"Who Pays for Disinflation? Disinflationary Monetary Policy and the Distribution of Income"

Using theoretical predictions, econometric results, and the example of the Volcker disinflation, Thorbecke establishes that through disinflation's burden on the durable goods and construction industries, small firms, and low-wage workers and its benefits to bond market investors, it effects a redistribution of wealth from the poor to the rich. Because of this distributional consequence, he argues, engineering a disinflationary recession now to wring more inflation out of the economy would be inappropriate. On the contrary, with inflation as low as it is and with upward pressure on wages that could trigger a rise in inflation also low, now is the time for the Federal Reserve to let the economy grow--to seek policies that promote distributive justice and that help those individuals most at risk for shrinking income.

A Dual Mandate for the Federal Reserve: The Pursuit of Price Stability and Full Employment

The Federal Reserve currently pursues both price stability and full employment. Congress is debating whether to make price stability the overriding goal of monetary policy. This paper argues against such a change for several reasons. First, under the current mandate the U.S. has experienced low inflation and low unemployment, while many inflation-targeting countries have experienced double-digit unemployment. Second, the costs of unemployment are substantial while the costs of moderate inflation are probably not large. Third, central bankers need prodding to pursue goals other than inflation. Fourth, if the price level is not free to adjust, an adverse supply shock can cause large increases in unemployment.Employment; Full Employment; Inflation; Monetary Policy; Monetary; Policy; Prices; Unemployment

How Elastic is East Asian Demand for Consumption Goods?

This paper investigates import demand in East Asia. Estimating exchange rate elasticities for countries in the region is difficult because many imports are used to produce goods for re-export. An exchange rate appreciation that reduces East Asian exports will also reduce the demand for imported inputs that are used to produce exports. To correct for this bias this paper examines the imports of consumption goods, since these are intended primarily for the domestic market. Results from several specifications indicate that currency appreciations and increases in income in East Asian countries would significantly increase consumption imports.east asia demand; exchange rate elasticities; consumption goods

Transpacific Imbalances and Macroeconomic Codependency

Current account deficits in the United States (US) and current account surpluses in East Asia are an enduring part of the global economic landscape. They are supported by low saving in the US and by reserve accumulation in Asia. This paper argues that this strategy is causing macroeconomic problems for the People’s Republic of China (PRC). Inflation is rising, and interest rates are set too low because the yuan is closely linked to the US dollar. Low interest rates have fueled overinvestment in physical capital and rising real estate prices. They also cause savers to earn negative returns on their bank deposits.reserve accumulation; sterilization policy; transpacific imbalances; macroeconomic codependency

The Effect of Exchange Rate Changes on Trade in East Asia

This paper considers how exchange rates affect East Asian trade. The evidence indicates that exports produced within regional production networks depend on exchange rates throughout the region while labor-intensive exports depend on exchange rates in the exporting country. These results make sense since the majority of the value-added of processed exports come from imported parts and components while most of the value-added of labor-intensive exports comes from the domestic economy. Recent findings also indicate that imbalances between the People’s Republic of China (PRC) and the United States are a major outlier and that an appreciation of the PRC yuan (CNY) is necessary to reduce these imbalances.global imbalances exchange rate elasticities prc; exchange rate changes east asia

"Further Evidence on the Distributional Effects of Disinflationary Monetary Policy"

The performance of the U.S. economy between 1994 and 1998 was so good that some pundits began to call for the Federal Reserve to increase interest rates to depress economic activity and reduce asset prices. However, slowing the economy to stabilize asset prices would have adverse distributional effects. Impulse-response functions from identified vector autoregression (VAR) indicate that unexpected increases in the federal funds rate increase unemployment among blacks and Hispanics by 50 to 90 percent more than among whites. A narrative approach applied to two disinflationary periods shows that higher interest rates in the 1974 disinflation decimated the housing industry and that two interest-rate-sensitive sectors-construction and durable goods-showed the largest declines in 1980 and 1981 (periods following the 1979 tightening). Utilizing the Romer and Romer examination of the minutes of Federal Open Market Committee meetings to determine dates on which the Fed attempted to create a recession to reduce inflation, antiinflationary policy shocks can be estimated to increase unemployment among nonwhites more than twice as much as they do among whites. A social accounting matrix (SAM) indicates that in the sectors that were hardest hit by recession following the 1974-1975 and 1979-1982 disinflations (construction and durable goods), blue-collar workers were harmed more than other workers in terms of lost income and urban households were hurt much more than rural households. Minorities bear the brunt of disinflationary policy and do not share proportionately in the benefits of keeping the stock market stable, a factor that the Fed should take into account when contemplating actions aimed at stabilizing asset markets.

"A Dual Mandate for the Federal Reserve, The Pursuit of Price Stability and Full Employment"

The Federal Reserve currently has two legislated goals--price stability and full employment--but a debate continues about making price stability the Fed's primary and overriding goal. Evidence from the recent history of monetary policy contradicts arguments in favor of assigning primacy to inflation fighting and supports giving full employment equal importance. Economic performance under the dual mandate has been excellent, with low unemployment and low inflation, while many European countries whose central banks focus solely on inflation are experiencing double-digit unemployment. The costs of unemployment are high, but the costs of even moderate inflation are estimated to be low. Central bankers, who tend to be inflation-averse, need to be prodded to consider goals other than inflation. And, if the Fed pursues price stability exclusively, the price level is not free to increase in the event of an adverse supply shock to prevent large increases in unemployment. A dual mandate allows the Fed to focus on one goal or the other as conditions demand and to balance policy effects.