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A comprehensive monetary analysis of the U.S. during COVID-19
Full text linkAbstract. As a response to the economic crisis caused by the COVID-19 pandemic, the Federal Reserve implemented one of the most expansionary monetary policies in its history, renewing asset purchases under quantitative easing and supporting the economy using a wide range of other tools. In this paper, the authors provide an overview of the changes in the balance sheet of the Federal Reserve from February 26th, 2020 to April 7th, 2021 as well as an overview of the main actions taken by the Federal Reserve over the same period. The authors then analyze the impact of the activity of the Federal Reserve on the economy from the monetary perspective. In particular, the authors examine the expansion of the balance sheet of U.S. commercial banks, analyze credit counterparts of broad money, and conduct the golden growth rate analysis for broad money supply growth. The authors conclude the paper by analyzing changes in inflation expectations and Treasury yields.Keywords. Money supply; Credit; Money multipliers; Monetary policy.JEL. E50; E51; E52
Real options: Capital investment appraisal; estimating the market price of risk and application to the valuation of a new business
Full text linkAbstract. The risk-neutral valuation approach to evaluating an investment avoids the need to estimate risk-adjusted discount rates, but it does require the market price of risk parameters for all stochastic variables. When historical data is available on a particular variable, its market price of risk can be estimated using the capital asset pricing model.Keywords. Real options; Capital investment appraisal; Market price of risk; New business valuation; Internet companies; Amazon.JEL. G30; G31; G32; N00; N80; M10
Exchange arrangements and economic growth: What relationship is there?
Full text linkAbstract. This article provides empirical support for the hypothesis that different exchange rate regimes have an impact on economic growth in advanced, emerging and developing countries. The effects of different exchange rate arrangements on economic growth are examined through least squares dummy variable regressions using panel data on 125 countries during the post-Bretton Woods period (1974-1999). Also, this article addresses the issue of measurement errors in the classification of exchange rate regimes by using four different classification schemes. Three de facto and one de jure classifications are used. Consequently, the sensitivity of these results to alternative exchange rate classifications is also tested. The empirical findings indicate that developing countries with fixed regimes tend to have a higher economic growth.Keywords. Exchange rate regimes; Economic growth.JEL. F31; F33; O47
Germanys position in the world on globalization, technology and innovation
Full text linkAbstract. Germany is situated in Central Europe bordering the Baltic Sea and the North Sea. Germany is the sixth largest country in Europe. The capital of Germany after a vote from the lower house Bundestag in 1993 was moved from Bonn in the West to Berlin in the East. Germany houses the European Central Bank and according to recent statistics the GDP of Germany stood at 4.0T. Germany is a powerhouse when it comes to technology and innovation. Well-known brands include; BMW, Mercedes, SAP, Volkswagen, Audi, Siemens, Allianz, Adidas, Porsche, Deutsche and Bosch.Keywords. Germany; Globalization; Technology; Innovation.JEL. E58; G01; L25
The aggregate “portfolio”: Econometrics of economic rates of return with a Portuguese illustration
Full text linkAbstract. This research forwards estimation procedures – applications of weighted and generalized least squares techniques - designed to infer expected values, variances and covariances of rates of return in the presence of variously correlated sample observations but uncorrelated “sample waves” (strata of) and availability of already aggregate data – under which inference must rely on averages (means) of averages of averages... The same principles are extended to the method of order statistics, appropriate for univariate inference of a truncated distribution parameters. Simple tests of portfolio – market - efficiency based on correlations (or special rank correlations) between actual and estimated optimal shares are also proposed. Illustrative estimates for Portuguese economic sectors are provided – relying on yearly, semi-aggregate information for firms with 20 or more employees, covering the period 1996-2002: on the one hand, sector means, variances and covariances of economic returns to unitary (tangible and intangible asset) applications are presented and reduced by principal components. On the other, optimal (“unrestricted”) portfolios for nested subsets are reported, having been generated by a stepwise elimination procedure. Industries’ betas are approximated and market efficiency tested. Finally, parameter MOS estimates under (univariate) truncated normal assumptions are obtained.Keywords. Industry economic rates of return; Firm size; Optimal portfolio; Mean – Variance; CAPM; Market efficiency; Weighted least squares; “Weighted” SUR; Weighted method of order statistics; Weighted principal components; Dummy variables. Index numbers; Aggregation.JEL. G11; G12; G30. C39; C43; C51; C61. C24. L16; L25
Inflation policy, 2022: Background
Full text linkAbstract. By mid-2022, if not earlier, it was clear that the Federal Reserve’s inflation policy had failed. Not only did the Fed not focus on broad monetary aggregates (M2, M3, etc.), it also was not responsive to changes in end variables –an accelerating CPI indicator or Nominal GDP (NGDP). The Fed’s failing here reflects neglect by many non-Fed economists – eg, Krugman – of the same factors. The Fed has fitfully introduced average inflation targeting (AIT) over the last few years, which allows some flexibility depending on other economic variables, hence some counter-cyclicality in its methodology; it is a step toward NGDP targeting. But here too, the Powell Fed seemed not to notice cautionary signals. By early 2022, however, monetary indicators had turned flat–just as the Powell Fed accelerated rate increases. Similarly, the dollar was rising against most other currencies, more presumptive evidence that US monetary policy is now contractionary. If we consider normal lag times, the Fed is likely to be over-doing it, so that an unnecessary recession may be in the works for 2023 or early 2024. One argument says that US pandemic and other spending in 2020 contributed to the inflationary surge in late 2021 and 2022. That is not likely: the world’s demand for treasury securities is quite robust. The US central bank does not need to monetize debt, which is the channel through which deficit spending would become inflationary. The Fed policy of paying interest on excess reserves (IOER) contributed to deflationary results during the decade following the 2008-2009 recession, a consequence of which was zero-bound interest rates. IOER, combined with the Fed’s policy of quantitative easing, resulted in a greater public sector role in resource allocation.Keywords. John Maynard Keynes; Milton Friedman; Stephen Hanke; Broad money targeting; Nominal GDP (NGDP) targeting; Average inflation targeting (AIT); Foreign exchange rate targeting; Jerome Powell; Matthew Klein and Michael Pettis; George Selgin; Scott Sumner; Modern Monetary Theory; Interest on Excess reserves (IOER) policy; Zero-bound interest rates.JEL. E00; E32; E52; E58; F21; F32
The First 200 Studies in Applied Economics
Full text linkThe Studies in Applied Economics working paper series began as a way to disseminate research by Steve Hanke’s undergraduate students that deserved wider notice. The series broadened to include work by established scholars and practitioners. We use the landmark of 200 papers to review what the series has achieved and what we have learned about guiding bright undergraduate students in doing original scholarly research.Keywords. Economics, Writing, Students.JEL. A22; A30
Coalition government or federalism? The relationship between policy distance and institutional design
Full text linkAbstract. This study theorises the political system after the introduction of democracy through one mechanism: federalism and coalition government. This study shows that if a stable ruling party can be constituted by a coalition government without a federal system, then either the coalition government is maintained or a single party runs the state government as the ruling party, without devolving as much power to the regions as in a federal system. However, if there is a strong opposition party and the ruling party cannot be expected to have sufficient policy effectiveness, and if the opposition is strong enough in some regions to be the opposition party in the national government but the ruling party in the regions if federalism is introduced, then both the ruling party and the opposition party will benefit from federalism. Incentives then arise for both the ruling party and the opposition to reduce the powers of the state as a state and increase the powers of local government. Institutional designers choose whether to introduce federalism or to constitute a coalition government as a way of optimising investment for policy by the parties as well as the balance between policy distance between parties and the size of the parties.Keywords. Coalition governments; Federalism, Policy distance, Relation-specific investment.JEL. P26; P48; L38