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Tag Archives: exchange rates

Living on a one dimensional planet

This post is a bit long and slightly technical, but I also believe it is important. Think about the following pairs of statements: The Wicksellian natural rate of interest is the policy rate that leads to stable prices. The Wicksellian natural exchange rate is the policy exchange rate that leads to stable prices. Monetary policy affects the economy by moving the policy interest rate relative to the natural rate. Monetary policy affects the economy by moving the policy...

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Why does Australia have mini-recessions?

Both here and at MoneyIllusion I’ve occasionally done posts on the odd lack of mini-recessions in the US. I define these as periods where unemployment rises by between 1.0% and 2.0% and then falls back, although you could set the lower bar at 0.7% if you removed the brief 1959 steel strike. If you smoothed the unemployment series with a three-month moving average you could also get a wider range. In other words, when unemployment starts rising in America, it rises by...

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The curse of size

Small countries have numerous advantages. For instance, they are less likely to get drawn into a trade war. The Netherlands and Germany have roughly the same size current account surplus (as a share of GDP), and yet it’s Germany that attracts all the criticism. Singapore’s current account surplus is far larger than China’s (as a share of GDP), but the US goes after China. Yes, there are now other issues with China beside trade, but at the beginning it was the Chinese...

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If you don’t want people to believe you will do X, then don’t do X

There are two ways of thinking about the relationship between monetary policy tools and monetary outcomes. Standard approach: The standard view is that lower interest rates lead to higher NGDP growth. In addition, a bigger monetary base leads to a higher NGDP. Alternate view: An alternative approach starts from the assumption that the central bank will do whatever it takes to hit its target, and then asks what the equilibrium interest rate, or equilibrium monetary...

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