Olivier Blanchard
@ojblanchard1
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Robert Solow Professor of economics emeritus, MIT Senior Fellow, Peterson Institute for International Economics
Washington DC
Joined November 2015
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This is insane.
#Brazil
and
#Argentina
to start preparations for a common currency
Other Latin American nations will be invited to join plan which could create world’s second-largest currency union
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1/8. A point which is often lost in discussions of inflation and central bank policy. Inflation is fundamentally the outcome of the distributional conflict, between firms, workers, and taxpayers. It stops only when the various players are forced to accept the outcome.
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I feel the use of ``stagflation’’ is wrong. We are not seeing anything like stagnation. What we are seeing instead is very strong growth, fueled by private and public demand, hitting supply constraints, and leading to some sharp price increases. Nothing to do with stagflation.
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I have lost my mentor. Robert Solow was my thesis advisor, and being named the Robert Solow professor of economics at MIT was the proudest day of my life. There will be times for elogies. Meanwhile, RIP Bob, with infinite thanks.
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Recalé
Ca s'appelle l'effet multiplicateur. On l'apprend en première année d'éco en cours de Macroéconomie.
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1. If it is confirmed that even 3 doses of Sinovac are ineffective against Omicron, China now has 1.4b non immunized citizens... This has major economic implications for China and for the world.
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RIP Alberto Alesina, my student, my friend. Passion for life. Passion for work (we often disagreed, but we both learned from each other), creativity, and very hard work. Big loss.
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日本は特に悪性の「長期停滞」、つまり、国内の民間需要の不足に直面しています。完全雇用を維持するためには、積極的な金融政策と財政政策が必要になります。金融政策に可能なことは全て行いました。そこで、財政政策の役割が求められます。
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Ben Bernanke is the living economist who has made the biggest contribution to world GDP. Without his actions when the financial crisis came, GDP would have collapsed much more than it did. So, on purely financial grounds, he deserves the prize (and on other grounds as well).
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I finished the 8th ed of ``Macroeconomics'' before covid came. I have now written a covid chapter. It is largely self contained and may be of interest to teachers, students, and interested observers. Comments and suggestions welcome.
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Don't blame the oil companies for their high profits. It is not price gouging, just how markets work. But there is nothing wrong with taxing those exceptional profits.
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J'ai peur que les économistes de NUPES aient mal compris la signification de multiplicateurs supérieurs a 1. Comme ils ont tendance à me citer, je me sens oblige de corriger. Deux points tout simples (bien sûr, il y a beaucoup de complications potentielles que j’ignore ici):
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Who is this guy? He is stealing my show...
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I am afraid Mr Schäuble misunderstood me. I objected to the Biden stimulus program not because of the increase in debt but because of the size of the demand push it implies and the risk of overheating and inflation. And I do not worry about inflation in the EU.
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A fascinating graph, showing the dynamics of the second wave in France.
Things were fine in July, but the 20-29 year olds starting relaxing.
Over time, they contaminated older generations until infection rates were high for all.
How will the reverse movement proceed?
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A question. Central banks have large research departments. Ministries of finance typically do not even have a research department. (with the result that research on monetary policy is much more developed than research on fiscal (macro) policy). Why?
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A textbook example of how not to design and not to sell a fiscal expansion. While we were worried about Italy, the UK sneaked in. We are lucky that the UK is not in the euro… Otherwise, we would be facing another euro crisis. ☹
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50k folllowers today. Never got into a war of words. Learned quite a bit from the interactions. Twitter, used right, is incredibly useful.
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RIP Bob Mundell. The Mundell- Fleming model still today perhaps the best thought-organizing model we have in our macro tool kit.
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The world is de facto at war (against the virus, rather than against each other---this is the good news...) With this in mind: US Federal deficits as a ratio to GDP: 1942: -12%, 1943: -26%, 1944: -21%, 1945: -20%. Let's not be squeamish.
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Enormously impressed by the webinar by Raj Chetty today
An amazing combination of how to put big data together, test hypotheses, and draw highly relevant policy conclusions. This is 21st century economic research. I feel old, but excited. Watch it.
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My two cents on the virus today. Two vital sets of measures.
Keep the flow of infections down so the health system is not overwhelmed. Do whatever it takes.
Prepare fiscal measures, including transfers and backstops to banks. Do whatever it takes.
This is more or less it.
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I thought it was a bad idea to seize Russian reserves before the US congress had voted on the Ukraine package. It gave too easy a way to Congress to vote no and pass the buck. Now that they have voted, it is hard to think of good reasons not to seize. Yes, it will create a
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Of utmost relevance for covid dynamics.
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1. A year and a half ago, President Macron asked Jean Tirole and me to form an international commission to study future major challenges facing France and think about policies. We decided to focus on three issues, global warming, inequalities, and aging. The report just came out.
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For the last year, I have been working on a book on fiscal policy under low interest rates. It will be published by MIT Press in 2022. Meanwhile, MIT Press has made the draft available to all on an open source site,
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Let me double down and go through some numbers. I agree that too much is better than too little and we should aim for some overheating. The question is how much. Much too much is both possible and harmful. I think this package is too much.
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On MMT. I shall write a longer piece. But: Yes, fiscal policy can be used to maintain output at potential. No, the deficit, unless very small, cannot be fully financed through non-interest bearing money creation, without leading to high or hyperinflation.
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A 11-piece thread on Italy, the ECB, and the need to avoid another euro crisis. Start with the basics, the first two points being the most important.
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Macroeconomics 8th edition is out. Compared to the first edition (1997), I am struck by two things. The architecture has not changed. But the degree to which what was exotic then is, at least for the time being, the new normal.
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Larry: Are you becoming chartist? 😀(I kind of remember that something happened at the end of the 1970s, like a trippling of oil prices, which might be vaguely relevant. Do u expect it to happen again?)
It is sobering to recall that the shape of the past decade’s inflation curve almost perfectly shadows its path from 1966 to 1976 before it accelerated in the late 1970s.
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A fact that struck me: Russia's GDP (1.4 trillion in dollars) is equal to the sum of Netherlands and Belgium GDP (0.9 and 0.5 trillion respectively)...
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1. I thought it useful to gather my thoughts and predictions for the US economy for the rest of the year. The usual caveat applies: there is a lot of uncertainty around them, but these are my best guesses. 1/9
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1. Twitter is great in allowing you to get your thoughts out quickly. Sometimes too quickly. You have second thoughts. The world changes. I want to take three covid forecasts that I got wrong:
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"Against ignorance we have education. Against inequalities, development. Against cynicism, trust and good faith. Against fanaticism, culture. Against disease and epidemics, medicine. Against the threats on the planet, science."
Macron in his speech to Congress. Feels good.
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Some quick reactions to the new lockdowns in Europe.
1. The degree of uncertainty is much higher than in the first wave. In the first wave, the (incorrect) belief was that the infection rate would quickly decrease and remain low thereafter.
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A fascinating graph in many ways. The starting point. The steady collapse over 80 years. The sharp, but limited reversal. (from Daniel Wadenstrom, )
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Why I am pessimistic about inflation, and why I believe the Fed will have to increase rates more than markets think.
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Janet Yellen: A truly great appointment. The perfect expertise mix. Especially at a time when, because of the secular stagnation environment, fiscal and monetary policy makers must work together in new and complex ways.
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Great choices for the Nobel prize. Sad that Alan Krueger could not share it.
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Democrats. Delighted by your win. But please don't go for the 2000 dollars checks. Aim the money better, for those who really need it.
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Take them.😀 Why are people still willing to pay tens of thousands in tuition when they can get these for free... This will change, and, with it, the business model of higher ed.
MIT University just released free online courses.
No payment required.
Here are 10 courses you don't want to miss in 2024:
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1. A mini revolution in the presentation of the US budget. Two new lines: Real net interest payments (that is, net interest payments corrected for inflation, in dollars and as % of GDP. And striking numbers: They are negative up to 2028, small after that....
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I am known as a dove. I believe that the absolute priority is to protect people and firms affected by covid. Still, I agree with Summers. The 1.9 trillion program could overheat the economy so badly as to be counterproductive. Protection can be achieved with less.
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More than the level of debt or even debt service, what matters most for debt sustainability is whether the budget process is functional or disfunctional, whether it can adjust if the need arises. The US budget process is disfunctional. Fitch downgrading was reasonable.
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1/6 The lag conundrum of monetary policy
Monetary policy affects activity with a lag. This enormously complicates the task of policy makers, and the design of disinflationary policy.
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Weighing my words carefully: We may be on the verge of a shift in fiscal paradigm. Proof of concept: The large agreement between Summers, Furman, Bernanke, Rogoff, and me, in the PIIE-Brookings zoom. (Second hour. The first hour is great as well)
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1. Rip Daniel Cohen, my friend
Daniel combined the best of anglo saxon economics and French intellectual flair. He was perhaps the world expert on sovereign debt and debt renegotiation. He was incredibly creative, had a hundred ideas a minute, had a culture beyond compare.
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1. I know I should not try to answer the MMT crowd. But I am told: Look at Japan. It shows that MMT is right. Deficits are large.The BOJ is buying bonds by the bundle, and yet no inflation. So three points (I know, it is complicated.Much easier to give categorical pithy answers):
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A lot of similarities between crypto and QAnon. Same anti-state sentiment, same irrationality, same herd behavior. Good reasons to worry.
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Not joking: Very relevant, as we learned in 2008-9.
Maybe the toughest challenge to macro as we do it.
Microeconomic decisions create macroeconomic phenomena...
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Dear Gabriel: Happy to see you take the right step (and on the right day). Rather than writing academic papers, advising the very rich to invest into crypto is clearly a great way to reduce inequality.
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A new year's gift. Solow on Solow. Take the time.
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7/8. It is a highly inefficient way to deal with distributional conflicts. One can/should dream of a negotiation between workers, firms, and the state, in which the outcome is achieved without triggering inflation and requiring a painful slowdown.
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Much of the debate about fiscal policy appears to be based on the notion that governments will ALWAYS misbehave, so one should NEVER tell them that there is more policy space, even when there is. This is counterproductive, and leads governments to ignore academic advice.
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Much of the progress in macro in the last 40 years came from the assumption of ergodicity. It lies behind the use of VARs and other time series tools. It lies behind the solution to dynamic optimization problems. These may have a hard time dealing with the current data...
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8/8. But, unfortunately, this requires more trust than can be hoped for and just does not happen. Still, this way of thinking inflation shows what the problem is, and how to think of the least painful solution.
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1. During World war II, economists working for US military intelligence, and using analytical tools, identified how bombings should be chosen so as to have the maximum impact on production in Germany.
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In the name of covid, a naked attack by the administration on foreign students and universities. (and, with lower educational exports, a likely major hit to the trade balance, dear to the President. ) Maybe I take too personally, but it stinks and hurts.
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My Princeton webinar on fiscal policy. What it should do, what are the challenges, whether there will be too much debt, both in rich and poor economies, the need for coordination, and the role of international institutions. All this in 45 minutes. 😀
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I want to vent. Suppose you have given a talk in a university or at a Fed. You want to be reimbursed for the plane ticket and two taxi receipts. To do this, you are directed to a portal which clearly has been designed to handle all suppliers, including contractors, etc. It
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Rip Emmanuel Farhi, a shooting star. Super brilliant, super nice, super modest. We loved you, and should have said it more.
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Inspired by France's events. Could it be that, given the political constraints on redistribution and the constraints from capital mobility, we may just not be able to alleviate inequality and insecurity enough to prevent populism and revolutions. What comes after capitalism?
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Let's be clear. The German "non paper" proposal for the reform of EU fiscal rules, requiring in particular a decline of 0.5% in the debt to GDP (1% for high debt countries) ratio each year would be catastrophic. It would lead to the worst form of pro-cyclical fiscal policy.
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The good and the bad of tweeter:
Me: If we spend money, may make sense to try to give it to those who need it. (sounds trivial/reasonable to me...)
Choir(1.5 m impressions): Communist, imbecile, academic (not a compliment), ignorant, economics is a garbage science, and worse. ☹️
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1. The next few days will likely see an avalanche of analyses of the economic effects of the corona virus. Here are a few points, building on a previous thread. Basic point: Anti virus measures aim at the core of economic organization, the division of labor.
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1. The war in Ukraine will to an increase in gas and oil prices. How much will depend on whether either Russia is willing to limit exports or the EU is willing to limit imports. For the moment, the effects are limited. They could get worse.
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RIP Bob Lucas. Surely the most influential macroeconomist of the last 50 years. A perfect example of destructive creation: He made our intellectual lives more difficult, but much more exciting. Bob: Profound thanks.
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1/6 The risk of a false dawn in US inflation.
Headline inflation is likely to decrease sharply over the next few months. The reason is simple: Many of the large increases in commodity prices have started to reverse.
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It is hard to understate the importance of the decision of the European Court of Justice to allow the EU to withhold funds to countries that do not respect the rule of law. It is a truly major decision, decisive for the future of the European Union.
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"Mission accomplished"? Paul: you of all people should know better... 🙂
The war on inflation is over. We won, at very little cost
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One thought about inflation fighting
1. When inflation comes from overheating, convincing workers that the economy needs to slow down, and that unemployment has to increase to control inflation, is hard but at least the logic can be explained.
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2.Les dépenses budgétaires augmentent la demande, mais l’offre ne peut répondre que si l’économie n’est pas au plein emploi. Sinon elles créent de l’inflation.
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In the next few months, I intend to write a short book about fiscal policy today. The slides, used for a discussion with
@JohnHCochrane
below are a first pass. More to come as I make progress.
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People have mentioned that I am big on r<g, but Piketty became famous by arguing that r>>g. How do we reconcile? My r is the safe rate. Piketty's r is the rate of return on capital, which is indeed much higher than g.
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I keep being asked: You say we may not need to increase taxes to pay for the additional debt. How can this be? Who will pay? The answer: Investors, who are willing to accept a negative rate (or more technically, a rate less than the growth rate).
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1. I see that my paper with Ben Bernanke on inflation is interpreted in contradictory ways: “BB show that demand played a small role, BB show that there is no reason to worry, etc.” It is clear that we were not clear enough... So here it goes, stated as clearly as I can.
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Global supply chains and trade wars. You are China and unhappy about the new tariffs. You identify a few Chinese plants crucial to the supply chains of a couple of US firms. You send a hygiene inspector, who finds a rat, and closes the plant for a month. You are done.
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プライマリーバランス赤字を維持し、更には拡大する理由は三点あります。第一に、需要を確保するためです。財政のスタンスが引き締めとなれば、何が需要を確保するのでしょうか？民間の需要が何らかの理由で拡大すれば、財政の引き締め余地があるでしょう。しかし、現時点ではそうではないでしょう。
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2. Given China's zero-covid policy, this implies frequent and major lockdowns, with a large effect on activity in China.
It also implies major effects on trade. Sharp limits on travel, inbound and outbound will make it hard to maintain/expand supply chains going through China.
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fascinating graph. and, while there are plenty of hypotheses, nobody is quite sure as to why.
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Why I am concerned about the size of the Biden 1.9 trillion package. A closer look at the output gap, the multipliers, and the risk of inflation.
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2/8. The source of the conflict may be too hot an economy: In the labor market, workers may be in a stronger position to bargain for higher wages given prices. But, in the goods market, firms may also be in a stronger position to increase prices given wages. And, on, it goes.
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1. My views on the implications of higher long rates for fiscal policy and debt trajectories. Here is a short summary.
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I very much agree. Macro is often getting a bum rap, because it has to answer big, essential, general equilibrium questions, where the kind of identification one dreams of is rarely/never available. Absolutism, be it in identification or in micro foundations is bad.
This is unfortunately quite true. From any rational, decision-theoretic standpoint, the Economics profession under-invests in imperfectly identified analyses of big/important/relevant questions relative to well-identified but comparatively uninteresting questions.
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I wanted to start a conversation on public debt and fiscal policy. The conversation has started. This is a first pass at listing and discussing objections to my AEA paper, and also an attempt to translate general principles into practical policy advice.
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A Trump administration potential silver lining: It may provide macroeconomists with true randomized (not quite controlled) experiments.
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第二に、インフレ率がインフレ目標を下回っていることです。インフレ目標の達成は望ましいことです。そのため、経済の過熱をある程度の期間継続する必要があります。それにより賃金と物価が上昇します。プライマリーバランス赤字の多少の拡大が、その達成の助けとなるでしょう。
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Message from my AEA address: Low interest rates imply that, not only public debt may have small fiscal costs, it may also have low welfare costs. You can use it, if you use it wisely. The beginning of a conversation? text:
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1. 「21世紀の財政政策」が出版されました。"Fiscal Policy under Low Interest Rates"の邦訳です。財政政策、財政赤字、債務に関心を持つすべての方にとって、本書が貴重な材料となることを願っています。
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6/8. But, in the end, forcing the players to accept the outcome, and thus stabilizing inflation, is typically left to the central bank. By slowing down the economy, it can force firms to accept lower prices given wages, and workers to accept lower wages given prices.
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Yesterday, I trolled Larry Summers, as I thought his graph was more misleading than helpful. But I fully agree with the major points of his WAPO column today: Inflation is still too high, unemployment very low, and deficits too large.
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Two reasons to expect Russia to drastically cut gas supplies.
1. Russia is a gas monopolist facing a very inelastic European demand curve. The only reason not to set a nearly infinite price (and sell epsilon) is to preserve future demand.
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Cost of banana 2 dollars. cost of duct tape: 3 dollars. Price of banana with duct tape: 120,000 dollars. Conclusion for research: We need a deeper theory of markups (and entry in the banana plus duct tape market).
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The first of two papers on inflation. This one on US inflation. The second, to come out soon, on inflation in 11 countries, based on the work of national central bank teams.
Meta conclusions very similar in the second paper.
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On the swoosh recovery. My guess is that, conditional on covid not getting worse (big if), there will be an initial fast recovery as many businesses simply reopen. But this will be another "mission accomplished" moment. Don't be fooled. The rest of the climb will be a slog.
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Ironic. Just saw the column by
@paulkrugman
, who refers to my work to develop the opposite position from mine.😀To be clear: Debt default in the US is not imminent. But I worry the needed adjustment may not come until financial markets make it unpleasantly clear that it has to.
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1. In the world of social media, it is hard not to be pigeonholed as a dove or as a hawk (in this case on fiscal policy). People are confused if you are hawkish in some case, dovish in others. So, for the record:
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