Category Archives: Papers

New short paper: “Resilience, Debt, and Net Worth: Has Resilience Increased with Higher Debt-to-Income Ratios?”

New short paper, “Resilience, Debt, and Net Worth: Has Resilience Increased with Higher Debt-to-Income Ratios?,” January 2014, paper.

Abstract

Since 1995, Swedish households’ debt has risen from about 90 percent of disposable income to about 170 percent and hence almost doubled. Many, including the Riksbank, conclude that this has made the households more vulnerable to disturbances. But at the same time, real and financial assets and net worth have approximately doubled. Total assets and net worth are now about 580 percent and 410 percent of disposable income, respectively. This doubling of assets and net worth should contribute to households’ being more resilient to disturbances. This short paper argues that a doubling of the average Swedish household’s balance sheets actually increases resilience, rather than reduces it. Generally, a richer household is more resilient than a poorer one.

 

 

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“Leaning Against the Wind” Leads to a Higher (Not Lower) Household Debt-to-GDP Ratio

New revision, November 2013.
Vox column: “The Riksbank is wrong about the debt: Higher policy rates increase rather than decrease the household-debt ratio,” September 3, 2013.

Abstract

“Leaning against the wind” — a tighter monetary policy than necessary for stabilizing inflation
around the inflation target and unemployment around a long-run sustainable rate — has been
justified as a way of reducing household indebtedness. But, under realistic assumptions, it
actually has the opposite effect; it leads to higher real household debt and a higher household
debt-to-GDP ratio. The reason is that a tighter policy than a baseline induces a relatively slow
fall below the baseline of total nominal (mortgage) debt but a faster fall in the nominal price
level and nominal GDP. There is then first a rise in real debt and the debt-to-GDP ratio relative
to the baseline, a rise that is almost as large and as fast as the fall in the price level and nominal
GDP. Then, real debt and the debt-to-GDP ratio slowly fall back to the baseline during a few
additional years. Therefore, “leaning against the wind” as a way of reducing the household
debt-to-GDP ratio is counterproductive.

PDF

Publication: “Evaluating Monetary Policy”

New publication: “Evaluating Monetary Policy,” in Koenig, Evan F., Robert Leeson, and George A. Kahn, eds., The Taylor Rule and the Transformation of Monetary Policy, Hoover Institution Press, 2012, p. 245-274. PDF

The line: With a modified Taylor curve, the forecast Taylor curve, and plots of mean squared gaps showing the tradeoff between the variability of the inflation-gap and output-gap forecasts it is possible to evaluate policy ex ante, that is, taking into account the information available at the time of the policy decisions, and even evaluate policy in real time.

“Comments on Gerlach, Stefan, and Thomas Jordan, ‘Tactics and Strategy in Monetary Policy: Benjamin Friedman’s Thinking and the Swiss National Bank'”

“Comments on Gerlach, Stefan, and Thomas Jordan, ‘Tactics and Strategy in Monetary Policy: Benjamin Friedman’s Thinking and the Swiss National Bank’,” given at Recent Developments in Monetary Policy, Fiscal Policy, and Financial System Design: A Conference Honoring Benjamin M. Friedman, International Journal of Central Banking 8, Supplement 1 (2012) 57-63. PDF

Handbook chapter: “Inflation Targeting”

Handbook chapter: “Inflation Targeting,” in Friedman, Benjamin M., and Michael  Woodford, eds., Handbook of Monetary Economics, Volume 3b, chapter 22, Elsevier, 2011.
Chapter. Paper.

Abstract
Inflation targeting is a monetary-policy strategy characterized by an announced numerical inflation target, an implementation of monetary policy that gives a major role to an inflation forecast that has been called forecast targeting, and a high degree of transparency and accountability. It was introduced in New Zealand in 1990, has been very successful in terms of stabilizing both inflation and the real economy, and as of 2010 has been adopted by about 25 industrialized and emerging-market economies. This chapter discusses the history, macroeconomic effects, theory, practice, and future of inflation targeting.

JEL classification: E52, E58, E42, E43, E47

Keywords: Flexible inflation targeting, forecast targeting, optimal monetary policy, transparency

Monetary Policy with Judgment: Forecast Targeting

“Monetary Policy with Judgment: Forecast Targeting,” International Journal of Central Banking 1(1) (2005) 1-54, paper, online appendix.

First draft: June 2004
Published: May 2005

Abstract

“Forecast targeting,” forward-looking monetary policy that uses central-bank judgment to construct optimal policy projections of the target variables and the instrument rate, may perform substantially better than monetary policy that disregards judgment and follows a given instrument rule. This is demonstrated in a few examples for two empirical models of the U.S. economy, one forward looking and one backward looking. A complicated infinite-horizon central-bank projection model of the economy can be closely approximated by a simple finite system of linear equations, which is easily solved for the optimal policy projections. Optimal policy projections corresponding to the optimal policy under commitment in a timeless perspective can easily be constructed. The whole projection path of the instrument rate is more important than the current instrument setting. The resulting reduced-form reaction function for the current instrument rate is a very complicated function of all inputs in the monetary-policy decision process, including the central bank’s judgment. It cannot be summarized as a simple reaction function such as a Taylor rule. Fortunately, it need not be made explicit.

JEL Classification: E42, E52, E58
Keywords: Inflation targeting, optimal monetary policy, forecasts.