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Public Service Announcement, for those who wish to talk intelligently about macro, instead of ranting. Here's what I use (in response to Steven Kopits asking "What the he** do you teach your students, Menzie"). The following are free use, or older editions that have been superseded by newer. Blanchard and Johnson, Macroeconomics (earlier version of […]

Math and reading scores on the 2022 National Assessment of Educational Progress—known as "the nation's report card"—raised widespread concern when they were released last fall. Just as troubling, however, is news that the average 8th grade proficiency rates in civics and U.S. history fell to 1998 levels, or only 22% and 13% proficient, respectively. This…

(This post is co-authored by Patrick Kuhn and Stefanie Walter) The second edition of our introductory textbook to political science was just published. In view of the already saturated market for introductory textbooks to political science, several colleagues asked us: … Continue reading →

In short, we have a textbook situation where a prohibition on labor supply causes shortages, black markets, and losses for both business and labor.

Over the last 45 years, the Islamic Republic has weaponized textbooks, religious debates, movies, city walls, and even cemeteries to impose cultural violence, particularly over religious minorities, but it faced resistance.

Dr. Kenny's article breaks with libertarian principles (and textbook insights from Pigouvian economics) by endorsing the goal of "net zero" CO2 emissions and embracing a set of global interventionist policies to achieve it.

The publisher of my textbook Principles of Economics will host a webinar on October 21 during which I will talk about the new edition, which will be available in January. If you are interested, click here.

I appreciate every new adoption of one of my textbooks, but this one, facilitated by my publisher Cengage at the request of my friend Patrick Moynihan of the Haitian Project, is especially heartwarming.

Brigham Daniels (University of Utah College of Law) has posted Why Stop Grazing the Climate Commons? (Michigan Journal of Environmental and Administrative Law, Forthcoming) on SSRN. Here is the abstract: Many have argued that climate change is the textbook example...

Imagine a university whose library was filled with books written by only its faculty and whose textbooks were developed entirely in-house. Fortunately, even the largest institutions in America do not perform all of these functions themselves.
The post Sustain College and University Partnerships to Foster Innovation appeared first on American Enterprise Institute - AEI.

Close reading of K-12 history textbooks has suddenly become popular among adults (not so much among students). This is surprising given how bored most American adults were in their history classes and given Americans' focus on the immediate present. ("The only history that is worth a tinker's damn is the history we make today," said […]

The beginning of the new school year in many countries of the former Soviet Union, including in Russia, is celebrated on September 1st and is known as "Knowledge Day". This year, September 1st will be unique as the new educational amendments enter into force in Russia and Russia-controlled territories. These amendments introduce controversial changes to the educational process, which raise serious concerns about children's rights and freedoms. These changes include new unified textbooks on history, the legalisation of children's forced labour, and the continuation of "Conversations about the important" lessons with an enhanced militaristic element.

The Rohingya refugee crisis as a trigger for displacement For decades, the Rohingya, a predominantly Muslim ethnic group in Myanmar, have sought refuge in neighbouring Bangladesh to escape persecution. This influx, particularly since 2015, has strained Bangladesh's limited resources. The persecution of the Rohingya is a textbook case of ethnic cleansing by Myanmar's civilian-military government. With around one million Rohingya refugees in Bangladesh, concerns have been raised about the safety of the host population . Despite intense diplomatic efforts, Myanmar, governed by a military junta since 2021, remains reluctant to repatriate its Rohingya nationals, causing frustration in Bangladesh. Previous repatriation attempts in 2018 and 2019 failed due to the Rohingya refugees' fear of violence upon return. In Rakhine State, where ...

This post is from a set of comments I gave at the NBER Asset Pricing conference in early November at Stanford.  Conference agenda here. My full slides here. There was video, but sadly I took too long to write this post and the NBER took down the conference video. I was asked to comment on "Downward Nominal Rigidities and Bond Premia" by François Gourio  and Phuong Ngo. It's a very nice clean paper, so all I could think to do as discussant is praise it, then move on to bigger issues. These are really comments about whole literatures, not about one paper. One can admire the play but complain about the game. The paper implements a version of Bob Lucas' 1973 "International evidence" observation. Prices are less sticky in high inflation countries. The Phillips curve more vertical. Output is less affected by inflation. The Calvo fairy visits every night in Argentina. To Lucas, high inflation comes with variable inflation, so people understand that price changes are mostly aggregate not relative prices, and ignore them. Gourio and Ngo use a new-Keynesian model with downwardly sticky prices and wages to express the idea.  When inflation is low, we're more often in the more-sticky regime. They use this idea in a model of bond risk premia. Times of low inflation lead to more correlation of inflation and output, and so a different correlation of nominal bond returns with the discount factor, and a different term premium. I made two points, first about bond premiums and second about new-Keynesian models. Only the latter for this post. This paper, like hundreds before it, adds a few ingredients on top of a standard textbook new-Keynesian model. But that textbook model has deep structural problems. There are known ways to fix the problems. Yet we continually build on the standard model, rather than incorporate known ways or find new ways to fix its underlying problems. Problem 1: The sign is "wrong" or at least unconventional.The basic sign is wrong -- or at least counter to the standard belief of all policy makers. In the model, higher interest rates cause inflation to jump down immediately, and then rise over time. Everyone at the Fed uniformly believes that higher interest rates cause inflation to go nowhere immediately, and then gently decline over time, with "long and variable lags." Larry Ball pointed this out 30 years ago. The behavior comes straight from the forward-looking Phillips curve. Lower output goes with lower inflation, relative to future inflation. I.e. inflation rising over time. To be clear, maybe the model is right and the beliefs are wrong. It's amazing that so much modeling and empirical work has gone in to massaging theory and data to conform to Milton Friedman's 1968 proclamation of how monetary policy works. The "long and variable lags" in particular are a trouble to modern economics. If you know prices are going up tomorrow, you raise prices today. But that's for another day. This model does not behave the way most people think the economy behaves, so if you're going to use it, at least that needs a major asterisk.  Well, we know how to fix this. You can see that sneaking lagged inflation into the Phillips curve is going to be a big part of that.  Christiano Eichenbaum and Evans, 20  years ago, produced a widely cited model that "fixes" this problem. It has a lot of ingredients. Most of all, it assumes that wages and prices are indexed. Firms and workers that don't get tapped by the Calvo fairy to change their price or wage nonetheless raise by observed inflation. This gives a Phillips curve with lagged inflation. Moreover, in preferences, investment, and this Phillips curve, CEE modify the model to put growth rates in place of levels. (More review in a three part series on new-Keynesian models here.) The result: If the funds rate goes down (right panel) unexpectedly, inflation goes down just a bit but then turns around and goes up a year later. (Several other authors get to the same place by abandoning rational expectations. But that has its own problems, and it's going to be hard to incorporate asset pricing that way. Much more in Expectations and the Neutrality of Interest Rates) Great. But notice that neither Gourio and Pho nor pretty much anyone else builds on this model. We cite it, but don't use it. Instead, 20 more years of NK theorizing studies different extensions of the basic model, that don't solve the central conundrum. Problem 2: Fed induced explosionsThe standard new-Keynesian model says that if the Fed holds interest rates constant, inflation is stable -- will go away on its own -- but indeterminate. There are multiple equilibria. The standard new-Keynesian model thus assumes that the Fed deliberately destabilizes the economy. If inflation comes out more than the Fed wishes, the Fed will lead the economy to hyperinflation or hyper deflation. Under that threat, people jump to the inflation that the Fed wishes to see. But the Fed does no such thing.  Central bankers resolutely state that their job is to stabilize the economy, to bring inflation back from wherever it might go. Despite thousands of papers with new-Keynesian equations written at central banks, if anyone were ever to honestly describe those equations in the introduction, "we assume that the central bank is committed to respond to inflation by hyperinflation or deflation in order to select from multiple equilibria" they would be laughed out of a job. This has been clear, I think, since 2000 or so. I figured it out by reading Bob King's "Language and Limits." My  "Determinacy and Identification" in the JPE 2011 was all about this. We've also known at least one way to fix it, as shown: fiscal theory. OK, I'm a broken record on this topic. Instead, we go on with the same model and its underlying widely counterfactual assumption about policy. Problem 3: The fit is terribleA model consists of a set of equations, with the thing you want to determine (say, inflation) on the left, the economic causes described by the model on the right, plus "shocks," which are things your model can't capture. In the explanation part, there are parameters (\(\sigma, \ \beta, \ \kappa, \ \phi\)), that control how much the things on the right affect the things on the left. The fit of new-Keynesian models is usually terrible. In accounting for economic variables (\(x_t,\) \(\pi_t, \) \(i_t \) here), the error terms (\(\varepsilon\)) are much larger than the model's economic mechanisms (the \(x,\) \(\pi\) on the right hand side). Forecasts -- predicting  \(\pi\), \(x\) ahead of time -- is worse. For example, where did inflation come from and why did it go away? Expected inflation hasn't moved much, and the economy just plugged along. Most of the rise and fall of inflation came from inflation shocks.  Related, the fit of the models is about the same amount of terrible for different values of the parameters. That means the parameters are "poorly identified" if identified at all. That means that the mechanisms of the model -- say, how much higher interest rates lower output, and then how much lower output affects inflation -- are weak, and poorly understood. In part this isn't often noticed because we got out of the habit of evaluating models by fit in the 1980s. Most models are evaluated, as I showed above for CEE by matching select "identified" impulse response functions. But as those response functions also explain small variances of output and inflation, it's possible to match response functions well, yet still fit the data badly, i.e. fit the data only by adding big shocks to every equation. I don't know of good fixes here. Old fashioned ISLM models had similar problems (See Sims 1980). But it is a fact that we just ignore and go on. The Phillips curve is a central problem, which has only gotten worse lately. Unemployment was high and declining throughout the 2010s, with stable inflation. Inflation came with high unemployment in 2021. And inflation fell with no high real interest rates, no unemployment, and strong growth in 2022-2023. But what will replace it? So where are we?Macro is surprisingly un-cumulative. We start with a textbook model. People find some shortcomings and suggest a fix. But rather than incorporate that fix, the next paper adds a different fix to the same textbook  model. One would think we would follow the path on the right. We don't. We follow the path on the left. This is common in economics. The real business cycle literature followed much the same path. After the King Plosser Rebelo stochastic growth model became the standard, people spent a decade with one extension after another, each well motivated to fix a stylized fact. But by and large the next paper didn't build on the last one, but instead offered a new variation on the KPR model. Posteriors follow priors according to Bayes' rule, of course. So another way of putting the observation, people seem to put a pretty high prior on the original model, but don't trust the variations at all. I sin too. In Fiscal Theory of the Price Level  I married fiscal theory with the new-Keynsian IS and Phillips curve, exactly as above, despite problems #1 and #3. Well, it makes a lot of sense to change one ingredient at a time to see how a new theory works. I'm unhappy with the result, but I haven't been able to move on to a new and better textbook model, which is what has occasioned several of these related posts.  Wę need a digestion. Which of the new ingredients are reliable, robust, and belong as part of the new "textbook" model? That's not easy. Reliable and robust is very hard to find, and to persuade people. There are so many to choose from -- CEE's smorgasbord, capital, financial frictions, heterogeneous agents, different expectation formation stories, different pricing frictions,  and so on. What's the minimal easy set of these to use? Part of the trouble lies in how publishing works. It's nearly impossible to publish a paper that removes old ingredients, that digests the model down to a new textbook version. The rewards are to publishing papers that add new ingredients. Even if, like CEE, everyone cites them but doesn't use them. I've asked many economists why they build on a model with so many known problems, and why they don't include known fixes. (Not just fiscal theory!) The answer is usually, yes, I know about all these problems, but nobody will bother me about them since every other paper makes the same assumptions, and I need to get papers published.     I went on a bit of a tear here as I referee lots of great papers like this one. Every part of the paper is great, except it builds on a model with big flaws we've known about for 30 years. It feels unfair to complain about the underlying model, since the journal has published and will publish a hundred other papers. But at what point can we, collectively, scream "Stop!" The new-Keynesian model has been the standard model for an astonishing 30 years. None of ISLM, monetarism, rational expectations, or real business cycles lasted that long.  It's even more amazing that it is so unchanged in all this time. It is definitely time for a better textbook version of the model! Maybe this is a plea for Woodford, Gali or one of the other NK textbook authors, which much better command of all the variations than I have, to bless us a new textbook model. Or, perhaps it's time for something totally new. That's not fiscal theory per se. Fiscal theory is an ingredient, not a model.  You can marry it to new-Keynesian models, as I, Leeper, Sims, and others have done. But you can also marry it to old ISLM or anything else you want. Given the above, maybe there isn't an existing modification but a new start. I don't  know what that is. (My comments also have some similar comments about term premiums and how to think about them, but this post is long enough.) Update:Twitter correspondents Stéphane Surprenant and Tom Holden point me to The Transmission of Monetary Policy Shocks by Silvia Miranda-Agrippino Giovanni Ricco in the AEJ Macro, and Inflation, output and markup dynamics with purely forward-looking wage and price setters by Louis Phaneuf, Eric Sims, and Jean Gardy Victor in the European Economic Review. The former is a VAR with high frequency measurement of the monetary policy shock. And.. Source: Miranda-Agrippino and RiccoThe price level as well as the inflation rate can jump down immediately when the interest rate rises! (I think the graph plots the level of CPI, not growth rate.) That's even stronger than the baseline model in which the price level, being sticky, does not move, but the inflation rate jumps on the interest rate rise. The latter is a nice theoretical paper. It adds a lot of the CEE assumptions.  I overstated a great deal that others have not used these ingredients.  They are used in these "medium scale" models, just not in "textbook" models. However, it gets rid of indexed prices and wages with purely forward looking Phillips curves. It adds intermediate goods however. This makes prices changes work through the network of suppliers adding interesting dynamics, which has always struck me as a very important ingredient. And...Source: Phaneuf, Sims ,and VictorThe main estimate is the dark line. Here you see a model with the conventional response: inflation does not move on impact, and increases some time after the interest rate rise.  So, we can switch places! Estimates can replicate the conventional model, with an instant inflation response. Models can replicate the conventional estimates, with a slow inflation response. This one is much prettier than CEEs. 

The Times gives us this headline and sub:There has never been more music made — but most artists go hungryTech and streaming have made writing, recording and distributing a pop song easier than ever, yet reaching an audience of millions from your bedroom won't necessarily make you richIf only we had some form of human science that could explain this to us. Ah, yes, that's it, isn't it? Supply and demand. Pages two and three (after the copyright page that is) of every introductory economics textbook ever. Econ 101 it's called.If there's lots more supply - and if the cost of supply falls then there will be - then the price gained for that supply falls. A teen in a bedroom can now turn out a perfectly cromulent pop song on some few hundred pounds worth of equipment. We know this because some are indeed doing so. Which is an interesting insight, no? Perhaps we should apply it to other things that we currently think are expensive in our society. Those that might, from those prices, be thought to be in short supply? Houses? Make them cheaper to supply, see supply rise and prices fall. We always did like the Sound of the Suburbs **No, not punk, competent musicians so disqualified