Brookings Institute

Political outsiders have had quite a good year in the United States (and elsewhere), and many pundits have attributed their success to voters’ profound dissatisfaction with the economy. Certainly there is plenty to be dissatisfied about, including growing inequality of income and wealth and stagnation in real wages. But there are positives as well, including an improving labor market, low inflation, and low gasoline prices. How do people really feel about the U.S. economy?

Even more obvious now than before the vote is that the biggest losers, economically speaking, will be the British themselves. The vote ushers in what will be several years of tremendous uncertainty—about the rules that will govern the U.K.’s trade with its continental neighbors, about the fates of foreign workers in Britain and British workers abroad, and about the country’s political direction, including perhaps where its borders will ultimately lie.

In a recent speech at the Hutchins Center at the Brookings Institution, Neel Kashkari, the new president of the Federal Reserve Bank of Minneapolis, argued that we need new strategies to tackle the problem of “too big to fail” (TBTF) financial institutions. On Monday, I’ll be on a panel at the Minneapolis Fed on the issue. This post previews my comments. In short, it seems to me that a lot of progress has been made (and more is in train) toward reducing the risks that large, complex financial institutions pose for the financial system and the economy. To say that “nothing has been done” is simply not correct. That said, because it’s really important to get this right, thoughtful debate on the issue is necessary and welcome.

“Let us suppose now that one day a helicopter flies over this community and drops an additional $1,000 in bills from the sky, which is, of course, hastily collected by members of the community. Let us suppose further that everyone is convinced that this is a unique event which will never be repeated." (Milton Friedman, “The Optimum Quantity of Money,” 1969)

Although the U.S. economy appears to be on a positive trajectory, history suggests that at some time in the next few years we may again face a slowdown, with a weakening job market and possibly declining inflation. Given that the historically low level of short-term interest rates is likely to limit the scope for conventional rate cuts, how would the Federal Reserve respond?

The Fed is not out of ammunition, and monetary policy could help cushion a possible future slowdown. That said, there are signs that monetary policy in the United States and other industrial countries is reaching its limits, which makes it even more important that the collective response to a slowdown involve other policies—particularly fiscal policy. A balanced monetary-fiscal response would both be more effective and also reduce the need to use unconventional monetary tools.

China’s central banker, Zhou Xiaochuan of the People’s Bank of China (PBOC), and other top Chinese officials recently launched a communications offensive to persuade markets and foreign policymakers that no significant devaluation of the Chinese currency is planned.[1] Is the no-devaluation strategy a good one for China? If it is, what does China need to do to make its exchange-rate commitments credible?

At the recent G20 gathering in Shanghai, three Chinese leaders—Premier Li Keqiang, People’s Bank of China Governor Zhou Xiaochuan, and Finance Minister Lou Jiwei—reassured attendees that the Chinese government had the monetary and fiscal tools as well as the know-how to guide the economy through its current challenges.

In this post we first confirm the positive correlation between stocks and oil prices, noting that it is not just a recent phenomenon. We then investigate the hypothesis that underlying changes in aggregate demand explain the oil-stocks relationship. We find that an underlying demand factor does account for much of the positive relationship, and that if, in addition, we account for shifts in market risk preferences, we can explain still more.