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by Jerry O’Driscoll Fed Chairman Jerome Powell testified to the Senate Committee on Banking, Housing, and Urban Affairs. It was the semi-annual testimony mandated by the Humphrey–Hawkins Act. Powell's testimony was anodyne. He repeated and reiterated the Fed's planned policy moves with respect to interest rates, and added suitable caveats on economic growth, inflation, and … Continue reading Fed Policy

|Peter Boettke| Nicholas Bloom, on a recent episode of Hidden Brain discusses the issue of workplace productivity during the pandemic. It turns out that enterprises saved on rent and other expenses, and worker productivity actually increased 13% by staying at...

|Peter Boettke| Earlier this year I published my book, The Struggle for a Better World which consists of various published versions of public lectures I have given over roughly between 2000-2020 mainly at learned societies and associations. They have also...

|Peter Boettke| I recently did this podcast with the Austrian Economics Institut in Vienna. I would like to draw attention to my discussion of the pivotal role that a 5 tool player (in this instance I highlight Ben Powell, see...

|Peter Boettke| This week the Institut Ostrom Catalunya hosted an online conference to honor Lin Ostrom and the Bloomington School, in which I participated in a dialogue with Deirdre McCloskey. I greatly enjoy these opportunities to discuss ideas and explore...

National courts often use international norms in their decisions even when such norms have not been incorporated into their domestic legal systems. Judicial cross-fertilization also occurs as a result of mutual referencing of foreign decisions that have persuasive appeal, and through extensive networking initiatives. It is argued that this phenomenon signals the emergence of a "global community of courts" and the merging of international and domestic legal systems. To evaluate this claim, research needs to engage two types of questions with far reaching implications for politics and law. The first, empirical question is whether transjudicial cooperation is indeed a global trend: is it occurring across legal traditions and cultures? What motivates courts to turn to international and foreign law in reasoning their decisions? How do other actors outside the judiciary perceive this practice? The second, normative question is whether this observed merging of international and national law may take place in the absence of shared values, principles and normative underpinnings. In other words, even if empirically it can be shown that judicial cross-fertilization is global in scope, and that it may blur the distinctions between international and national law, what are the ethical implications of such developments?

Participants: Kerstin Blome (University Bremen), Charlotte Ku (Univerity of Illinios), Philip Liste (University of Hamburg), Andreas von Staden (University St Gallen), Chair: Antje Wiener (University of Hamburg)

The Round Table discussion is taking place at the ISA Annual Convention, Montreal, Thursday, March 17, 2011 10:30 AM
Room: Viger A

The so-called zero-lower-bound (ZLB) plays a prominent role in modern (and even older) macroeconomic theories. It is often introduced in a paper or at conference as a fact of life -- an unavoidable property of the physical environment, like gravity. But is it correct to view it in this way? Or is the ZLB better thought of as legal constraint--something that can potentially be circumvented by policy?

The Financial Services Regulatory Relief Act of 2006 allows the U.S. Federal Reserve (the Fed) to pay interest on reserve accounts that private banks hold at the Fed. Specifically, the Act states that:

Balances maintained at a Federal Reserve bank by or on behalf of a depository institution may receive earnings to be paid by the Federal Reserve bank at least once each calendar quarter, at a rate or rates not to exceed the general level of short-term interest rates.
The effective date of this authority was advanced to October 1, 2008, by the Emergency Economic Stabilization Act of 2008.

It is not clear (to me, at least) whether the Act grants the Fed the authority to pay a negative interest rate on reserves. Note that if the interest-on-reserves (IOR) rate is set to a negative number, then banks would in effect be paying the Fed a "service fee" for the privilege of holding reserve balances with the Fed. But if the Fed is not legally permitted to use negative interest rate policy (NIRP), then the ZLB is obviously a legal constraint.

This legal constraint, however, may not be binding if the ZLB is also an economic constraint. In fact, the traditional explanation for the ZLB is the existence of physical currency bearing zero interest. The idea that arbitrage will effectively keep interest rates from falling below zero is deeply ingrained in the minds of economists. For example, Corriea, et. al. (2012) write:

Arbitrage between money and bonds requires nominal interest to be positive. This "zero bound" constraint gives rise to a macroeconomic situation known as a liquidity trap. It presents a difficult challenge for stabilization policy.
However, we know from recent experience that the ZLB appears not to be an economic constraint.  Several central banks today have set their deposit rates into negative territory:




There is currently over $10 trillion of government debt in the world yielding a negative nominal interest rate; see here. As of this writing, even long bonds like the German 10-year Bund are in negative territory.

Well, alright, so the ZLB is evidently not an economic constraint. But surely there is some limit to how low nominal interest rates can fall? This lower limit is called the effective lower bound (ELB). And economic theory is clear: if we're at the ELB in a recession, then monetary policy has done about as much as it can be expected to do.

But what exactly is the ELB? Is it -1%, -2%, -5%, or perhaps even lower? Economists like Miles Kimball believe it to sufficiently negative to warrant NIRP as an effective policy tool; see here (see also the discussion by Ken Rogoff in chapter 10 of his book). These arguments, however, did not seem to gain much traction. For example, in the present discussions concerning the Fed's new long-run monetary policy framework, the possibility of NIRP is not even mentioned. But perhaps it should be if the ELB is in fact significantly below zero. In what follows, I want to make my own (related) argument for why the ELB is probably a lot lower than most people think.

Suppose the Fed was to set the IOR to -10% (in a deep demand-driven recession, this would presumably be accompanied with a promise to raise the IOR at some point in the future). The traditional economic argument suggests that any security dominated in rate of return by cash would in this case be driven out of circulation.

The first thing we could imagine happening is banks attempting to convert their digital reserves into vault cash. Banks are presently holding over $1.6 trillion in reserves with the Fed. The largest denomination Federal Reserve note is $100. This is what $1 trillion in $100 bills apparently looks like:




That's about the size of a football field. Banks would not convert all of their reserves into cash--even if it was costless to do so--because they'd need about $20-30 billion or so to make interbank payments. Of course, managing all that cash would be far from costless. But there is a simpler reason for why banks would not make the conversion. The Fed could simply charge banks a 10% service fee on their vault cash.

Alright, well what effect is the -10% IOR rate going to have on the deposit rate (or fees) that banks offer (or charge) their depositors? Banks are not likely to pass the full cost on to their depositors, especially if they view the NIRP to be temporary, because they'll want to maintain their customer relationships.

But let us take the extreme case and suppose that NIRP is perceived to be permanent. Then surely deposit rates will decline (or bank fees will rise) significantly. Deposit rates may even decline to the point where depositors start withdrawing their money from the banking system. Banks may well let this source of funding go if they could borrow more cheaply from the Fed (banks would need to borrow reserves to honor the withdrawal requests of their customers). Of course, the Fed lending rate is also a policy variable and could, in principle, be lowered to negative territory as well.

But how realistic is it to imagine all or most bank deposits converted to cash? While this might be the case for small value accounts, it seems unlikely that the business sector would be able to manage its payments needs without the aid of the banking system. Even money market funds need to work through the banking system. I suppose one could imagine a new product created by (say) Vanguard in which they create a cash fund with equity shares redeemable for cash that is collected and stored in rented Las Vegas vault. But the moment the activity is intermediated, it becomes taxable. If the Fed is not permitted to tax (oops, charge a service fee) such entities, the fiscal authority could, in principle, implement a surcharge that is set automatically off the IOR rate in some manner.

I think in this way one can see how the ELB might easily be well below -5% (or more). This is probably low enough to allow us to disregard the ELB as a binding economic constraint. The relevant constraint is always a legal one. And laws can be changed if it is deemed to serve the public interest.

Keep in mind that in a large class of economic models, ranging from Keynes (1936) to New Keynesian, there is potentially much to be gained by eliminating the ZLB. If these models are wrong, then let's get rid of them. But if they're roughly correct, why don't we take their policy prescriptions seriously? Let's stop talking about the ZLB as if it's a force of nature. It is a policy choice. And if it's a bad policy choice, it should be changed.

"Big data" is particularly useful for demonstrating variation across large groups. Using administrative tax data, for example, Stanford economist Raj Chetty and his colleagues have shown big differences in upward mobility rates by geography, by the economic background of students at different colleges, by the earnings of students taught by different teachers, and so on.…

How is it that in a Democracy with massive inequality, where the poor have just as much voting power as the rich, do the wealthy continue to get what they want politically? It's a question that's troubled political thinkers for a long time.

Political scientists Jacob Hacker and Paul Pierson have an answer in their new book "Let Them Eat Tweets: How The Right Rules In An Age of Extreme Inequality". On this episode, we tackle that question and their answer.

I recommend Evan Ellis' post at Global Americans on his recently completed year at the U.S. State Department Policy Planning Staff. He now returns to the U.S. Army War College Strategic Studies Institute. It is a useful read both for its insider look and its discussion of "why does this matter?"Here is a key point:The problem is also compounded by the fundamental orientation of the State Department to tell our partners what we think and want, rather than listening to what they think and want. While seasoned diplomats know better in their personal interaction, I observed the balance of the work that came across my desk to be about "transmitting" rather than "receiving." Every high-level meeting involves the preparation of "talking points" seeking to advance an agenda, too seldom did they include questions about what our partners thought or needed.This echoes Lars Schoultz's In Their Own Best Interest, where he questions all "uplifting" aid, the effects of which are never measured. We can check boxes on delivery and execution, but not on whether it actually makes lives better. Making lives better requires starting with what our partners actually want. This has often been true, but is accentuated in the Trump era.In my own work, I did not see substantial evidence that the strategy and policy documents of each organization are actively used as guides to action by the other, beyond superficial references to fundamental documents such as the National Security Strategy. I also witnessed and participated in the drafting of some interagency documents, but beyond the somewhat useful exercise of meeting and coordinating about their wording, I did not perceive that the result meaningfully impacted the direction of either state or the other U.S. government entities involved.This is clearly a Trump administration problem, though past administrations were clearly not immune.  Unlike the past, though, the essential problem now is that policy is made by tweet, with government agencies scrambling to interpret it just like the rest of us. How do you feel like you're doing something meaningful when the president ignores you?I appreciate these kinds of perspectives. As a side note, as he does not address it, I know a number of people who have moved from academia to policy making and back, and I know their view of of the relevance and accuracy of academic work changed dramatically. I have not felt great temptation to try the policy making world myself, even as I recognize that even in small doses it would make us better analysts. Subscribe in a reader

After almost every election, you'll hear experts and pundits lamenting the lack of voter turnout. But does the research have anything to say about what policies would increase representation?

Our very own Anthony Fowler explains a new report that he co-authored in Brookings that argues we will get better representation but instituting compulsory voting in the U.S. But in a country where we can't even get everyone to wear a mask, what are the odds that compulsory voting would work here?

The dramatic rise of populism in America, embodied in President Trump, presents a real threat to democracy. Our very own professor William Howell argues that the root of the problem lies with ineffective government and that the solution may be to give the President agenda setting power.

We delve into his new book "Presidents, Populism, and the Crisis of Democracy" and explore how giving president's agenda setting power could break government gridlock and lead us to a more effective government.

One of the most anticipated developments of the 2020 election is who Democratic Presidential nominee, Joe Biden, will pick to be his running mate. One thing is certain, whoever he picks will be a women.

Does the political science scholarship tell us anything about how a woman executive may govern differently? One intriguing paper, "Queens", from Oeindrila Dube at The University of Chicago sheds some revelatory light on this question.

The Fed's much-anticipated new monetary policy framework is now public. Fed Chairman Jerome Powell outlined the policy framework last week in Jackson Hole; you can view his speech here. Overall, I thought Powell's delivery was very good. While there's room for improvement, I think the new framework is a step in the right direction (George Selgin provides a good critique here). There were three things in Powell's speech that stuck out for me. I discuss these below. Shortfalls vs. DeviationsAt the 22:30 mark, Powell reports what may very well be the most substantive change to the monetary policy statement. Here, he states that the FOMC will now interpret important macroeconomic time-series like GDP and unemployment as exhibiting "shortfalls" instead of "deviations" from some ideal or "maximum" level (a frustratingly vague concept). The practical effect of this shift is to remove (or make less prominent) in the minds of FOMC members the idea that the economy is, or will soon be, "overheating" (i.e., embarked on an unsustainable path that can only end in misery for those most vulnerable to economic recession). The idea of "deviation from (some) trend" seems like a plausible description of the postwar U.S. up to the mid-1980s. Severe contractions were usually followed by equally robust recoveries. However, this representation seems to break down since the "great moderation" that began in the mid-1980s. Since then, economic recessions have not been followed by above-average growth. Instead, each recession seems better described as a "growth shortfall." We're not entirely sure what accounts from this cyclical asymmetry, but it seems consistent with Milton Friedman's "plucking model." I think we can expect a stream of research resurrecting this old idea (see here, for example). In any case, the upshot here is that, to the extent that "overheating" is no longer considered a serious threat, the FOMC will be less likely to implement "preemptive" policy rate hikes. This constitutes a tacit acknowledgement that the period leading up to "lift off" and what followed might have been handled better. As I wrote at the time (see my discussion here), standard Phillips Curve logic did not seem to support tightening (unemployment was above the estimated natural rate, inflation was below target, and inflation expectations were declining). But the Committee somehow talked itself into the need to "normalize," to act preemptively and not get caught "behind the curve." In fairness, monetary policy is always about balancing risks (in this case, the perceived risk of overheating). In the near future, less weight will be assigned to the risk of overheating.  The Maximum Level of Employment At the 22:30 mark, Powell states "Of course, when employment is below its maximum level, as is so clearly the case now, we will actively seek to minimize that shortfall..." I have a hard time not interpreting "maximum" here as "socially desirable." I think most people would agree that the 2008 financial crisis caused employment to decline below its maximum level. The workers rendered idle in that episode constituted a social waste, and the Fed was right to loosen monetary policy to stimulate economic activity in the face of recessionary headwinds.  But the recession induced by the C-19 is very different from standard recessions. This was laid out very clearly by St. Louis Fed President Jim Bullard on March 23, 2020: Expected U.S. Macroeconomic Performance during the Pandemic Adjustment Period. According to Bullard, the temporary removal of some workers from their jobs is not, in this case, a waste of resources. The decline in employment in this case should be viewed as an investment in public health. That is, the maximum level of employment declined and its recovery is driven mostly by the contagion dynamic (as well as improvements in social distancing protocols, masking, testing, treatments, etc.). The role of monetary policy here is to calm financial markets (which the Fed successfully accomplished in March) and to aid the fiscal authority with its income maintenance programs. In short, the primary monetary/fiscal policy objective here is to deliver insurance, not stimulus.  Monetary stimulus is appropriate, however, to the extent that demand factors (e.g., individually rational, but a collectively irrational restraint on spending) are inhibiting the recovery dynamic. The evidence for this is usually assumed to be found in falling inflation and inflation expectations, and declining bond yields. And usually, this makes sense, because we usually assume that recessions are caused by collapses in aggregate demand (as in 2008-09). But what if the increase in the demand for money (safe assets in general) is driven by a collectively rational fear? We'd expect to see the exact same inflation and interest rate dynamic, but the role for stimulative monetary policy would be more difficult to justify (though the desirability for insurance remains).  So, maybe it is not so clearly the case now that employment is below or, at least, far below its "maximum" level. Note that a significant part of the decline in aggregate employment is coming from the leisure and hospitality sector: Arguably, we do not want, at this stage of the pandemic, to promote the indoor dining experiences people enjoyed earlier this year. This activity will return slowly as economic fundamentals improve. The "full employment" level of employment in this sector is clearly below what it was in Jan 2020. But, to be fair, it is entirely possible, and perhaps even likely, that the level of employment even here is lower than the "full employment" level. It's very hard to tell by how much though.  Average Inflation Targeting At the 24:00 mark, Powell explains how AIT will help anchor inflation expectations. Missing the inflation for a prolonged period of time will cause expectations to drift away from target and line up with the historical experience. This view of expectation formation is firmly rooted in the "adaptive expectations" tradition. That is, expectations are assumed to be formed by looking backward instead of forward.  People sometimes claim that adaptive expectations are inconsistent with "rational" expectations. But this is not necessarily the case. In fact, it makes sense to use the historical record of inflation realizations to make inferences about the long-run inflation target if people are not sure of the monetary authority's true inflation target; see, for example, here: Monetary Policy Regimes and Beliefs.  It's still not entirely clear to me whether FOMC members view AIT as a policy to pursue passively (i.e., let inflation creep up to and beyond target on its own) or actively (i.e., take explicit actions to promote an overshoot of inflation). If it's the former, then I'm on board with the idea. But if it's the latter, I am not. In particular, with the liquidity-trap-like conditions we're presently in, the Fed does not have the tools (or political will) to boost inflation persistently. It is likely to fail, just as the Bank of Japan failed. (I explain here why it's more difficult for a central bank to raise the inflation target than to lower it.) So, as I've advocated many times in the past, why not just declare 2% as a soft-ceiling and let fiscal policy do the rest?  My view rests on the belief that missing the inflation target from below by 50bp over the past eight years is not a significant macroeconomic problem (especially given how crudely inflation is measured). The FOMC did view it as a problem, but mainly, it seems, because of the embarrassment associated with missing its target. "We are a central bank. We have an inflation target. Central banks are supposed to hit their inflation targets. We need to hit our inflation target to remain credible." This is why earlier FOMC statements emphasized the Fed's "symmetric" inflation target. That did not work and so now we have AIT which, I'm afraid, might not work either. Happily (for those who want to see higher inflation), Congress seems comfortable with the idea of producing large budget deficits into the foreseeable future.   So, if we get higher inflation, it will largely be a fiscal phenomenon. The purpose of AIT is to accommodate any rise in inflation for the purpose of increasing inflation expectations and avoiding the specter of deflation (people often point to Japan as a case to avoid, by Japan seems to be doing fine as far as I can tell). There is the question of how the Fed would react should inflation rise sharply and persistently above 2%. Even if the event is unlikely, it would be good to state a contingency plan. In the past, the Fed could be expected to raise its policy rate sharply. But this event, should it transpire, will almost surely take place during an employment shortfall (since this is now the acknowledged new normal). The only prediction I'll make here is that the FOMC will have a lot of explaining to do in this event.