Month: October 2022

Here is the letter, they argue for a price cap on Russian oil and gas:

As envisaged by the G7, the price cap would set a maximum price that Russian oil could be traded in conjunction with G7 services. This price, set in dollars, would be substantially below the world price, yet above the marginal cost of production in Russia. To use US, UK, EU, and allied financial services (such as insurance, credit, and payments), market participants will need to attest that all qualifying purchases are at or below this threshold.

Given the importance of participating countries for global finance and for shipping, compliance with this cap will create pressure for a lower price on Russian oil moved by tanker. While we do not expect all trades will be performed under the price cap, its existence should materially increase the bargaining power of private and public sector entities that buy Russian oil.

The price cap maintains economic incentives for Russia to produce current volumes. In April 2020, when the price of the Brent benchmark was close to $20, Russia continued to supply oil to world markets, because that price was above the cost of production in many or most existing Russian oil fields. Russian has little or no available onshore storage, and since shutting down and restarting oil fields is expensive and risky, it was more profitable for Russia to continue producing in the presence of low prices. The price of Brent now is around $96 per barrel, but Russia receives significantly less due to the “Urals discount”. This discount is caused by the perceived stigma of buying Russian products for some customers; they decline to bid for Russian oil, which reduces effective demand and lowers the price that the remaining customers need to pay.

The oil price cap proposal would effectively institutionalize the Urals discount and consequently further lower the dollar value of the Russian government’s primary revenue stream.

Do read the whole thing, the list of signers is on the bottom.

Ben Bernanke is best known for being Fed chairman, but he has a long and distinguished research career of great influence.  Here are some of his contributions:

1. In a series of papers, often with Alan Blinder, Bernanke argued that “credit and money” are a better leading indicator than money alone.  And more generally he helped us rethink the money-income correlation that was so promoted by Milton Friedman.  This work was more correct than not, but since money as a leading indicator has fallen out of favor (partially because of Bernanke’s own later actions!), these contributions are seen as less important than was the case for about fifteen years.  See also this piece on the (earlier) import of the federal funds rate as a measure of monetary policy.  Ben’s body of work on money and credit was what first brought him renown.

2. Bernanke has a famous 1983 paper on how the breakdown of financial intermediation was a key component of the Great Depression.  Earlier, Milton Friedman had stressed the import of the contraction of the money supply, but Bernanke’s work led to a much richer picture of how the collapse happened. Savers were cut off from borrowers, due to bank failures, and the economy could not mobilize its capital very effectively.  This article also shows the integration between Bernanke’s work and that of Diamond and Dybvig.  This piece has held up very well.

3. Bernanke has related work, with Gertler, Gilchrist and others, on how financial problems can worsen a business cycle.  This work of course fed into his later decisions as chairman of the Fed.  In yet other work, Bernanke showed how economic downturns can lower the value of collateral, thus squeezing the lending process and exacerbating business cycle downturns.

4. Bernanke’s doctoral dissertation was on the concepts of option value and irreversible investment.  Modest increases in business uncertainty can cause big drops in investment, due to the desire to wait, exercise “option value,” and sample more information.  This work was published in the QJE in 1983.  I have long felt Bernanke does not receive enough credit for this particular idea, which later was fleshed out by Pindyck and Rubinfeld.

5. Bernanke wrote plenty of pieces — this one with Mishkin — on inflation targeting as a new means of conducting monetary policy.  Those were the days!  Much of the OECD lived under this regime for a few decades.

6. Here is Ben with co-authors: “We first document that essentially all the U.S. recessions of the past thirty years have been preceded by both oil price increases and a tightening of monetary policy…”  Uh-oh!

7. Here is 2004 Ben on what to do when an economy hits the zero lower bound.  Here is Ben on earlier Japanese monetary policy, and what he called their “self-induced paralysis” at the zero bound.  He really was in training for the Fed job all those years.  Here is Ben on “The Great Moderation.”  Here is 1990 Ben on clearing and settlement during the 1987 crash.

8. Ben has made major contributions to our understanding of how the gold standard and international deflationary pressures induced the Great Depression, transmitted it across borders, and made it much worse.  This work has held up very well and is now part of the mainstream account.  And more here.

9. Bernanke coined the term “global savings glut.”

Here is all the Swedish information on the researchers and their work.  I haven’t read these yet, but they are usually very well done.  Here is Ben on scholar.google.com.

In sum, Ben is a broad and impressive thinker and researcher.  This prize is obviously deserved.  In my admittedly unorthodox opinion, his most important work is historical and on the Great Depression.