower spending, output, and hence employment … slowly bring down inflation … So, raising interest rates lowers inflation …

The trouble is, standard economic theory, in essentially universal use since the 1990s, including all the models used by central banks, don’t produce anything like this mechanism. We do not have a simple economic theory, vaguely compatible with current institutions, of the Standard Doctrine.

At the heart of the NK model are three equations: One that nearly all macroeconomists take seriously, another one that many consider reasonable, and a final equation that only a few would wholeheartedly endorse. The first equation is the consumption Euler equation. It represents the fundamental concept of choice in the face of scarcity, capturing substitution towards cheaper goods: When the price of apples relative to oranges falls, households consume relatively more apples. The same logic applies with respect to current and future consumption: Higher real interest rates render future relative to current consumption cheaper, i.e., higher real interest rates go hand in hand with stronger growth. Accordingly, a higher nominal interest rate is associated with a strengthening of economic activity unless it triggers an even stronger increase in inflation.

Higher real interest rates make output higher in the future than today, and so raise output growth. The best we can hope [for in terms of reconciling Standard Doctrine and Euler equation] … is to have output jump down instantly today when the interest rate rises.

The second equation, the ‘Phillips curve,’ represents firms’ price setting. It relates current as well as expected future inflation to contemporaneous output. Underlying this second equation is the assumption that firms compete against each other and try to charge a markup over cost. Price increases by other firms as well as higher production, which pushes up costs, induce firms to raise their own prices as soon as they get a chance (sticky prices). But again, this is not easy to reconcile with the ‘Standard Doctrine:’

Again the sign is “wrong.” Suppose the economy does soften, lower [production] … A softer economy means lower inflation … relative to future inflation. It means inflation rises over time. At best, perhaps we can get inflation to jump down immediately, but then inflation still rises over time. … (This is an old puzzle, pointed out by Larry Ball in 1993.)

The final, least credible equation represents an interest rate rule whose coefficients satisfy the ‘Taylor principle.’ The assumption is that the interest rate set by the central bank systematically responds to inflation (and potentially output), and strongly so. The third equation and the ‘Taylor principle’ do not bear resemblance to real-world central banking, although many central bankers and journalists talk about ‘Taylor rules,’ which is not the same as the ‘Taylor principle.’ Rather, the equation and the principle are needed for technical reasons that relate to the dynamic properties of difference equations and more specifically, the number of unstable eigenvalues and jump variables. Paired with the assumption that output and inflation eventually return to their pre-shock trends, the equation subject to the ‘Taylor principle’ forces output and inflation to jump to specific values after the system is shocked.

Cochrane rejects the interest rate rule subject to the ‘Taylor principle’ as bogus. Instead, he favors an ‘FTPL’ mechanism to pin down output and inflation after a shock. According to the ‘FTPL,’ fiscal policy makers set primary surpluses ‘actively,’ i.e., independently of inflation. Inter temporal government budget balance then implies that changes in the economic environment, for instance a change in interest rates, give rise to an equilibrating jump in the aggregate price level, so fiscal policy pins down inflation.

Obviously, I think the fiscal theory story makes a lot more sense. The Fed does not have an “equilibrium selection policy.” The Fed does not deliberately destabilize the economy. The central story of how interest rates lower inflation is that the Fed threatens to blow up the economy in order to get us to jump to a different equilibrium. If you said that out loud, you wouldn’t get invited back to Jackson Hole either, though equations of papers at Jackson Hole say it all the time. The Fed loudly announces that it will stabilize the economy — that if inflation hits 8%, the Fed will do everything in its power to bring inflation back down, not punish us with hyperinflation.

Given the weak conceptual and empirical foundations of the third equation and the ‘Taylor principle,’ Cochrane is right to dispute the conventional argument that inflation is pinned down by this very equation—the Fed’s threat to ‘blow up the economy.’ But the FTPL mechanism he favors relies on a similar threat, in this case by fiscal policy makers. With ‘active’ fiscal policy, inflation is pinned down by the inter temporal government budget balance requirement; unless inflation assumes the ‘right’ value, government debt spirals out of control.

Independently of whether you believe in the third equation of the NK model subject to the ‘Taylor principle’ or in ‘active’ fiscal policy along the lines of the ‘FTPL,’ the implications are stark:

But we don’t have to take sides on that debate, because the result is the same, and the question here is whether current models can reproduce the Standard Doctrine. When interest rates rise, we can have an instantaneous jump down in inflation, that lasts one period before inflation rises again.

But this is a long way from the Standard Doctrine. First, we still have inflation that jumps down instantly and then rises over time, where the Standard Doctrine wants inflation that slowly declines over time. That sign is still wrong.

Second, the jump occurs because, coincidentally, fiscal policy tightened at the same time. Whether that happened independently, by fiscal-monetary coordination, or because the Fed made an equilibrium-selection threat and Congress went along doesn’t matter. Without the tighter fiscal policy you don’t get the lower inflation. So this is not really the effects of monetary policy. At best it is the effect of a joint monetary and fiscal policy.

Moreover, the fiscal/equilibrium selection business is doing all the work. You can get exactly the same unexpected inflation decline (or rise) with no change in interest rate at all. …

The mechanism is also a long way from the Standard Doctrine. The decline in inflation has nothing to do with the higher interest rates. There are no higher real interest rates anyway in this story. There is a fall in aggregate demand, but it comes entirely from tighter fiscal policy, having nothing to do with higher interest rates.

Cochrane is right to argue that the NK model’s transmission from interest rates to output and inflation has fiscal consequences, which the literature typically disregards. Consider the consequences of a shock. If we insist on the third equation subject to the ‘Taylor principle,’ then the inflation jump that guarantees stable system dynamics implies a revaluation of outstanding nominal debt (if there is some), which in turn requires fiscal policy makers to adjust future primary surpluses. So, the standard model subject to the ‘Taylor principle’—the Fed’s threat to blow up the world—implies that a shock to the interest rate (a ‘monetary policy shock’) forces fiscal responses. Cochrane asks, why researchers do not pay more attention to the fiscal consequences of ‘monetary policy shocks,’ and why they interpret the output and inflation dynamics resulting from the shock as the effects of monetary rather than monetary-and-fiscal policy.

If we instead dump the third equation and replace it with the notion of ‘active’ fiscal policy, then the shock cannot change future primary surpluses. Now, the inter temporal government budget balance requirement joint with the predetermined level of nominal debt (if some is outstanding) pins down contemporaneous inflation. And according to Cochrane, the traditional output and inflation adjustment paths to the ‘monetary policy shock’ are gone.

Cochrane discusses how the problems of the NK model transcend that model—they are not a consequence of the price stickiness assumption, i.e., the ‘Phillips curve.’ Even without price stickiness, the dynamics according to the ‘Standard Doctrine’ are hard for the Euler equation and the third equation to match.

The only way to get inflation and output to decline at all is to pair the interest rate rise with a FTPL fiscal shock or a multiple-equilibrium-selection-threat by the Fed, which induces a fiscal shock. Even then, we still get inflation that jumps down and then rises, and has nothing to do with the mechanism of the Standard Doctrine. The fiscal shock or equilibrium-selection threat is still coincidental with raising interest rates, and indeed has to fight the fact that higher interest rates want to raise inflation.

Cochrane suggests long-term debt as a potential model ingredient to better align model predictions under the ‘FTPL’ approach with the data. He also speculates why the NK model has been so successful in academia and central banks in spite of its dubious mechanics:

How could this state of affairs have gone on so long, that the basic textbook model produces the opposite sign from what everyone thinks is true, for 30 years? Well, interpreting equations is hard.

This paper contains more discussion and analysis. Have a look yourself and be prepared for a new business cycle framework.

“Macroeconomics II,” Bern, Fall 2024

MA course at the University of Bern.

Time: Monday 10:15-12:00. Location: A-126 UniS. Uni Bern’s official course page. Course assistant: Stefano Corbellini.

The course introduces Master students to modern macroeconomic theory. Building on the analysis of the consumption-saving tradeoff and on concepts from general equilibrium theory, the course covers workhorse general equilibrium models of modern macroeconomics, including the representative agent framework, the overlapping generations model, and the Lucas tree model.

Lectures follow chapters 1–4 (possibly 5) in this book.

“Makroökonomie I (Macroeconomics I),” Bern, Fall 2024

BA course at the University of Bern, taught in German.

Time: Monday 14:15-16:00. Location: Audimax. Uni Bern’s official course page. Course assistant: Sally Dubach.

Course description:

Die Vorlesung vermittelt einen ersten Einblick in die moderne Makroökonomie. Sie baut auf der Veranstaltung „Einführung in die Makroökonomie“ des Einführungsstudiums auf und betont sowohl die Mikrofundierung als auch dynamische Aspekte. Das heisst, sie interpretiert makroökonomische Entwicklungen als das Ergebnis zielgerichteten individuellen (mikroökonomischen) Handelns, und sie wird der Tatsache gerecht, dass wirtschaftliche Entscheidungen Erwartungen widerspiegeln und Konsequenzen in der Zukunft haben. Der klassische Modellrahmen, der in der Vorlesung entwickelt wird, bietet die Grundlage für die Analyse von Wachstum, Konsum, Arbeitsangebot, Investitionen oder Geld- und Fiskalpolitik sowie vieler anderer Themen, die auch in anderen Veranstaltungen des BA Studiums und darüber hinaus behandelt werden.

The course closely follows Pablo Kurlat’s (2020) textbook A Course in Modern Macroeconomics (book website). Lecture notes are available here. The following sections in the lecture notes are not covered in class and are not relevant for the exam:

  • Last pages of chapter 7, starting at p. 106;
  • last pages of chapter 9, starting at p. 128;
  • chapters B and C.

“Money and Banking with Reserves and CBDC,” JF, 2024

Journal of Finance. HTML (local copy).

Abstract:

We analyze the role of retail central bank digital currency (CBDC) and reserves when banks exert deposit market power and liquidity transformation entails externalities. Optimal monetary architecture minimizes the social costs of liquidity provision and optimal monetary policy follows modified Friedman rules. Interest rates on reserves and CBDC should differ. Calibrations robustly suggest that CBDC provides liquidity more efficiently than deposits unless the central bank must refinance banks and this is very costly. Accordingly, the optimal share of CBDC in payments tends to exceed that of deposits.

A Financial System Built on Bail-Outs?

In a Wall Street Journal opinion piece and an accompanying paper and blog post, John Cochrane and Amit Seru argue that vested interests prevent change towards a simpler, better-working financial system. They describe various “bail-outs” since 2020, in the U.S. financial sector and elsewhere. They point out that in Switzerland, too, the government orchestrated takeover of Credit Suisse by UBS relied on taxpayer support. And they conclude that regulatory measures after the great financial crisis including the implementation of the Dodd-Frank act failed. Instead, Cochrane and Seru favor narrow banking (they prefer to call it “equity-financed banking and narrow deposit-taking”):

Our basic financial regulatory architecture allows a fragile and highly leveraged financial system but counts on regulators and complex rules to spot and contain risk. That basic architecture has suffered an institutional failure. And nobody has the decency to apologize, to investigate, to talk about constraining incentives, or even to promise “never again.” The institutions pat themselves on the back for saving the world. They want to expand the complex rule book with the “Basel 3 endgame” having nothing to do with recent failures, regulate a fanciful “climate risk to the financial system,” and bail out even more next time.

But the government’s ability to borrow or print money without inflation is finite, as we have recently seen. When the next crisis comes, the U.S. may simply be unable to bail out an even more fragile financial system.

The solution is straightforward. Risky bank investments must be financed by equity and long-term debt, as they are in the private credit market. Deposits must be funneled narrowly to reserves or short-term Treasurys. Then banks can’t fail or suffer runs. All of this can be done without government regulation to assess asset risk. We’ve understood this system for a century. The standard objections have been answered. The Fed could simply stop blocking run-proof institutions from emerging, as it did with its recent denial of the Narrow Bank’s request for a master account.

Dodd-Frank’s promise to end bailouts has failed. Inflation shows us that the government is near its limit to borrow or print money to fund bailouts. Fortunately, plans for a bailout-free financial system are sitting on the shelf. They need only the will to overcome the powerful interests that benefit from the current system.

Budgetary Effects of Ageing and Climate Policies in Switzerland

A report by the Federal Finance Administration anticipates lower net revenues for all levels of government.

… demographic-related expenditure will increase from 17.2% of gross domestic product (GDP) to 19.8% of GDP by 2060. If no reforms are made, public debt would rise from the current 27% to 48% of GDP. The need for reform is particularly pronounced at federal (including social security) and cantonal level. While AHV expenditure in particular poses a challenge for the Confederation, especially after the adoption of the popular initiative for a 13th AHV pension payment, cantonal finances are coming under greater pressure, particularly in terms of healthcare expenditure.

… the path to net zero will primarily place a financial burden on the federal government and the social security funds. This is because climate protection measures dampen economic growth and thus also the growth in public receipts. The electrification of the transport sector will also lead to a loss of revenue from mineral oil tax and the performance-related heavy vehicle charge (LSVA). However, the study assumes that these can be offset by replacement levies. Greater use of subsidies in the climate policy will further increase the pressure on public finances. In 2060, depending on the policy scenario, the general government debt ratio would be 8% to 11% higher than without climate protection measures. Although no robust international or Swiss estimates are yet available, scientists agree that the costs of climate change for public finances will be significantly higher than the costs of climate protection measures.

SNB Annual Report

The SNB has published its annual report. Some highlights from the summary:

Climate risks and adjustments to climate policy can trigger or amplify market fluctuations and influence the attractiveness of investments. From an investment perspective, such risks are essentially no different from other financial risks. The SNB manages the risks to its investments by means of its diversification strategy. …

A prerequisite for illiquid assets to be used as collateral in obtaining liquidity assistance is that a valid and enforceable security interest in favour of the SNB can be established on these assets. Otherwise, should the loan not be repaid, the SNB would be unable to realise the collateral. A decisive factor for the usability of assets is that the banks have made the necessary preparations. …

The crisis at Credit Suisse highlighted weaknesses in the regulatory framework. Banks’ resilience and their resolvability in a crisis should therefore be strengthened. At the same time, the current ‘too big to fail’ (TBTF) regulations should be reviewed to ensure that they take adequate account of the systemic importance of individual banks. In particular, the SNB recognises a need for action in the areas of early intervention, capital and liquidity requirements, and resolution planning. It is participating at both national and international level in the ongoing debate about regulatory adjustments.

In 2023, the SNB presented its ‘Liquidity against Mortgage Collateral’ (LAMC) initiative to the public. Banks of all sizes can find themselves in a situation where they need significant amounts of liquidity quickly despite having precautions in place that comply with regulations. The aim of the LAMC initiative is to ensure that, should the need arise, the SNB will in future be able to provide liquidity against mortgage collateral to all banks in Switzerland that have made the requisite preparations. This possibility was already available to systemically important banks. Preparatory work for this initiative started in 2019. …

Employees from the BIS and the SNB continued their research activities at the BIS Innovation Hub Swiss Centre. Work focused on technologies for tokenising assets and on the analysis of large volumes of data. …

At the invitation of the Indian G20 presidency, Switzerland again participated in the Finance Track in 2023. In this forum, the SNB emphasised the importance of pursuing a monetary policy geared towards price stability and contributed its analyses of central bank digital currency and payment systems. …

The SNB introduced a new current account survey in order to better record the global production of multinational enterprises whose production and trade processes are distributed across various countries in Switzerland’s balance of payments statistics.

Banks and Privacy, U.S. vs Canada

JP Koning writes:

An interesting side point here is that Canadians don’t forfeit their privacy rights by giving up their personal information to third-parties, like banks. We have a reasonable expectation of privacy with respect to the information we give to our bank, and thus our bank account information is afforded a degree of protection under Section 8 of the Charter.

My American readers may find this latter feature odd, given that U.S. law stipulates the opposite, that Americans have no reasonable expectation of privacy in the information they provide to third parties, including banks, and thus one’s personal bank account information isn’t extended the U.S. Constitution’s search and seizure protections. This is known as the third-party doctrine, and it doesn’t extend north of the border.

“Topics in Macroeconomics,” Bern, Spring 2024

BA course at the University of Bern.

Time: Monday, 10:15–12:00. Location: H4, 115. Uni Bern’s official course page.

The course targets students who have completed their mandatory training in microeconomics, macroeconomics and mathematics and who want to make use of macroeconomic theory in order to analyze questions related to asset prices, bubbles, government debt, or the link between fiscal and monetary policy. The grade may depend on participation in class; small group projects; and/or a written exam.

“Fiscal and Monetary Policies,” Bern, Spring 2024

MA course at the University of Bern.

Lecture: Monday, 12.15 – 14.00, UniS A027.
Session: Tuesday, 12.15 – 14.00, UniS A017, on 5 Mar, 19 Mar, 26 Mar, 16 Apr, 30 Apr, 14 May. Some lecture and session dates may be swapped.

Uni Bern’s official course page. Problem sets and solutions can be found here.

The course covers macroeconomic theories of fiscal policy (including tax and debt policy) and the interaction between fiscal and monetary policy. Participants should be familiar with the material covered in the course Macroeconomics II. The course grade reflects the final exam grade. The classes follow selected chapters in the textbook Macroeconomic Analysis (MIT Press, 2019) and build on the material covered in the Macroeconomics II course, which follows the same text.

Main contents:

  1. Concepts.
  2. RA model with government spending and taxes.
  3. Government debt in RA model.
  4. Government debt and social security in OLG model.
  5. Neutrality results.
  6. Consolidated government budget constraint.
  7. Fiscal effects on inflation. Game of chicken.
  8. FTPL. Active and passive policies.
  9. Tax smoothing.
  10. Time consistent policy.
  11. Sovereign debt.

“Augenwischerei um SNB-Ausschüttungen (Misconceptions about SNB Distributions),” NZZ, 2024

Neue Zürcher Zeitung, January 25, 2024. PDF. HTML.

Kritik an der Höhe der SNB-Ausschüttungen ist somit nur gerechtfertigt, wenn die Finanzverantwortlichen von Bund und Kantonen die genannten Hebel nicht in Bewegung setzen können. Einer solchen Kritik muss sich die SNB stellen. Sie hat die Kompetenz, ihre Bilanz nach geldpolitischen Erfordernissen zu gestalten, aber eine mechanische Rückstellungspolitik entspricht diesem Erfordernis kaum. Die SNB sollte daher begründen, warum eine stabilitätsorientierte Politik vor dem Hintergrund der geldpolitischen Analyse und plausibler Szenarien die gewählte Bilanzstruktur und Rückstellungspolitik erfordert.

Ebenso wichtig ist ein Perspektivenwechsel in der politischen Diskussion. Mehr Interesse als SNB-Ausschüttungen verdienen das Nettovermögen von Bund und Kantonen sowie der Einfluss des SNB-Jahresergebnisses darauf. Ausserdem sollten sich Bund und Kantone darum bemühen, ihre Budgets aus eigener Kraft von schwankenden SNB-Ausschüttungen zu entkoppeln.

Alle Beteiligten sollten sich bewusst sein, dass eine Änderung der Regelungen für SNB-Ausschüttungen alle paar Jahre kein gutes Licht auf die Solidität dieser Regeln und auf die beteiligten Institutionen wirft.

Bank of England CBDC Academic Advisory Group

The Bank of England and HM Treasury have formed a CBDC Academic Advisory Group (AAG).

The AAG will bring together a diverse, multi-disciplinary group of experts to encourage academic research, debate and promote discussion on a range of topics, to support the Bank and HM Treasury’s work during the design phase of a digital pound.

Members:

Alexander Edmund Voorhoeve Professor of Philosophy London School of Economics
Alistair Milne Professor of Financial Economics Loughborough University
Andrew Theo Levin Professor of Economics Dartmouth College
Anna Omarini Tenured Researcher and an Adjunct Professor in Financial Markets and Institutions Bocconi University
Bill Buchanan Professor of Computing Edinburgh Napier University
Burcu Yüksel Ripley Senior Lecturer of Law University of Aberdeen
Danae Stanton Fraser Professor in Human Computer interaction, CREATE Lab University of Bath
Darren Duxbury Professor of Finance Newcastle University
David Robert Skeie Professor of Finance University of Warwick
Davide Romelli Associate Professor in Economics Trinity College Dublin
Dirk Niepelt Professor of Macroeconomics University of Bern & CEPR
Doh-Shin Jeon Professor of Economics Toulouse School of Economics
Gbenga Ibikunle Professor and Chair of Finance University of Edinburgh
Iwa Salami Reader (Associate Professor) in Law and Director, Centre of Fintech University of East London
Jonathan Michie Pro-Vice-Chancellor and Professor of Innovation & Knowledge Exchange Kellogg College, University of Oxford
Marta F. Arroyabe Reader & Deputy Head of Group University of Essex
Michael Cusumano Deputy Dean and Professor of Management Sloan School of Management, MIT
Pinar Ozcan Professor of Entrepreneurship and innovation Said Business School, University of Oxford
Sheri Marina Markose Professor of Economics University of Essex

Conference on “The Macroeconomic Implications of Central Bank Digital Currencies,” CEPR/ECB, 2023

Conference jointly organized by CEPR’s RPN FinTech & Digital Currencies and the European Central Bank. Welcome speech by Piero Cippolone, keynote by Fabio Panetta.

Organizers: Toni Ahnert, Katrin Assenmacher, Massimo Ferrari Minesso, Peter Hoffmann, Arnaud Mehl, Dirk Niepelt.

CEPR’s conference website. ECB’s website with videos. Website with pictures.

Panel on “The Economics of CBDC,” Riksbank, 2023

Panel at the Bank of Canada/Riksbank Conference on the Economics of CBDC, November 16, 2023. Video.

Fed Governor Christopher Waller, UCSB professor Rod Garratt and myself assess the case for central bank digital currency and stable coins and respond to excellent questions from the audience.

“Retail CBDC and the Social Costs of Liquidity Provision,” VoxEU, 2023

VoxEU, September 27, 2023. HTML.

From the conclusions:

… it is critical to account for indirect in addition to direct social costs and benefits when ranking monetary architectures.

… the costs and benefits we consider point to an important role of central bank digital currency in an optimal monetary architecture unless pass-through funding is necessary to stabilise capital investment and very costly.

… the interest rate on CBDC should differ from zero and from the rate on reserves.

From the text:

Notes: The dark grey area represents the efficiency advantage of CBDC needed to make it less costly than a two-tier system with optimum reserve holdings. The light grey area displays the same object but based on actual US reserve holdings rather than model-implied optimal ones. These distributions allow for pass-through costs and tax distortions, quantified by assuming taxing households causes deadweight burdens of 25% per tax dollar. The distributions are based on two million realisations.

Central Bank Balance Sheets, LOLR Safety Nets, and Moral Hazard

Niall Ferguson, Martin Kornejew, Paul Schmelzing and Moritz Schularick in CEPR dp 17858:

From the introduction:

… time and again, central banks deployed their power to create liquidity in a bid to insulate economies from disasters. … first began to be linked to geopolitical tail events during the 17th and 18th centuries – occurring with increasing regularity during wars and revolutions –, … the context of central bank liquidity support gradually but consistently shifted towards financial crises: … central banks’ sensitivity to financial crises has risen sharply over the 20th century and increasingly became a systematic response to financial distress after the Great Depression. …

… central bank liquidity support systematically cushioned economic effects of financial crises throughout modern history of advanced economies. …

Historically, central bank liquidity support in crises is associated with a rising probability of future episodes of excessive risk-taking by financial intermediaries that end in another financial crisis. If central banks refrained from using their balance sheet to support markets in the last crisis, episodes of renewed excessive risk taking are much rarer.

On the Credibility of the ‘Credibility Revolution’

Kevin Lang argues in NBER wp 31666:

When economists analyze a well-conducted RCT or natural experiment and find a statistically significant effect, they conclude the null of no effect is unlikely to be true. But how frequently is this conclusion warranted? The answer depends on the proportion of tested nulls that are true and the power of the tests. I model the distribution of t-statistics in leading economics journals. Using my preferred model, 65% of narrowly rejected null hypotheses and 41% of all rejected null hypotheses with |t|<10 are likely to be false rejections. For the null to have only a .05 probability of being true requires a t of 5.48.

Conference on “The Future of Payments and Digital Assets,” Bocconi/CEPR, 2023

Conference jointly organized by Bocconi’s Algorand FinTech Lab and CEPR’s RPN FinTech & Digital Currencies. Keynotes by Hyun Song Shin and Xavier Vives. Organized by Claudio Tebaldi and Dirk Niepelt.

CEPR’s conference website with program. Bocconi’s website with videos and more.

“Macroeconomics II,” Bern, Fall 2023

MA course at the University of Bern.

Time: Monday 10:15-12:00. Location: A-126 UniS. Uni Bern’s official course page. Course assistant: Stefano Corbellini.

The course introduces Master students to modern macroeconomic theory. Building on the analysis of the consumption-saving tradeoff and on concepts from general equilibrium theory, the course covers workhorse general equilibrium models of modern macroeconomics, including the representative agent framework, the overlapping generations model, and the Lucas tree model.

Lectures follow chapters 1–4 (possibly 5) in this book.