SEPTEMBER 11 2009

Alan Blinder, Foreign Affairs: The Fed's Political Problem. As the financial crisis continues, the U.S. Congress is considering a bill that would jeopardize the independence of the Federal Reserve. This is a shame. Monetary policy should be protected from congressional politics.

J. James Reade, Ulrich Volz, VoxEU: Should Sweden join the Eurozone? The global financial crisis has revived euro deliberations in Sweden. This column argues that Sweden ought to join the eurozone. It says that Swedish monetary independence is an illusion, as Swedish money market rates are driven by the policies of the ECB. Sweden would gain more by taking a seat at the ECB table than remaining a passive bystander.

John C. Williams, Fed San Francisco: Heeding Daedalus: Optimal Inflation and the Zero Lower Bound. If recent events are a harbinger of a significantly more adverse macroeconomic climate than experienced over the previous two decades, then a 2 percent steady-state inflation rate may be insufficiently high to stop the ZLB from having significant deleterious effects on the macroeconomy if the central bank follows the standard Taylor Rule. In such an adverse environment, stronger systematic countercyclical fiscal policy and/or alternative monetary policy strategies designed to mitigate the effects of the ZLB are needed for a 2 percent inflation target to provide a sufficient buffer.

Christina Romer et al, White House: The economic impact of the American recovery and reinvestment act of 2009. Estimates of the impact of the ARRA made by comparing actual economic performance to the predictions of a plausible, statistical baseline suggest that the Recovery Act added roughly 2.3 percentage points to real GDP growth in the second quarter and is likely to add even more to growth in the third quarter.

Gary Becker, Becker-Posner Blog: Productivity, Unemployment, and the End of the Recession. Productivity advances will lead the world out of the recession, and after a while toward a decent rate of growth in world GDP. These advances will occur even if the financial sector is not fully recovered from its crisis. As productivity advances continue at robust levels, that will stimulate the demand for labor, and begin to reduce unemployment and produce sizable rates of growth in employment.

John Cochrane, AQR: Nightmare Scenario. A long-term federal budget problem triggers a flight from the dollar, which has already fallen in value, a rise in long-term interest rates, followed by inevitable inflation. In turn high marginal rates can lower long-term growth, which makes eventual deficits worse. Phasing out health insurance subsidies as income rises amounts to such a high tax rate, and distorts people’s incentive to work.

Paola Giuliano, Antonio Spilimbergo, NBER: Growing up in a recession: Beliefs and the macroeconomy. We study the relationship between recessions and beliefs by matching macroeconomic shocks during early adulthood with self-reported answers from the General Social Survey. We show that individuals growing up during recessions tend to believe that success in life depends more on luck than on effort, support more government redistribution, but are less confident in public institutions. Moreover, we find that recessions have a long-lasting effect on individuals’ beliefs.

Marika Santoro, CBO: Will the Demand for Assets Fall When the Baby Boomers Retire? Although the retirement of the baby boomers is not likely to cause a large decline in aggregate demand for assets, several economic studies suggest that the retirement and aging of baby boomers could cause a temporary decrease in asset prices. That prediction of a temporary decrease is based on the studies’ theoretical prediction that the retirement of baby boomers will cause the demand for assets to fall more rapidly than the installed stock of capital will be reduced, causing asset prices to fall while the capital stock adjusts. Empirical evidence, however, has not revealed much connection between demographic trends and the changes observed in financial markets.