Results for “nominal GDP targeting”
30 found

Who will still be famous in 10,000 years?

Sam Hammond, a loyal MR reader, asks me:

Who do you think will still be famous in 10,000 years? People from history or now. Shakespeare? Socrates? Hawking? 

This requires a theory of 10,000 years from now, but let's say we're a lot richer, not computer uploads (if so, I know the answer to the question), and not in a collapsed dystopia.  We still look like human beings and inhabit physical space.  If you wish, postulate that not all of those 10,000 years involved strongly positive economic growth.

In that case, I'll go with the major religious leaders (Jesus, Buddha, etc.), Einstein, Turing, Watson and Crick, Hitler, the major classical music composers, Adam Smith, and Neil Armstrong.  (Addendum: Oops!  I forgot Darwin and Euclid.)

My thinking is this.  The major religions last for a long time and leave a real mark on history.  Path-dependence is critical in that area. 

Otherwise, an individual, to stay famous, will have to securely symbolize an entire area, and an area "with legs" at that.  The theory of relativity still will be true and it may well become more important.  The computer and DNA will not be irrelevant.  Hitler will remain a stand-in symbol for pure evil; if he is topped we may not have a future at all.  Beethoven and Mozart still will be splendid, but Shakespeare and other wordsmiths will require translation and thus will fade somewhat.  The propensity to truck and barter will remain and Smith will keep his role as the symbol of economics.  Keynesian economics may someday be less true, as superior biofeedback, combined with markets in self-improvement, ushers in an era of flexible wages, while market-based expected nominal gdp targeting prevents a downward deflationary spiral.

The fame of those individuals will not perish, in part, because the more distant future will produce fewer lasting mega-famous people.  Achievement will be more decentralized and more connected to teams.  The dominance of Edison and Tesla, in their breakthroughs, will not be repeated.  There won't be a mega-Einstein eighty years from now, to make everyone forget the current Einstein, even if (especially if) science goes very well.

Scott Sumner as a normative philosopher of language

Recently Scott Sumner visited us and I pondered the following.

Let's say that at the peak of a financial crisis, the central bank announces a firm intention to target a path or a level of nominal GDP, as Scott suggests.  If everyone is scrambling for liquidity, and panic is present or recent, and M2 is falling, I wonder if the central bank's announcement will be much heeded.  The announcement simply isn't very focal, relative to the panic.  A similar announcement, however, is more likely to work in calmer times, as the recent QEII announcement has boosted equity markets about seventeen percent.  But for the pronoucement to focus people on the more positive path, perhaps their expectations have to be somewhat close to that path, or open to that path, to begin with.

(Aside: there is always a way to commit to a higher NGDP path through currency inflation, a'la Zimbabwe.  But can the central bank get everyone to expect that the broader monetary aggregates will expand?)

The question is when literal talk, from the central bank, will be interpreted literally.

Much of the time, but not always.  Keep in mind that few informed people take the President literally.  Hardly anyone takes Congress literally.  Some people take the Fed literally but not always.  Literal speech, interpreted literally, is hardly the political default.  (One possible implication is that often a Fed cannot do much better than the political system it is embedded in, due to how people understand speech.)  Most people don't take their spouses literally either, or their children.

I view Scott as claiming that the world would be better off if the central bank would talk more literally.  If the central bank talks more literally, they will be (can be?) understood more literally as well.  Scott is a theorist of literality

In general I am sympathetic to this view and not only for the Fed.  I believe people should speak more literally in a wide variety of circumstances.

Since Treasury hardly ever speaks literally, I believe the Fed can speak literally, and be understood literally, only when it is fairly independent of Treasury.  That was not the case in the worst parts of 2008.

Central bankers usually speak with ambiguity.  Doing so conserves their influence, as has been presented in a number of important papers.  It is thus hard for the Fed to switch to a mode of pure literal speech.  Part of the difficulty is institutional, part lies with the audience (aren't you suspicious when a vague person sudden switches to direct, literal speech?), and part of the problem is political, since the Fed is not always independent.  Part of the problem lies in the Fed itself.  The Fed's mental model is often that speaking in a literal manner spends political capital and they are reluctant to do this, even when they ought to.  There is thus a public choice reason why the Fed serves up a suboptimal amount of literal speech.

Scott's views remind me of a concern of Robin Hanson's.  "Why can't those writers just come out and say what they mean?" Robin asked me once about the classic great books.  It was a plea for a more literal discourse.  Yet more literality is not always possible and not always more effective.

At the talk, Scott was superb in responding to questions and criticisms.  I enjoyed how much he gave the questions direct, literal answers.

Addendum: Mark Thoma has a good post on nominal gdp targeting.  Scott replies, Bill Woolsey too; I view Woolsey's reply as illustrating the difficulties with presenting literal speech.  Here is a DeLong reply.

Brain teasers from monetary theory and Scott Sumner

First, here is Scott Sumner's ideal world:

In an ideal world, we’d remove all discretion from central bankers. The Fed would simply define the dollar as a given fraction of 12- or 24-month forward nominal GDP, and make dollars convertible into futures contracts at the target price. If the public expected NGDP to veer off target, purchases and sales of these contracts would automatically adjust the money supply and interest rates in such a way as to move expected NGDP back on target. It would be something like the classical gold standard, but with the dollar defined in terms of a specific NGDP futures contract, instead of a given weight of gold. The public, not policymakers in Washington, would determine the level of the money supply and interest rates most consistent with a stable economy.

To proceed, not everyone will understand this post, which is DeLong on Scott Sumner:

As I understand Scott's proposal, it is this: Nominal GDP in the fourth quarter of 2007 was $14.291 trillion. A 5% growth rate from that base would give us a value of $17.455 trillion for the fourth quarter of 2011. Add on another 3% for the average short-term nominal interest rate we would like to see, and we have $18.153 trillion. Therefore the Federal Reserve would, today, announce that it stands ready to buy and sell dollar deposits to qualified customers at a price of $1 = 1/18,155,000,000,000 of 2011Q4 GDP.

If investors thought that nominal GDP in the fourth quarter of 2011 was likely to be lower than $18.15 trillion, they would take the Fed up on its offer: demand the cash now, pay off the contract in a year by then paying 1/18,155,000,000,000 of 2011Q4 GDP, and (hopefully, if they were right) make money–thus the money stock would increase. If investors thought that nominal GDP in the fourth quarter of 2011 was likely to be greater than $18.155 trillion, they would take the Fed up on its offer: give cash to the Fed now, collect the contract in a year by receiving 1/18,155,000,000,000 of 2011Q4 GDP, and (hopefully, if they were right) make money–thus the money stock would fall.

If nominal GDP were expected to fall, the Federal Reserve would be shoveling money out the door at negative expected nominal interest rates. If his scheme were applied today it would be quantitative easing on a pan-galactic scale, as everybody would run to the Fed with bonds to use as collateral for their promises to pay the expected futures contract in a year in exchange for the cash now.

The Federal Reserve would then become truly the lender of not just last but first resort. Why would anybody borrow on the private market even at 0% per year when they could borrow from the Fed at -3%/year? Savers would simply hold cash rather than try to match the terms that the Fed was offering borrowers. Borrowing firms would borrow from the Fed exclusively. The Fed would thus create a wedge between the minimum nominal interest rate that savers would accept (zero, determined by the alternative of stuffing cash in your mattress) and the nominal interest rate open to borrowers.

I expressed related reservations about a related version of the idea in the 1997 JMCB.  I am all for (rough) nominal GDP targeting, and considering the forecast, and for Scott's work in general, but I don't think the "automaticity" versions of it work.  NGDP targeting does best as a general guideline for the central bank, which the central bank follows to make the world a better place, but without renouncing some ultimate degree of discretion with regard to timing and targeting and how good a deal they offer everyone at this new and somewhat unusual version of the discount window.

It's a general problem with strict pegging schemes that some prices (or pxq variables) adjust more quickly than others, or are better and more quickly forecast than others, and that means arbitrage opportunities against the pegger and/or very dramatic swings in nominal interest rates.

So on this question I agree with Brad and not with Scott.

Still, there is a general rule: when Scott Sumner says you are wrong, you are wrong (this is somewhat distinct from the claim that "Scott Sumner is always right," though if he worded all his pronouncements in a particular way I suppose it would not be).

So perhaps Scott will say that Brad and I are wrong.  Or perhaps he will say that I am wrong about the general rule in the first place.  Or perhaps he will say that we have misunderstood him.

The broader underlying question is how strict a nominal GDP target or NGDP forecast target can be and that question is not very well understood.

The best argument for the gold standard

No, I do not favor a gold standard, for reasons explained in this Bloomberg column.  Still, it is sad/funny to watch the mood affiliation circus of those trying to suggest, in more or less the same breath, that Trump’s Fed picks are dangerous and terrible, and also that the gold standard is the worst idea ever.  Here is one point of mine:

Historical data indicates that industrial production volatility was not higher before 1914, when the U.S. was on the gold standard, compared to after 1947, when it mostly wasn’t. And there are similar results for the volatility of unemployment. That’s not quite an argument for the gold standard, but it should cause opponents of the gold standard to think twice. Whatever the imperfections of a gold standard might be, monetary authorities make a lot of mistakes, too.

And here is the closer:

Most generally, I still think central bank governance can do a better job than a gold-based system that sometimes creates excess deflationary pressures.

Nonetheless, the contemporary world is always testing my belief in central banking. Exactly how will matters unfold when so many world leaders are not behaving as responsibly as they should? Might that irresponsibility seep into monetary policy? After all, populations are aging and debt is accumulating. Surely it is reasonable to worry that some of these governments will seek to monetize their debts and move toward excessively easy money.

Oh, but wait — I forgot one big new argument in favor of a gold standard: President Trump himself. Perhaps his management of central bank affairs is somewhat … erratic? Might it not be a good idea to have the operation of monetary policy protected by a greater reliance on rules? My personal preference is for a nominal GDP rule, but the irony is this: At the end of the day, the advocates of the gold standard, and their possible presence on the Federal Reserve Board, are themselves the best argument for … the gold standard.

Interesting throughout.

Real wage cuts in the UK recession (a questionnaire of sorts)

2008 and after: -8.5%

That measure of wage decline is from John van Reenen (pdf, useful powerpoints on UK productivity), citing Martin and Rowthorn (2012).

Now I am all for the UK trying ngdp targeting, or for that matter well-targeted fiscal policy, or both.  I never favored their *tax increases*, often misleadingly labeled “austerity” for political reasons.

I would, however, like to get a handle on Keynesian thinking here and thus the questionnaire aspect of this post.  In the traditional Keynesian story, stimulus lowers real wages through nominal reflation.  Is that the Keynesian view here?  If so, why do Keynesians believe that British real wages need to fall more than 8.5%  Why did they need to fall 8.5% to begin with?

I understand this view and accept it in part myself: “Real wages in the UK were way too high to begin with because the country was producing well above potential output.”  Yet Keynesians have been very unwilling to make that argument.

I also have seen Keynesian-style thinkers argue that inflation will make labor markets tighter and raise real wages.  This is either incoherent or at the very least underargued (there is a possible version of the view if you think prices are nominally sticky but wages are not).

In a multiple equilibria view, new information is revealed about the British economy from the financial crisis, and that economy collapses to a lower trust/productivity/risk-taking point, plus it loses some relative weight in its high productivity sectors, such as finance.  That too I understand and also partially accept, though again I don’t see current Keynesians pushing that line (though it need not run counter to Keynesianism, broadly construed).

I also understand what it would look like to mix Keynesianism with an extreme form of a stagnation theory, more extreme than I hold myself.  But again, I just don’t see that view out there.

So what is the current Keynesian view on why British real wages need to be falling so much?  I would like to better understand the alternatives to my views.

I appreciate your help in the comments.

Addendum: Scott Sumner offers very good commentary.

Why monetary policy matters less every day

1. Resource misallocation and unemployment get “baked in” to some extent, due to hysteresis.  I also would argue that some of the long-term unemployed are revealed as having been “baked in in the first place,” once the boom demand for their labor ended and their marginal products were more closely scrutinized.

2. Many nominal values end up reset, more and more as time passes and as new projects replace the old.

3. As banking and finance heal, debt overhang is less of an AD problem.  The debt repayments get rechanneled into investment, rather than falling into a black hole.

4. The Fed, at least right now, is not able to make a credible commitment toward a significantly more expansionary policy for very long.  Putting aside the more general and quasi-metaphysical issues with precommitment, just look at the key players.  Bernanke leaves the scene in 2014 and is a lame duck at some point before then.  Obama could be gone by the end of this year, and in any case is unlikely to be reelected with a thundering mandate.  Romney’s actual views on monetary policy are a cipher.  Either house of Congress could change hands.  There is less public support for a consensus view of the Fed today than in a long time.

On this issue I feel Scott Sumner is insufficiently Sumnerian.  He correctly stresses the role of expectations and credible commitments, but I still do not understand why he does not accept the implied pessimism in this, at least for May 2012.  2008-2009 was the time to act, in a Ludwig Erhard/Douglas MacArthur/Alexander Haig “I’m in charge now and we’re doing ngdp targeting try to challenge me in the chaos and confusion” sort of way.

5. The Fed already has failed to act, for whatever reasons.  That makes it all the harder to achieve the credible commitment now.  The market expectation has become “the Fed can/will only do so much.”  It’s like a guy hemming and hawing on the marriage proposal for three or four years, and then trying to suddenly set it right and show real commitment to the woman.  That’s hard to do, even aside from the points in #4.

I still believe in a looser monetary policy, I just think that what we can get for that now is much much less (a fifth? a tenth?) of what we could have received in 2008-2009.

Scott Sumner believes that Jim Hamilton somehow has changed his mind (and is puzzled by my approving link to Hamilton), but I don’t see that.  I simply believe Hamilton realizes he is now writing for a world where the credible commitment from the Fed mostly isn’t there.  Angus understands this well.

This will sound counterintuitive, but we should be debating real factors more and nominal factors less, all the more as time passes.

Circa 2012, monetary policy matters less every day.  You might feel outraged by that reality, and by the policy omissions from the past, but still monetary policy matters less every day.  That point follows from basic insights from Milton Friedman and Irving Fisher, or for that matter modern most mainstream neo-Keynesian models.  By the way the labor force participation rate declined in the latest round of data, and will likely remain low for a good while, so I am not convinced by graphs which beg the question about the size of the output gap.

I also stress that I haven’t changed my views at all, not since 2008-2009, and not since my early column on Scott Sumner (someday I’ll do a post on why I wrote that column in terms of prices rather than ndgp).  Same views, but I do see the clock ticking on the wall.

This entire point is hardest to grasp in a mental framework of “accumulated blame,” easiest to grasp within a disciplined, non-moralizing look at marginal products.

You also could write a post “Fiscal policy matters less every day.”  It’s not a message that a lot of people want to hear.

Scott Sumner, public choice, and Karl Polanyi all meet up

Through Interfluidity, where else?  Here is one bit:

Consider NGDP targeting. Under this policy rule, Treasury securities would become risk assets, whose real return would be geared to the health of the economy. (NGDP path targeting implies that shortfalls in real growth must be matched by increases in inflation.) Treasuries become low-beta index funds, diversified claims on the real production. Nominal yields would be more stable, but the real value of a future payment becomes as uncertain and volatile as the business cycle.

Read the whole thing.  In American politics, old people usually get their way.  In Western Europe, those governments have been obsessed with protecting insider interests for decades and they are not suddenly swept up with an enthusiasm for free market economics.  The problem isn’t “the Austerians”; do you really think that Pete Boettke is in charge?

Scott Sumner on sticky wages for the unemployed

Scott writes (and Alex seconds, and here is a Woolsey response):

Nominal wages are fixed for the employed. NGDP falls 5%, and 5% of workers are laid off. Now the unemployed workers lower their wage demands by 20%. Why not by even more? Because of minimum wage laws, unemployment insurance, fear of loss of prestige, etc.

Suppose companies are not worried about workers making invidious comparisons (a big if, but I’ll grant this point to my opponents.) In the best case scenario firms lay off 4% percent of their workers and hire back the 5% who are unemployed at the same total wage bill. The excess unemployment is now 4% instead of 5%. The total unemployment rate falls from 10% to 9% (assuming 5% is the natural rate.) No big deal, we are still deep in recession. Thus wage flexibility among the unemployed doesn’t really help very much. If all employed workers accepted a 5% pay cut (or if the government ordered such a cut) and the Fed kept targeting inflation, we’d experience rapid economic growth.

Most of all, I praise Scott for being the only respondent, of many, to actually try and explain why nominal wages are sticky.

As the argument is presented, I would respond: “There is talk of fixed NGDP and talk of a fixed total wage bill.  Both conditions are assuming away the possibility of an easy solution.  An unemployed worker shows up, he and the employer cut a deal, a job is created, monetary velocity goes up, NGDP goes up, and the Pareto improvement occurs.  To use a different terminology, velocity should be elastic with respect to available gains from trade and thus so is NGDP.  More concretely, referring to the current day, employers are sitting on plenty of cash.  There is nothing in the NGDP identities to prevent further hiring from that stash.”

You can read Scott’s not-easy to-summarize counter-response to a comparable comment of mine here.  I do not interpret it as defending the relevance of nominal stickiness over the longer run or even as hoeing to the above passage.  For instance Scott writes “the actual change in NGDP is a sufficient statistic for understanding the net effect of wage flexibility on NGDP, PLUS monetary policy on NGDP.”  I believe Scott could have more accurately written”: “the actual change in NGDP is a sufficient statistic for understanding the net effect of labor market and other coordination breakdowns on NGDP, PLUS monetary policy on NGDP,” removing wage stickiness from the sentence altogether.  We’re back to viewing wage stickiness as one component of GDP problems, without knowing how important wage stickiness for the unemployed is, which is precisely where we started.

Sticky wages and unemployment

In my post ZMP vs. sticky wages I argued:

By the way, the problem of sticky wages is often misunderstood. The big problem is not that the wages of unemployed workers are sticky, the big problem is that the wages of employed workers are sticky. This is why stories of the unemployed being reemployed at far lower wages are entirely compatible with the macroeconomics of sticky wages.

At lunch with Tyler today discussing his recent post I expanded on this point arguing that since a large fraction of GDP is wages that a 5% cut in the wage bill is a very big number and that even a large cut in the wages of the unemployed just isn’t enough. Scott Sumner wasn’t at lunch but nails it with a simple example:

Nominal wages are fixed for the employed. NGDP falls 5%, and 5% of workers are laid off. Now the unemployed workers lower their wage demands by 20%. Why not by even more? Because of minimum wage laws, unemployment insurance, fear of loss of prestige, etc.

Suppose companies are not worried about workers making invidious comparisons (a big if, but I’ll grant this point to my opponents.) In the best case scenario firms lay off 4% percent of their workers and hire back the 5% who are unemployed at the same total wage bill. The excess unemployment is now 4% instead of 5%. The total unemployment rate falls from 10% to 9% (assuming 5% is the natural rate.) No big deal, we are still deep in recession. Thus wage flexibility among the unemployed doesn’t really help very much. If all employed workers accepted a 5% pay cut (or if the government ordered such a cut) and the Fed kept targeting inflation, we’d experience rapid economic growth.

See Scott’s post for more.

Note that this doesn’t mean that I think sticky wages are necessarily “the answer” or even the most important problem (sticky debt is an issue as well etc.) but the evidence for sticky wages for the employed is very strong and it certainly is a problem.

How to win a civil war?

Don’t overestimate the military dimension, the law matters too:

In what may be the most significant development of the civil war since the Western airstrikes began, the rebels just declared the formation of a new “Libyan Oil Company,” and “the designation of the Central Bank of Benghazi as a monetary authority competent in monetary policies in Libya.”

This is really important. It means that a rebel government, recognized by France, now has an oil company and a central bank.

Here is more.  The next step is to get them targeting nominal gdp.

Faith in the Fed- my last word

In his response to my critique, Tyler calls the Federal Reserve the "saviour institution," a most un-Tyler like phrase although consistent with his earlier plea that all will be well if we just put our faith in the Fed.

Clearly, I am less of a true-believer than Tyler but lets turn from faith based argument towards substantive matters.

I said the case for the Fed is weak, Tyler responds that the case for free banking is weak–this is not a rebuttal.  The point is more than rhetorical since there are many alternatives to the Fed as we know it, Scott Sumner has relentlessly made the case for nominal-GDP targeting (with futures markets), Kotlikoff makes the case for limited purpose banking, Tyler and Randy Kroszner once made the case for a similar idea, mutual fund banking (Tyler is less favorable today), Selgin and White make the case for free banking, and of course there are also commodity standards such as a gold standard and the BFH system (e.g. see this piece by Bill Woolsey). Since the case for the Fed is weak, I see work on all these alternative institutions as important and valuable.

In the 1970s and 1980s there was a large literature on rules versus discretion at the Fed, that literature faded out with the great moderation. The great moderation today looks more like a combination of luck and structural change rather than discretionary wisdom.  The Selgin, Lastrapes, White paper can be read as an argument to put greater weight on rules.

Tyler argues (but compare here) that "Many of the Fed's most serious mistakes are sins of omission, not commission…" and then he seems to argue (it's not entirely clear) that alternative institutions are all omission and thus cannot do better.  The rules versus discretion debate shows us the falsity of this conjunction.  As Sumner has repeatedly reminded us a nominal GDP rule would have required more action not less. Moreover, it's quite possible that other alternative institutions such as free banking would also do better on avoiding sins of omission as well as commission.

Tyler says:

It takes a good deal of imagination to believe that the Fed's periodic overreaches outweigh the benefits it provides through countercyclicality.

If this were correct the benefits of the Fed in reducing variability would be obvious in the data. The benefits are not obvious in the data, why not? I see several possibilities.

1) As Milton Friedman showed, once we take into account lags and uncertainty it's quite easy to see how counter-cyclical monetary policy can backfire even when the case for monetary policy is strong.

2) As I suggested above, it could also be that alternative institutions performed about as well on counter-cyclicality as the Fed.  

3) It could also be that counter-cyclical monetary policy is not as important as we think. Tyler has argued strongly that the current recession is majority structural (e.g. here, here, here) and thus that neither monetary nor fiscal policy is very effective.  If a lot of recessions are structural then monetary institutions of any kind might not matter that much.

The experiment starts

The Federal Reserve has taken a large step towards a formal inflation target after chairman Ben Bernanke said that most of its officials think the rate of price rises should be “2 per cent or a bit below”.

For all my carping, I've thought this is a good idea for some time now, but I'm selfish enough to be most excited about what we will learn.  As I wrote:

Professor Sumner’s proposals may not be public policy now. But if there is one thing economists should know, it is that we should not underestimate the power of an idea.

It should be noted that Sumner's first choice is a nominal gdp target and the targeting of a price level, not an inflation rate.

Confusions about the multiplier < 1 (me defending fiscal policy, sort of)

I've been having discussions with some associates about what it means when a measured short-run multiplier is positive yet less than one.  It is occasionally suggested that a multiplier less than one means that fiscal policy is necessarily a bad idea, but I don't see it that way. 

Keep in mind there is no a priori argument that the government purchases "don't count," even though sometimes they don't produce much value ex post.  And the borrowed dollar isn't "taken out" of the economy in a meaningful way.  It can come from abroad or it can accelerate velocity, at least potentially.

Let's say the multiplier is 1.0.  That typically means a dollar is spent on a road (or whatever), which is in the plus one column.  There is some crowding out of private investment but not usually one hundred percent.  Let's say that's minus 30 cents.  The spending on the road, and road workers, has some positive second-order effects.  Let's say those are plus thirty cents per dollar.

In that particular case, the multiplier ends up as equal to one and that is net, all things considered.  The spending still would yield a short-term positive for gdp if the multiplier were 0.5.

The case against fiscal policy should examine long-term budgetary costs, possible confidence factors, implementation lags, political economy problems, difficulties in targeting unemployed resources, and also the (underrated) notion that sometimes fiscal policy postpones problems into the medium run rather than solving them through jump-starting a recovery.  But it is difficult to deny that fiscal policy brings some economic benefits in the short run, or can brake an economic decline, even if the measured multiplier is less than one or for that matter well under one.  

As an aside, I do not prefer to emphasize the notion of "investment crowding out" for analyzing fiscal policy.  The notion is a coherent one, but frequently analysts, and audiences, end up confusing nominal flows of finance with real resource opportunity costs.  I instead prefer to ask how effectively the fiscal policy is targeting real unemployed resources and to deemphasize the financial angle, at least for the first-order analysis.

My macro final

1. The pessimists commonly argue that the large U.S. trade and budget deficits eventually will require a big fall in the dollar, higher real interest rates, and a general loss of confidence in dollar-denominated assets. We all know that g > r would stop this problem in its tracks. But let us say that g is not big enough relative to r. What other non-pessimistic scenarios can you outline? How valid are they?

2. What is the difference between covered and uncovered interest parity? Which are assumed by the traditional Dornbusch model of exchange rate overshooting? None, just one, or both? How do the observed failures of the expectations theory of the term structure affect the Dornbusch model? 

3. How will the aging baby boom generation affect the following and why? Savings rates, interest rates (real, nominal, short and long term), Fed policy, inflation, and investment.

4. Targeting nominal gdp involves targeting M x V, or Money times Velocity. Do open economy considerations make this a better or worse idea? Make sure your assumptions are clearly stated.

5. Write your own exam question and answer it, do not use open economy macro as your major topic since three of the questions already cover that. The quality of the question matters as much as the quality of the answer.

Some people did very well.  #2 and #4 gave people the biggest problems.

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