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Chapter 35: The Short-Run Tradeoff between Inflation and Unemployment

Recent Posts
(Note: Page numbers referenced in posts prior to June 1, 2011 refer to 5th edition)

 

October 30

The Latest from Merle Hazard

Singer/Economist Merle Hazard presents a music video about the difficulties created for the Fed because of its dual mandate to control both inflation and unemployment.

Textbook References:

Pages 786-789 “The Phillips Curve”

March 20

Measuring Slack in the Phillips Curve

The Phillips curve shows the short-run trade-off between the inflation rate and the unemployment rate. Research by Alan Krueger et al suggests that the trade-off is between the inflation rate and the unemployment rate of the short-term unemployed, not the overall unemployment rate.

Textbook References:

Pages 786-789 “The Phillips Curve”

December 20

Solow on Greenspan

Nobel Laureate Robert Solow reviews former Fed chair Alan Greenspan's new book. He argues that Greenspan fails in his attempt to justify the mistakes he made during the housing bubble.

Textbook References:

Pages 802-804 “The Greenspan Era”

November 14

The Map and the Territory

Mankiw reviews Alan Greenspan's book, The Map and the Territory. In the review, Mankiw traces Greenspan's unconventional path to the top of the economics profession.

Textbook References:

Pages 802-804 “The Greenspan Era”

July 10

Is the Fed too timid?

Betsey Stevenson and Justin Wolfers argue that the Fed should increase inflation to reduce unemployment.

Textbook References:

Pages 786-789 “The Phillips Curve”

April 27

Remembering Milton Friedman

Several famous economists reminisce about Milton Friedman.

Textbook References:

Pages 789-796 “Shifts in the Phillips Curve: The Role of Expectations”

December 4

Sargent and Sims

The New York Times profiles two recent winners of the Nobel Prize in Economics.

Textbook References:

Pages 800-801 “Rational Expectations and the Possibility of Costless Disinflation”

September 24

A Conversation with Robert Lucas

Robert Lucas talks about the effects of high marginal tax rates on growth, about the recent financial crisis, and about rational expectations.

Textbook References:

Pages 7-9 “Principle 4: People Respond to Incentives”
Page 561 “Financial Crises”
Pages 631-632 “Bank Capital, Leverage, and the Financial Crisis of 2008-2009”
Pages 745-748 “The Recession of 2008-2009”
Pages 789-795 “Shifts in the Phillips Curve: The Role of Expectations”

September 23

Three from National Affairs

John Cochrane is concerned that our large debt will generate large inflationary expectations, and hence inflation.

Textbook References:

Pages 789-795 “Shifts in the Phillips Curve: The Role of Expectations”

February 27

Empiricists versus Theorists

Christina Romer argues that when inflation is low and the unemployment rate is high, there is little danger of inflation. She says that the Fed could engage in more aggressive quantitative easing, but seems to be overly worried about inflation expectations.

Textbook References:

Pages 14-15 “Principle 10: Society Faces a Short-Run Trade-off between Inflation and Unemployment”
Pages 664-676 “The Classical Theory of Inflation”
Pages 809-810 “The Short-Run Phillips Curve”

November 27

How to Improve Frank-Dodd

Oliver Hart and Luigi Zingales comment on the Wall Street Reform and Consumer Protection Act. They argue that the Fed should clearly define what "systemically important" means.

Textbook References:

Pages 648-649 “The Federal Reserve System”
Pages 654-655 “The Financial Crisis of 2008”
Pages 821-822 “Bernanke's Challenges”

November 17

QE2

Mankiw argues that the Fed's second round of quantitative easing "is a modestly good idea." He does not expect its impact will be large, and trusts that the Fed will avoid its pitfalls.

Textbook References:

Pages 653-657 “The Fed's Tools of Monetary Control”
Pages 778-787 “How Monetary Policy Influences Aggregate Demand”
Pages 821-822 “Bernanke's Challenges”

November 3

Feldstein on QE2

Martin Feldstein argues that the anticipated second round of the Fed's quantitative easing will do little good and might do much damage. In particular, it may create asset bubbles and create volatility in the currency markets.

Textbook References:

Pages 653-657 “The Fed's Tools of Monetary Control”

Pages 778-787 “How Monetary Policy Influences Aggregate Demand”

Pages 821-822 “Bernanke's Challenges”


October 12

Woodford on Monetary Policy

Michael Woodford argues that the Fed "should allow a one-time-only inflation increase." He argues that such a move would boost current spending via its effect on expectations.

Textbook References:

Pages 654-655 “The Financial Crisis of 2008”
Pages 664-676 “The Classical Theory of Inflation”
Pages 778-787 “How Monetary Policy Influences Aggregate Demand”
Pages 793-797 “Using Policy To Stabilize The Economy”
Pages 821-822 “Bernanke's Challenges”

September 7

Bernanke on the Financial Crisis

Ben Bernanke discusses the causes of the recent financial crisis.

Textbook References:

Pages 654-655 “The Financial Crisis of 2008”
Pages 821-822 “Bernanke's Challenges”

May 28

Fama on Financial Reform

There is a video of an interview with Eugene Fama. He discusses the recent financial crisis and suggested reforms.

Textbook References:

Pages 8-10 “Principle 6: Markets Are Usually A Good Way To Organize Economic Activity”
Pages 10-12 “Principle 7: Governments Can Sometimes Improve Market Outcomes”
Pages 606-610 “Asset Valuation”
Pages 654-655 “The Financial Crisis of 2008”
Pages 821-822 “Bernanke's Challenges”

May 27

The Next Financial Crisis

Jeremy Stein presents a fictionalized account of a financial crisis in the year 2025.

Textbook References:

Pages 654-655 “The Financial Crisis of 2008”

Pages 821-822 “Bernanke's Challenges”


May 24

Whither Fannie and Freddie?

Donald Marron and Phillip Swagel propose ways to improve Fannie Mae and Freddie Mac. Their objective is to reduce the risk to taxpayers while preserving liquidity for housing.

Textbook References:

Pages 654-655 “The Financial Crisis of 2008”

Pages 821-822 “Bernanke's Challenges”


October 22

From the CEA Chair

Christina Romer discusses the economic crisis, the policy response, and the outlook for the future.

Textbook References:

Pages 654-655 “The Financial Crisis of 2008”
Page 657 “Bank Runs and the Money Supply”
Pages 664-676 “The Classical Theory of Inflation”
Chapter 33 “Aggregate Demand and Aggregate Supply”
Chapter 34 “The Influence of Monetary and Fiscal Policy on Aggregate Demand”
Chapter 35 “The Short-Run Trade-off between Inflation and Unemployment”
Chapter 36 “Five Debates over Macroeconomic Policy”


September 25

Back from the Brink

Christina Romer, chair of the President’s Council of Economic Advisors, discusses the parallels between the crises of 1929 and 2008. She argues that the policy response to the current crisis has been much better than the response in 1929.

Textbook References:

Pages 654-655 “The Financial Crisis of 2008”
Page 657 “Bank Runs and the Money Supply”
Chapter 33 “Aggregate Demand and Aggregate Supply”
Chapter 34 “The Influence of Monetary and Fiscal Policy on Aggregate Demand”
Chapter 35 “The Short-Run Trade-off between Inflation and Unemployment”
Chapter 36 “Five Debates over Macroeconomic Policy”

Chapter 35: The Short-Run Tradeoff between Inflation and Unemployment
Archived Posts

 

September 19

Levine on Macro

David Levine accuses Paul Krugman of ignoring advances in modern macroeconomics.

Textbook References:

Pages 494-500 “Behavioral Economics”
Pages 606-610 “Asset Valuation”
Chapter 33 “Aggregate Demand and Aggregate Supply”
Chapter 34 “The Influence of Monetary and Fiscal Policy on Aggregate Demand”
Chapter 35 “The Short-Run Trade-off between Inflation and Unemployment”
Chapter 36 “Five Debates over Macroeconomic Policy”


September 17

Kocherlakota on Macro

Narayana Kocherlakota makes ten claims about the state of modern macroeconomics.

Textbook References:

Pages 494-500 “Behavioral Economics”
Pages 606-610 “Asset Valuation”
Chapter 33 “Aggregate Demand and Aggregate Supply”
Chapter 34 “The Influence of Monetary and Fiscal Policy on Aggregate Demand”
Chapter 35 “The Short-Run Trade-off between Inflation and Unemployment”
Chapter 36 “Five Debates over Macroeconomic Policy”


September 14

Gordon on Macro

Robert Gordon argues that modern dynamic stochastic general equilibrium models are not relevant to the real world. He suggests a return to a Keynesian model, but one stripped of the short-run Phillips Curve.
Textbook References:
Chapter 33 “Aggregate Demand and Aggregate Supply”
Chapter 34 “The Influence of Monetary and Fiscal Policy on Aggregate Demand”
Chapter 35 “The Short-Run Trade-off between Inflation and Unemployment”
Chapter 36 “Five Debates over Macroeconomic Policy”


September 3

Krugman on Macro

Paul Krugman argues that most macroeconomists have preferred beauty to truth.

Textbook References:

Pages 494-500 “Behavioral Economics”
Pages 606-610 “Asset Valuation”
Pages 751-761 “The Aggregate Supply Curve”
Chapter 34 “The Influence of Monetary and Fiscal Policy on Aggregate Demand”
Pages 817-818 “Rational Expectations and the Possibility of Costless Deflation”
Chapter 36 “Five Debates over Macroeconomic Policy”


August 25

POTUS makes a wise choice

Mankiw congratulates President Obama on his choice to reappoint Ben Bernanke as chair of the Fed.

Textbook References:

Pages 648-649 “The Federal Reserve System”
Pages 654-655 “The Financial Crisis of 2008”
Page 821 “Bernanke’s Challenges”


August 2

The Case for More Inflation

Tyler Cowen reports on Scott Sumner’s proposal that the Fed commit to an inflation rate of 2 to 3 percent.

Textbook References:

Pages 654-655 “The Financial Crisis of 2008”
Pages 778-787 “How Monetary Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?


July 21

The Fed’s Exit Strategy

Ben Bernanke explains how the Fed plans to prevent inflation when the recovery takes hold.

Textbook References:

Chapter 29 “The Monetary System”
Chapter 30 “Money Growth and Inflation”
Pages 778-787 “How Monetary Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?


July 19

Anna Schwartz on the Bernanke Fed

Anna Schwartz thinks Bernanke has confused a crisis of confidence with a shortage of liquidity.

Textbook References:

Pages 576-580 “Financial Institutions in the U.S. Economy”
Pages 654-655 “The Financial Crisis of 2008”
Pages 778-787 “How Monetary Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?


July 02

Old Speeches, New Policies

Blogger Mark Thoma uses a speech Mankiw gave six years ago to defend Obama’s deficit spending. But Mankiw’s speech emphasizes that a deficit caused by spending may have a different long-term effect than a deficit caused by tax cuts.

Textbook References:

Pages 7-8 “Principle 4: People Respond to Incentives”
Pages 246-248 “The Fiscal Challenge Ahead”
Pages 581-582 “Some Important Identities”
Pages 589-593 “Policy 3: Government Budget Deficits”
Pages 654-655 “The Financial Crisis of 2008”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?” Pages 838-841 “Should the Government Balance Its Budget?”
Pages 842-843 “Dealing with Deficits”


June 23

Financial Crisis Timeline

The New York Fed presents domestic and international timelines for the financial crisis.

Textbook References:

Pages 246-248 “The Fiscal Challenge Ahead”
Pages 581-582 “Some Important Identities”
Pages 589-593 “Policy 3: Government Budget Deficits”
Pages 649-653 “Banks and the Money Supply” Pages 654-655 “The Financial Crisis of 2008”
Pages 778-787 “How Monetary Policy Influences Aggregate Demand”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Pages 589-593 “Policy 3: Government Budget Deficits”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?”
Pages 838-841 “Should the Government Balance Its Budget?”


May 30

Ferguson Takes on Krugman

Historian Niall Ferguson argues that the recent rise in interest rate on long-term Treasury bonds is evidence that Krugman is wrong that expansionary fiscal policy will not drive up interest rates.

Textbook Reference:

Pages 246-248 “The Fiscal Challenge Ahead”
Pages 581-582 “Some Important Identities”
Pages 589-593 “Policy 3: Government Budget Deficits”
Pages 654-655 “The Financial Crisis of 2008”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Pages 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?”
Pages 838-841 “Should the Government Balance Its Budget?”


May 27

The Yield Curve is Steep

The yield curve that shows the difference between the yields on two year and ten year Treasury bonds has a large positive slope. In the past, this has signaled an end to recessions.

Textbook Reference:

Pages 576-577 “The Bond Market”

John Taylor is Worried

John Taylor is concerned that the U.S. federal debt is growing too large. Among other things, it jeopardizes the country’s credit rating.

Textbook References:

Pages 246-248 “The Fiscal Challenge Ahead”
Pages 581-582 “Some Important Identities”
Pages 589-593 “Policy 3: Government Budget Deficits”
Pages 654-655 “The Financial Crisis of 2008”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?
Pages 838-841 “Should the Government Balance Its Budget?”


May 26

More on Negative Interest Rates

Glen Rudebusch of the San Francisco Fed says that to be consistent with the Fed’s past policy, the interest rate would have to be negative five percent by the end of this year.

Textbook References:

Pages 539-541 “Real and Nominal Interest Rates”
Chapter 30 “Money Growth and Inflation”
Pages 778-787 “How Monetary Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?


May 18

The Fiscal Future

Robert Samuelson worries about the extraordinary amount of deficit spending.

Textbook References:

Pages 246-248 “The Fiscal Challenge Ahead”
Pages 581-582 “Some Important Identities”
Pages 589-593 “Policy 3: Government Budget Deficits”
Pages 654-655 “The Financial Crisis of 2008”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?
Pages 838-841 “Should the Government Balance Its Budget?”
Pages 842-843 “Dealing with Deficits”


May 14

Limited Purpose Banking

Laurence Kotlikoff and John Goodman make the case for limiting banks to their role as financial intermediaries.

Textbook References:

Pages 7-8 “Principle 4: People Respond to Incentives”
Pages 578-580 “Financial Intermediaries”
Pages 649-658 “Banks and the Money Supply”
Page 821 “Bernanke’s Challenges”


May 11

Negative Interest Rates

The city of Prien am Chiemsee in Bavaria, Germany, employs a local currency that implements one of Mankiw’s suggestions for creating negative interest rates.

Textbook References:

Pages 539-541 “Real and Nominal Interest Rates”
Chapter 30 “Money Growth and Inflation”
Pages 778-787 “How Monetary Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?


May 7

More on Negative Interest Rates

Former central banker Willem Buiter endorses the idea of negative interest rates.

Textbook References:

Pages 539-541 “Real and Nominal Interest Rates”
Chapter 30 “Money Growth and Inflation”
Pages 778-787 “How Monetary Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?


May 5

An Overview of the Credit Crisis

There is an article that summarizes how the current crisis started, how it spread and the actions taken to counteract it. There are also links to a large number of articles and videos on the same topics. This should be an especially valuable resource for instructors.

Textbook References:

Pages 8-10 “Principle 6: Markets are Usually a Good Way to Organize Economics Activity”
Pages 10-12 “Principle 7: Governments Can Sometimes Improve Market Outcomes”
Chapter 26 “Saving, Investment, and the Financial System”
Pages 654-655 “The Financial Crisis of 2008”
Chapter 33 “Aggregate Demand and Aggregate Supply”
Pages 778-787 “How Monetary Policy Influences Aggregate Demand”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?”
Pages 838-841 “Should the Government Balance Its Budget?”


May 1

From the CEA Chair

Christina Romer discusses the causes of the current crisis, the policy actions taken to end the crisis, and the prospects for the future.

Textbook References:

Pages 246-248 “The Fiscal Challenge Ahead”
Pages 581-582 “Some Important Identities”
Pages 589-593 “Policy 3: Government Budget Deficits”
Pages 649-653 “Banks and the Money Supply”
Pages 654-655 “The Financial Crisis of 2008”
Pages 778-787 “How Monetary Policy Influences Aggregate Demand”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?”
Pages 838-841 “Should the Government Balance Its Budget?”


Apr. 29

Miron on the Financial Crisis

Jeff Miron argues the case for the government to do nothing in response to the financial crisis.

Textbook References:

Pages 8-10 “Principle 6: Markets are Usually a Good Way to Organize Economic Activity”
Pages 10-12 “Principle 7: Governments Can Sometimes Improve Market Outcomes”
Pages 246-248 “The Fiscal Challenge Ahead”
Pages 581-582 “Some Important Identities”
Pages 589-593 “Policy 3: Government Budget Deficits”
Pages 654-655 “The Financial Crisis of 2008”
Pages 740-742 “Three Key Facts About Economic Fluctuations”
Pages 778-787 “How Monetary Policy Influences Aggregate Demand”

Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?
Pages 838-841 “Should the Government Balance Its Budget?”


Apr. 28

Fed Staff goes Negative

A Fed report says that the ideal interest rate now would be negative 5 percent.

Pages 539-541 “Real and Nominal Interest Rates”
Chapter 30 “Money Growth and Inflation”
Pages 778-787 “How Monetary Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?


Apr. 27

Instantaneous Deflation as a Macro Solution

Robert Murphy responds to Mankiw’s argument that we need negative interest rates. He points out that Mankiw’s argument for future inflation is logically equivalent to an instantaneous collapse of prices. Mankiw points out that if prices are sticky, that can’t happen.

Textbook References:

Pages 539-541 “Real and Nominal Interest Rates”
Chapter 30 “Money Growth and Inflation”
Pages 755-760 “Why the Aggregate-Supply Curve Slopes Upward in the Short Run”
Pages 778-787 “How Monetary Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?


Apr. 22

More on Negative Interest Rates

Mankiw continues the discussion he started on April 18 about the usefulness of negative interest rates.

Textbook References:

Pages 539-541 “Real and Nominal Interest Rates”
Chapter 30 “Money Growth and Inflation”
Pages 778-787 “How Monetary Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?”


Apr. 21

Solow on Posner

Robert Solow reviews Richard Posner’s book, A Failure of Capitalism: The Crisis of ’08 and the Descent into Depression. Along the way he provides insightful observations, as one would expect from a Nobel laureate.

Textbook References:

Pages 8-10 “Principle 6: Markets are Usually a Good Way to Organize Economic Activity”
Pages 10-12 “Principle 7: Governments Can Sometimes Improve Market Outcomes”
Pages 246-248 “The Fiscal Challenge Ahead”
Pages 484-489 “Asymmetric Information”
Pages 581-582 “Some Important Identities”
Pages 589-593 “Policy 3: Government Budget Deficits”
Pages 654-655 “The Financial Crisis of 2008”
Pages 778-787 “How Monetary Policy Influences Aggregate Demand”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?”
Pages 838-841 “Should the Government Balance Its Budget?”


Apr. 19

Observations on Negative Interest Rates

Mankiw responds to comments about his April 18 post in favor of negative interest rates.

Textbook References:

Pages 539-541 “Real and Nominal Interest Rates”
Chapter 30 “Money Growth and Inflation”
Pages 778-787 “How Monetary Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?


Apr. 18

Going Negative

Mankiw argues that the Fed should consider negative interest rates, possibly by creating inflation.

Textbook References:

Pages 539-541 “Real and Nominal Interest Rates”
Chapter 30 “Money Growth and Inflation”
Pages 778-787 “How Monetary Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?


Apr. 16

Meet the Cassandras

Salon lists the 14 biggest critics of Obama’s economic policy, along with a short synopsis of their criticisms.

Textbook References:

Pages 246-248 “The Fiscal Challenge Ahead”
Pages 581-582 “Some Important Identities”
Pages 589-593 “Policy 3: Government Budget Deficits”
Pages 649-653 “Banks and the Money Supply”
Pages 654-655 “The Financial Crisis of 2008”
Pages 778-787 “How Monetary Policy Influences Aggregate Demand”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?”
Pages 838-841 “Should the Government Balance Its Budget?”


Apr. 5

Bernanke’s Gamble

Simon Johnson and James Kwak argue that Ben Bernake has expanded the Fed’s role in the economy and has taken great risks.

Textbook References:

Pages 649-653 “Banks and the Money Supply”
Pages 654-655 “The Financial Crisis of 2008”
Pages 778-787 “How Monetary Policy Influences Aggregate Demand”
Page 821 “Bernanke’s Challenges”


Apr. 3

Boskin on the Obama Budget

Michael Boskin argues that the Federal budget deficit will be much larger than the administration claims.

Textbook References:

Pages 246-248 “The Fiscal Challenge Ahead”
Pages 581-582 “Some Important Identities”
Pages 589-593 “Policy 3: Government Budget Deficits”
Pages 654-655 “The Financial Crisis of 2008”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?
Pages 838-841 “Should the Government Balance Its Budget?”


Mar. 25

Sachs on the Geithner-Summers Plan

Jeffrey Sachs thinks the plan to rid the banking system of toxic assets is little more than a transfer program for banks.

Textbook References:

Pages 649-658 “Banks and the Money Supply”
Page 821 “Bernanke’s Challenges"


Mar. 24

Toxic Assets versus Toxic Liabilities

Jeremy Bulow and Paul Klemperer argue that the current plan to fix the banking system is flawed and offer an alternative.

Textbook References:

Pages 649-658 “Banks and the Money Supply”
Page 821 “Bernanke’s Challenges”


Mar. 20

Budget Deficits as a Fraction of GDP

The CBO projects the future of the budget deficit. There’s lots of red ink in our future.

Textbook References:

Pages 246-248 “The Fiscal Challenge Ahead”
Pages 581-582 “Some Important Identities”
Pages 589-593 “Policy 3: Government Budget Deficits”
Pages 654-655 “The Financial Crisis of 2008”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?
Pages 838-841 “Should the Government Balance Its Budget?”

The Direction of Policy

Alan Blinder argues that Obama is not a socialist. Gary Becker and Kevin Murphy think that Obama’s plan may kill capitalism.

Textbook References:

Pages 8-10 “Principle 6: Markets are Usually a Good Way to Organize Economic Activity”
Pages 10-12 “Principle 7: Governments Can Sometimes Improve Market Outcomes”
Pages 246-248 “The Fiscal Challenge Ahead”
Pages 581-582 “Some Important Identities”
Pages 589-593 “Policy 3: Government Budget Deficits”
Pages 654-655 “The Financial Crisis of 2008”
Pages 740-742 “Three Key Facts About Economic Fluctuations”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?
Pages 838-841 “Should the Government Balance Its Budget?”


Mar. 14

Reading the Tea Leaves on the Budget

Mankiw comments on Obama’s budget proposal, He finds that Obama is serious about climate change but not concerned about budget deficits.

Textbook References:

Chapter 10 “Externalities”
Pages 246-248 “The Fiscal Challenge Ahead”
Pages 581-582 “Some Important Identities”
Pages 589-593 “Policy 3: Government Budget Deficits”
Pages 654-655 “The Financial Crisis of 2008”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?
Pages 838-841 “Should the Government Balance Its Budget?”


Mar. 13

The Obama Program

Larry Summers describes the causes of the current crisis, the administration’s response and long-term implications.

Textbook References:

Pages 8-10 “Principle 6: Markets are Usually a Good Way to Organize Economics Activity”
Pages 10-12 “Principle 7: Governments Can Sometimes Improve Market Outcomes”
Pages 654-655 “The Financial Crisis of 2008”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?
Pages 838-841 “Should the Government Balance Its Budget?”


Mar. 11

Did the Fed Cause the Crisis?

Alan Greenspan says no.

Textbook References:

Pages 654-655 “The Financial Crisis of 2008”
Pages 778-787 “How Monetary Policy Influences Aggregate Demand”
Page 821 “Bernanke’s Challenges”


Mar. 9

From the CEA Chair

CEA Chair Christina Romer discusses the lessons from the Great Depression that should guide policy today.

Textbook References:

Pages 589-593 “Policy 3: Government Budget Deficits”
Pages 654-655 “The Financial Crisis of 2008”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?


Mar. 6

How is the President Doing?

Michael Boskin thinks Obama is too radical. Paul Krugman thinks Obama is dithering. And the Economist thinks Obama has not explained how he is going to pay for everything.

Textbook References:

Pages 4-5 “Principle 1: People Face Trade-Offs”
Pages 8-10 “Principle 6: Markets are Usually a Good Way to Organize Economic Activity”
Pages 10-12 “Principle 7: Government Can Sometimes Improve Market Outcomes”
Pages 589-593 “Policy 3: Government Budget Deficits”
Pages 654-655 “The Financial Crisis of 2008”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”


Mar. 3

CBO on the Stimulus

The Congressional Budget Office estimates that the stimulus plan will have a positive short-run effect but not much long-run effect.

Textbook References:

Pages 246-248 “The Fiscal Challenge Ahead”
Pages 581-582 “Some Important Identities”
Pages 589-593 “Policy 3: Government Budget Deficits”
Pages 654-655 “The Financial Crisis of 2008”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?
Pages 838-841 “Should the Government Balance Its Budget?”


Feb. 28

What is a Deficit Hawk to do?

Obama’s budget document is titled “A New Era of Responsibility.” Mankiw argues that the budget does not seem to live up to its name.

Textbook References:

Pages 246-248 “The Fiscal Challenge Ahead”
Pages 581-582 “Some Important Identities”
Pages 589-593 “Policy 3: Government Budget Deficits”
Pages 654-655 “The Financial Crisis of 2008”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?
Pages 838-841 “Should the Government Balance Its Budget?”


Feb. 27

A Speech From the CEA Chair

CEA Chair Christina Romer Defends the Stimulus Bill.

Textbook References:

Pages 10-12 “Principle 7: Governments Can Sometimes Improve Market Outcomes”
Pages 246-248 “The Fiscal Challenge Ahead”
Pages 581-582 “Some Important Identities”
Pages 589-593 “Policy 3: Government Budget Deficits”
Pages 654-655 “The Financial Crisis of 2008”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?
Pages 838-841 “Should the Government Balance Its Budget?”


Feb. 25

Gleaser on the Mortgage Interest Deduction

Ed Gleaser argues that the tax deduction on mortgage interest payments should be limited to loans up to $300,000.

Textbook References:

Pages 7-8 “Principle 4: People Respond to Incentives”
Chapter 12 “The Design of the Tax System”
Pages 609-610 “Market Irrationality”
Pages 654-655 “The Financial Crisis of 2008”
Page 821 “Bernanke’s Challenges”


Feb. 24

The Spending Stimulus Debate

Brad DeLong and Michele Boldrin are on opposite sides of the debate over the stimulus.

Pages 246-248 “The Fiscal Challenge Ahead”
Pages 581-582 “Some Important Identities”
Pages 589-593 “Policy 3: Government Budget Deficits”
Pages 654-655 “The Financial Crisis of 2008”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?
Pages 838-841 “Should the Government Balance Its Budget?”

Banking Fixes

Ricardo Caballero and Jeffrey Sachs offer their views on fixing the banking crisis. Caballero wants the government to promise to buy bank shares five years from now at twice their current price. Sachs wants taxpayers to take over the bad assets in exchange for an amount of equity to be determined later.

Textbook References:

Pages 649-658 “Banks and the Money Supply”
Page 821 “Bernanke’s Challenges”


Feb. 23

Is Macro Policy Overreacting?

Jeffrey Sachs argues that the current macroeconomic policy is courting disaster in the long run.

Textbook References:

Pages 246-248 “The Fiscal Challenge Ahead”
Pages 581-582 “Some Important Identities”
Pages 589-593 “Policy 3: Government Budget Deficits”
Pages 654-655 “The Financial Crisis of 2008”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?
Pages 838-841 “Should the Government Balance Its Budget?”


Feb. 22

Good Banks Inside of Bad Banks

Susan Woodward and Robert Hall argue that we should create good banks inside of bad banks.

Textbook References:

Pages 649-658 “Banks and the Money Supply”
Page 821 “Bernanke’s Challenges”


Feb. 21

Buiter’s Solution

Willem Buiter argues that we should capitalize new banks rather than help banks with toxic assets.

Textbook References:

Pages 649-658 “Banks and the Money Supply”
Page 821 “Bernanke’s Challenges”


Feb. 20

Loose Money and Politicized Mortgages

Phil Gramm argues that the financial crisis was caused by loose monetary policy and politicians interfering in the mortgage market.

Textbook References:

Pages 8-10 “Principle 6: Markets are Usually a Good Way to Organize Economics Activity”
Pages 654-655 “The Financial Crisis of 2008”
Page 821 “Bernanke’s Challenges”


Feb. 19

Banks vs Holding Companies

John Coates and David Scharfstein argue that TARP money should be sent to banks, not to their holding companies.

Textbook References:

Pages 649-658 “Banks and the Money Supply”
Page 821 “Bernanke’s Challenges”


Feb. 13

Uncertainty and the MPC

Irving Fisher

There is a link to a story from The Economist about Irving Fisher. It suggests that Fisher’s ideas, especially about debt deflation, are relevant today.

Textbook References:

Pages 654-655 “The Financial Crisis of 2008”

Pages 674-676 “The Fisher Effect”

Page 821 “Bernanke’s Challenges”


Jan. 26

Cochrane on Fiscal Stimulus

John Cochrane makes the case against fiscal stimulus. Brad DeLong accuses him of making a “freshman mistake.”

Textbook References:

Pages 654-655 “The Financial Crisis of 2008”
Pages 778-787 “How Monetary Policy Influences Aggregate Demand”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?


Jan. 23

Huizinga, Lucas and Murphy

There is a link to a University of Chicago panel discussion of the proposed fiscal stimulus.

Textbook References:

Pages 778-787 “How Monetary Policy Influences Aggregate Demand”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?
Pages 838-841 “Should the Government Balance its Budget?”


Jan. 20

The Long Lags of Fiscal Policy

Mankiw posts an article from the AP reporting that the CBO thinks the infrastructure projects in the stimulus plan will not affect the economy for some time.

Textbook Reference:

Pages 830-832 “Con: Policymakers Should Not Try to Stabilize the Economy”


Jan. 19

Advice for Tim Geithner

There is a link to commentary by Luigi Zingales, who has advice for the new Secretary of the Treasury.

Textbook References:

Pages 10-12 “Principle 7: Governments Can Sometimes Improve Market Outcomes”
Pages 578-580 “Financial Intermediaries”
Pages 778-787 “How Monetary Policy Influences Aggregate Demand”
Page 821 “Bernanke’s Challenges”


Jan. 15

A Defense of TARP

There is a link to an editorial by two former chairs of the Council of Economic Advisors. They respond to critics of how the first $350 billion have been spent.

Textbook References:

Page 656 “Problems in Controlling the Money Supply”
Pages 778-787 “How Monetary Policy Influences Aggregate Demand”
Page 821 “Bernanke’s Challenges”


Jan. 13

There is a link to a report by Glen Rudebusch about the unconventional monetary policy that the Fed has employed. It is necessary because the conventional method of cutting interest rates is no longer possible.

Textbook References:

Pages 653-656 “The Fed’s Tools of Monetary Control”
Pages 778-787 “How Monetary Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”


Dec. 31

Open Market Operations in Equities

Roger Farmer suggests that the Fed should buy some stock to stabilize the equities markets in a manner akin to its open market operations in the bond market.

Textbook References:

Pages 576-578 “Financial Markets”
Pages 653-658 “The Fed’s Tools of Monetary Control”
Pages 778-787 “How Monetary Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?


Dec. 30

The IMF on Fiscal Policy

There is a link to a report from the IMF titled “Fiscal Policy for the Crisis.”

Textbook References:

Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?


Dec. 27

Summers on the Obama Plan

There is a link to an editorial by Larry Summers that argues that stimulus spending should focus on investment rather than consumption.

Textbook Reference:

Chapter 25 “Production and Growth”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?


Dec. 25

Merry Christmas

There is a humorous, Christmas-themed video of all the government’s efforts to fix the financial crisis.

Textbook References:

Pages 778-787 “How Monetary Policy Influences Aggregate Demand”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?


Dec. 24

Feldstein on Defense Spending

There is a link to an editorial by Martin Feldstein that argues that a significant share of new government spending should be for defense.

Textbook References:

Pages 227-232 “Public Goods”
Pages 242-248 “A Financial Overview of the U.S. Government”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?


Dec. 23

A Primer on Quantitative Easing

There is a video that does an excellent job of explaining the Fed’s current strategy.

Textbook References:

Pages 649-658 “Banks and the Money Supply”
Pages 778-787 “How Monetary Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?

Robert Lucas on the Economy

There is a link to an editorial by Robert Lucas where he argues that monetary policy should be preferred to fiscal policy.

Textbook References:

Pages 778-787 “How Monetary Policy Influences Aggregate Demand”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?


Dec. 18

Stimulus Policy Skeptics

Mankiw presents the case against a fiscal policy stimulus, mostly by links to his previous posts.

Textbook References:

Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?
Pages 838-841 “Should the Government Balance its Budget?”

Two Views of Housing Policy

There is a link to an editorial by Glenn Hubbard and Chris Mayer that argues in favor of more government action to reduce mortgage interest rates. There is also a link to an editorial by Ed Glaeser and Joe Gyourko that argues that such a policy is the cause of the current crisis.

Textbook References:

Pages 8-10 “Principle 6: Markets Are Usually A Good Way To Organize Economic Activity”
Pages 10-12 “Principle 7: Governments Can Sometimes Improve Market Outcomes”
Pages 778-787 “How Monetary Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?


Dec. 16

1. The Next Round of Ammunition

Mankiw discusses what else the Fed can do, given that interest rates are as low as they can go.

Textbook References:

Chapter 33 “Aggregate Demand and Aggregate Supply”
Pages 778-787 “How Monetary Policy Influences Aggregate Demand”
Page 821 “Bernanke’s Challenges”


Dec. 13

Interview with Marty

There is a video of an interview with Martin Feldstein. Martin addresses the auto bailout, Fannie Mae and Freddy Mac, and real interest rates.

Textbook References:

Pages 7-8 “Principle 4: People Respond to Incentives”
Pages 298-300 “The Firm’s Long-Run Decision to Exit or Enter a Market”
Pages 348-351 “Competition with Differentiated Products”
Chapter 26 “Saving, Investment, and the Financial System”
Page 821 “Bernanke’s Challenges”


Dec. 10

Cooley on Mortgage Restructuring

There is a link to an editorial by Tom Cooley. Tom argues that the current mortgage restructuring methods have had little impact because they are badly designed.

Textbook References:

Pages 7-8 “Principle 4: People Respond to Incentives”
Page 821 “Bernanke’s Challenges”


Dec. 4

What I did today

There is a link to an article about a panel discussion at Harvard about the economic crisis.

Textbook Reference:

Page 821 “Bernanke’s Challenges”

The Case for Inflation

There is a link to an article by Ken Rogoff that argues in favor of more inflation. More inflation would reduce the real value of debt.

Textbook References:

Page 682 “A Special Cost of Unexpected Inflation: Arbitrary Redistributions of Wealth”
Chapter 35 “The Short-Run Trade-off between Inflation and Unemployment”


Dec. 3

Morning Reads

There is a link to an editorial by Oliver Hart and Luigi Zinglaes that argues that the government should not bail out failed firms.

Textbook References:

Pages 8-10 “Principle 6: Markets Are Usually A Good Way To Organize Economic Activity”
Pages 10-12 “Principle 7: Governments Can Sometimes Improve Market Outcomes”
Page 821 “Bernanke’s Challenges”