In this paper, I offer some preliminary comparisons between the trade collapses of the Great Depression and Great Recession. The commodity composition of the two trade collapses was quite similar, but the latter collapse was much sharper due to the spread of manufacturing across the globe during the intervening period. The increasing importance of manufacturing also meant that the trade collapse was more geographically balanced in the later episode. Protectionism was much more severe during the 1930s than after 2008, and in the UK case at least helped to skew the direction of trade away from multilateralism and towards Empire. This had dangerous political consequences.

Almost all governments issue large stocks of debt. Optimal taxation theory typically concludes that they should hold large stocks of assets. To reconcile facts and theory, we introduce two simple modifications into an otherwise standard optimal taxation model with commitment: government impatience and continuous debt limits. Two results are obtained. First, positive government debt is optimal for even minimal government impatience. Second, the optimality of negative government debt disappears even without impatience if discrete debt limits are replaced by very wide but continuous debt limits. We go on to quantify the implications for debt, interest rates and business cycle dynamics.

US imports and exports respond little to exchange rate changes in the short run. Firms’ pricing behavior is thought central to explaining this response: If local prices do not respond to exchange rates, neither will trade flows. Sticky prices, strategic complementarities, and imported intermediates can reduce the trade response, and they are necessary to match newly available international micro price data. Using trade flow data, I test models designed to match these trade price data. Even with significant pricing frictions, the models imply a stronger trade response to exchange rates than found in the data. Moreover, despite substantial cross-sector heterogeneity, differential responses implied by the model find little to no support in the data.

Long-term interest rates in Europe fell sharply in 2014 to historically low levels. This development is often attributed to yield-chasing in anticipation of quantitative easing by the European Central Bank. We examine how portfolio adjustments by long-term investors aimed at containing duration mismatches may have acted as an amplification mechanism in this process. Declining long-term interest rates tend to widen the negative duration gap between the assets and liabilities of insurers and pension funds, and any attempted rebalancing by increasing asset duration results in further downward pressure on interest rates. Evidence from the German insurance sector is consistent with such an amplification mechanism.

We analyze conventional and unconventional monetary policies in a dynamic small open-economy model with financial frictions. In the model, financial intermediaries or banks borrow from the world market and lend to domestic households. Banks can borrow abroad up to a multiple of their equity; in turn, there is a limit to how much bank equity households can hold. The combination of external and domestic frictions results in an economy-wide credit constraint and an endogenous interest rate spread. It also magnifies the amplitude and persistence of aggregate responses to exogenous shocks. In response to external balance shocks, fixed exchange rates are contractionary and flexible exchange rates expansionary (although less so in the presence of currency mismatches); the opposite is true in response to increases in the world interest rate. Unconventional policies, including central bank direct credit, discount lending, and equity injections to banks, have real effects only if financial constraints bind. Because of bank leverage, central bank discount lending and equity injections are more effective than direct credit. Sterilized foreign exchange intervention is equivalent to lending directly to domestic agents. Unconventional policies are feasible only to the extent that the central bank holds a sufficient amount of international reserves.

The 2007–2009 Great Recession has led to an unprecedented increase in public debt in many countries, triggering substantial fiscal adjustments. What are the distributional consequences of fiscal austerity measures? This is an important policy question. This paper analyzes the effects of fiscal adjustments for a panel of 17 OECD countries over the last 30 years, complemented by a case study of selected fiscal adjustment episodes. The paper shows that fiscal adjustments are likely to raise inequality through various channels including their effects on unemployment. Spending-based adjustments tend to worsen inequality more significantly, relative to tax-based adjustments. The composition of austerity measures also matters: progressive taxation and targeted social benefits and subsidies introduced in the context of a broader decline in spending can help offset some of the adverse distributional impact of fiscal adjustments.

We examine the behavior, determinants, and implications of the equilibrium level of the real federal funds rate, interpreted as the long run or steady state value of the real funds rate. We draw three main conclusions. First, the uncertainty around the equilibrium rate is large, and its relationship with trend GDP growth much more tenuous than widely believed. Our narrative and econometric analysis using cross-country data and going back to the 19th century supports a wide range of plausible estimates for the current level of the equilibrium rate, from a little over 0 per cent to the pre-crisis consensus of 2 per cent. Second, a bivariate vector error correction model that looks only to U.S. and world real rates well captures the behavior of U.S. real rates. The model treats real rates as cointegrated unit root processes. As of the end of our sample (2014), the model forecasts the real rate in the U.S. will asymptote to an equilibrium value of a little less than half a percent by 2021. Consistent with our first point, however, confidence intervals around this point estimate are huge. Third, the uncertainty around the equilibrium rate argues for more “inertial” monetary policy than implied by standard versions of the Taylor rule. Our simulations using the Fed staff’s FRB/US model show that explicit recognition of this uncertainty results in a later but steeper normalization path for the funds rate compared with the median “dot” in the FOMC’s Summary of Economic Projections.

Across the industrialised world, real interest rates and nominal investment rates have fallen, while house prices and household debt ratios have risen. We present a calibrated OLG model which quantifies how much of these four trends can be explained with a fifth—the widespread fall in the relative price of investment goods. Relative to other explanations for low real interest rates, this trend is important because it can also account for the fall in nominal investment rates. The model can reproduce a small but economically significant part of the observed fall in interest rates and rises in house prices and household debt, and a larger part of the fall in the investment rate.

In a standard two-country international macro model, the paper asks whether imposing restrictions on international noncontingent borrowing and lending is ever desirable. The answer is yes. If one country imposes capital controls unilaterally, it can generate favorable changes in the dynamics of equilibrium interest rates and the terms of trade, and thereby benefit at the expense of its trading partner. If both countries simultaneously impose capital controls, the welfare effects are ambiguous. The paper identifies calibrations in which symmetric capital controls improve terms-of-trade insurance against country-specific shocks and thereby increase welfare for both countries.