How does uncertainty affect economy? What about monetary policy?

Why uncertainty matters?

The OECD has been warning everyone (Economic outlook 2019) , that the trade policy tension and uncertainty around it hit global economy hard. My question is, how can we think about uncertainty and its influence on monetary policy?

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What is secular stagnation and why do we care?

I’ve heard the arguments that secular stagnation refers to a situation with low long-term interest rates – reaching the zero lower bound on nominal rate often – low inflation and low output growth.  But what does this really mean?

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Neo-fisherism and unconventional monetary policy- is it a solution to low inflation?

It took me a while to convince myself to write about “neo-fisherism” as a solution to low trend inflation.

The motivation behind neo-fisherism is relatively intuitive – we have observed nominal interest rates and inflation move together, and require an explanation that supports that stylised fact.  Furthermore, the idea behind neo-fisherism is that there is the Fisher effect describes how inflation expectations must move when nominal interest rate goes changes – allowing us to keep our assumption of “neutrality” in the long run with a fixed real interest rate, rather than relying on changes in the neutral real rate of interest.

However, at face value this completely contradicts the conventional monetary policy set up, where we were taught that inflation rate and nominal interest rate follow the Taylor principle, so that when you cut the nominal interest rate, then inflation (and inflation expectations) goes up.  Given this way of thinking, and the empirical regularity that inflation and nominal interest rates DO move together, does this overturn conventional monetary economics?

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Government and central bank coordination in a low inflation world

In my previous posts on the liquidity trap and about US Treasury bond purchases I have mentioned that central banks and governments should coordinate their policies as a part of unconventional monetary policy when the interest rates are near the zero lower bound and inflation is persistently low.

However, there are costs and benefits associated with any coordination game. The benchmark coordination model and the restricted version of it are well described in English, Erceg, Lopez-Salido 2017 Read more

Why are global interest rates falling?

Over 2019, interest rates for a variety of fixed terms have been declining – a topic that is likely to be front and centre at Jackson Hole over the coming days.  The weird behaviour of interest rates is something that is causing some big name economists to rethink monetary policy – such as Larry Summers thread here:

However, all I’d like to do here is talk about one of the reasons why interest rates have taken another down step in the past month or so that sounds like it has gone under the radar – poor coordination between the US Treasury and US Fed regarding cash reserves.

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Liquidity traps and unconventional monetary policy

With all this talk about a zero lower bound and unconventional monetary policy I was keen to refresh myself on “liquidity traps” – as I remember people chatting away about these when I was at university.  So what is a liquidity trap, how does it refer to what is going on now, and how can I think about monetary policy when we are in that situation?

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