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The battle of Bretton Woods
When turmoil strikes world monetary and financial markets, leaders invariably call for 'a new Bretton Woods' to prevent catastrophic economic disorder and defuse political conflict. The name of the remote New Hampshire town where representatives of forty-four nations gathered in July 1944, in the midst of the century's second great war, has become shorthand for enlightened globalization. The actual story surrounding the historic Bretton Woods accords, however, is full of startling drama, intrigue, and rivalry, which are vividly brought to life in Benn Steil's epic account.
Upending the conventional wisdom that Bretton Woods was the product of an amiable Anglo-American collaboration, Steil shows that it was in reality part of a much more ambitious geopolitical agenda hatched within President Franklin D. Roosevelt's Treasury and aimed at eliminating Britain as an economic and political rival. At the heart of the drama were the antipodal characters of John Maynard Keynes, the renowned and revolutionary British economist, and Harry Dexter White, the dogged, self-made American technocrat. Bringing to bear new and striking archival evidence, Steil offers the most compelling portrait yet of the complex and controversial figure of White--the architect of the dollar's privileged place in the Bretton Woods monetary system, who also, very privately, admired Soviet economic planning and engaged in clandestine communications with Soviet intelligence officials and agents over many years.
A remarkably deft work of storytelling that reveals how the blueprint for the postwar economic order was actually drawn,The Battle of Bretton Woodsis destined to become a classic of economic and political history.
eBook
A Behavioral New Keynesian Model
This paper analyzes how bounded rationality affects monetary and fiscal policy via an empirically relevant enrichment of the New Keynesian model. It models agents’ partial myopia toward distant atypical events using a new microfounded “cognitive discounting” parameter. Compared to the rational model, (i) there is no forward guidance puzzle; (ii) the Taylor principle changes: with passive monetary policy but enough myopia equilibria are determinate and economies stable; (iii) the zero lower bound is much less costly; (iv) price-level targeting is not optimal; (v) fiscal stimulus is effective; (vi) the model is “neo-Fisherian” in the long run, Keynesian in the short run.
Journal Article
THE DEPOSITS CHANNEL OF MONETARY POLICY
We present a new channel for the transmission of monetary policy, the deposits channel. We show that when the Fed funds rate rises, banks widen the spreads they charge on deposits, and deposits flow out of the banking system. We present a model where this is due to market power in deposit markets. Consistent with the market power mechanism, deposit spreads increase more and deposits flow out more in concentrated markets. This is true even when we control for lending opportunities by only comparing different branches of the same bank. Since deposits are the main source of liquid assets for households, the deposits channel can explain the observed strong relationship between the liquidity premium and the Fed funds rate. Since deposits are also a uniquely stable funding source for banks, the deposits channel impacts bank lending. When the Fed funds rate rises, banks that raise deposits in concentrated markets contract their lending by more than other banks. Our estimates imply that the deposits channel can account for the entire transmission of monetary policy through bank balance sheets.
Journal Article
Capitalist revolutionary : John Maynard Keynes
\"The Great Recession of 2008 restored John Maynard Keynes to prominence. After decades when the Keynesian revolution seemed to have been forgotten, the great British theorist was suddenly everywhere. The New York Times asked, \"What would Keynes have done?\" The Financial Times wrote of \"the undeniable shift to Keynes.\" Le Monde pronounced the economic collapse Keynes's \"revenge.\" Two years later, following bank bailouts and Tea Party fundamentalism, Keynesian principles once again seemed misguided or irrelevant to a public focused on ballooning budget deficits. In this readable account, Backhouse and Bateman elaborate the misinformation and caricature that have led to Keynes's repeated resurrection and interment since his death in 1946. Keynes's engagement with social and moral philosophy and his membership in the Bloomsbury Group of artists and writers helped to shape his manner of theorizing. Though trained as a mathematician, he designed models based on how specific kinds of people (such as investors and consumers) actually behave -- an approach that runs counter to the idealized agents favored by economists at the end of the century. Keynes wanted to create a revolution in the way the world thought about economic problems, but he was more open-minded about capitalism than is commonly believed. He saw capitalism as essential to a society's well-being but also morally flawed, and he sought a corrective for its main defect: the failure to stabilize investment. Keynes's nuanced views, the authors suggest, offer an alternative to the polarized rhetoric often evoked by the word \"capitalism\" in today's political debates.\"--From the dust-jacket front flap.
Book
FINANCIAL HETEROGENEITY AND THE INVESTMENT CHANNEL OF MONETARY POLICY
We study the role of financial frictions and firm heterogeneity in determining the investment channel of monetary policy. Empirically, we find that firms with low default risk—those with low debt burdens and high “distance to default”— are the most responsive to monetary shocks. We interpret these findings using a heterogeneous firm New Keynesian model with default risk. In our model, low-risk firms are more responsive to monetary shocks because they face a flatter marginal cost curve for financing investment. The aggregate effect of monetary policy may therefore depend on the distribution of default risk, which varies over time.
Journal Article
Monetary Policy, Bounded Rationality, and Incomplete Markets
This paper extends the benchmark New-Keynesian model by introducing two frictions: (i) agent heterogeneity with incomplete markets, uninsurable idiosyncratic risk, and occasionally-binding borrowing constraints; and (ii) bounded rationality in the form of level-k thinking. Compared to the benchmark model, we show that the interaction of these two frictions leads to a powerful mitigation of the effects of monetary policy, which is more pronounced at long horizons, and offers a potential rationalization of the “forward guidance puzzle.” Each of these frictions, in isolation, would lead to no or much smaller departures from the benchmark model.
Journal Article