The Unassuming Economist

Source: Econbrowser

“Fama (JME, 1984), and Tryon (1979) demonstrated that changes in the exchange rate do not equal the forward premium, in what came to be known as the forward premium puzzle. Since the forward premium equals the interest differential in the absence of current and incipient capital controls and in the absence of default risk — this finding is equivalent to the result that interest rates, after accounting for exchange rate changes, are not equalized on average. In other words, if the yield on the US default-risk-free bond is 2% and the yield on a UK default-risk-free bond is 5%, then the US dollar does not on an average appreciate by 3% against the pound in order to equalize returns.“

While this puzzle has largely persisted for a long time, it disappeared during and after the global financial crisis, until reappearing recently. In this blog, the authors have propounded explanations for the same. Read on to know more.

In his blog, The Grumpy Economist, John H. Cochrane, Senior Fellow at Stanford University’s Hoover Institution writes about the role of fiscal policy in pushing inflation.

“Starting in March 2020, in response to the disruptions of Covid-19, the U.S. government created about $3 trillion of new bank reserves, equivalent to cash, and sent checks to people and businesses. (Mechanically, the Treasury issued $3 trillion of new debt, which the Fed quickly bought in return for $3 trillion of new reserves. The Treasury sent out checks, transferring the reserves to people’s banks. See Table 1.)  The Treasury then borrowed another $2 trillion or so, and sent more checks. Overall federal debt rose nearly 30 percent. Is it at all a surprise that a year later inflation breaks out?  It is hard to ask for a clearer demonstration of fiscal inflation, an immense fiscal helicopter drop, exhibit A for the fiscal theory of the price level (Cochrane 2022a, 2022b).”

Click here to read the full blog.

Related Reading:

The Ghost of Christmas Inflation

Source: IMF Working Paper (2022)

In this paper, the authors have developed a new measure of aggregate trade restrictions (MATR) using data from the IMF’s Annual Report on Exchange Arrangements and Exchange Restrictions. It covers an unbalanced panel of 157 countries annually between 1949 and 2019, and is correlated with existing measures of openness and trade policy.

“MATR aggregates the multitude of ways that countries restrict the international trade of goods and services. The underlying variables cover tariffs, non-tariff barriers, and restrictions on requiring, obtaining, and using foreign exchange for current transactions. More precisely, MATR is based on the IMF’s AREAER binary variables related to: (i) exchange measures; (ii) arrangements for payments and receipts; (iii) imports and imports payments; (iv) exports and exports proceeds; and (v) payment and proceeds from invisible transfers and current transfers.”

In the second half of the paper, they establish its efficiency as a measure by using it to investigate the aftermath of trade restrictions across parameters like region, time, income groups etc.

Source: NBER Working Paper (2022)

“Results show that clubs and networks play a large role in influencing both editor and reviewer decisions. Authors who attended the same PhD program, were ever colleagues with, are affiliates of the same NBER program(s), or are more closely linked via coauthorship networks as the handling editor are significantly more likely to avoid a desk rejection. Likewise, authors from the same PhD program or who previously worked with the reviewer are significantly more likely to receive a positive evaluation. We also find that sharing “signals” of ability, such as publishing in “top five”, attending a high ranked PhD program, or being employed by a similarly ranked economics department significantly influences editor decisions and/or reviewer recommendations.”

From a new NBER paper by Philip J. Glandon, Kenneth Kuttner, Sandeep Mazumder & Caleb Stroup:

“How is macroeconomic research conducted and what is it trying to accomplish? We explore these questions using information gleaned from 1,894 articles published in ten leading journals. We find that over the past 40 years there has been a growing emphasis on increasingly sophisticated quantitative theory, such as DSGE modeling, and papers employing these methods now account for the majority of articles in macro journals. The shift towards quantitative theory is mirrored by a decline in the use of econometric methods to test economic hypotheses. Econometric techniques borrowed from applied microeconomics have to a large extent displaced time series methods, and empirical papers increasingly rely on micro and proprietary data sources. Market imperfections are pervasive, and the amount of research involving financial frictions has increased significantly in the past ten years. The frequency with which non-macro JEL codes appear in macro articles indicates a great deal of overlap between macroeconomics and other fields.”