1/18 With President Trump "firing" Fed Governor Lisa Cook, it might be a good time to revisit Türkiye's recent experiment with artificially low rates

Hakan Kara and I analyze Türkiye's 2021-2023 policy experiment: @ali_hakan_kara @alihakankaraEng

Paper: dropbox.com/scl/fi/ozs83h5… 2/18 President Erdogan systematically eroded Türkiye's central bank independence over the last decade

Central bank governors' terms grew shorter and shorter as Erdogan dismissed several of them for not keeping rates low enough

1/ New paper: "FCI-star" with Ricardo Caballero and @TomasCaravello

We introduce FCI*—the neutral level of financial conditions that closes the output gap

Think of it as the analogue of r*, but for the broader financial conditions that actually drive monetary transmission 2/ Why does this matter?

In 2022, monetary policy became tight in anticipation of rate hikes—months before the Fed raised rates

In 2024, policy became loose due to the stock boom, despite rates staying high

The policy rate alone is a terrible guide to effective policy stance

1/🧵 The Fed has raised rates to historic levels, yet the economy keeps surprising on the upside. Today's strong jobs report is the latest example. Why? Our new paper suggests we're looking at the wrong indicator. 2/ While policy rates are high, Financial Conditions are actually quite loose. The stock market rally and tight credit spreads have effectively offset much of the Fed's tightening.

Turkiye'deki makroekonomik durumun ozeti:

Gevsek para politikasi kur-enflasyon sarmali yaratiyor

Beklenenin ustunde enflasyon reel maaslari dusuruyor

Sonuc: Ekonomi ortalamada buyuyor, ama halkin genis kesimlerinin geliri ve harcamasi dusuyor

Esitsizlik arttirici buyume
1/10 Esitsizlik artisi aslinda sasirtici, cunku talep yonlu buyume NORMALDE gelir dagilimina olumlu yansir

Talep artisi istihdam artisina yol acar

Istihdam buyumeyi tabana yayar

Gelirlerin artmasi bir daha talep artisina yol acar (Keynezyen kaldirac)

Bizde ANORMAL durum var
2/10

The Fed usually stabilizes markets (Fed put)

But recently it did exactly the opposite

When does the Fed stabilize markets? When does it destabilize?

New paper with Caballero that sheds light on the love-hate relationship between the Fed and markets
1/16
dropbox.com/s/m9zsyrxxwett… The starting point is the observation that the economy requires equilibrium in both the macroeconomy (top boxes) and the financial markets (bottom boxes)

Caballero and I have been analyzing this dual equilibrium problem, as I explain in this thread
2/16

https://twitter.com/alpsimsek_econ/status/1258856727237349377

Thanks to @d_harrison and @WSJ for covering two of my recent papers today

My work with Ricardo Caballero suggests the Fed inducing stock market jitters is normal

It is the flip side of the asset price overshooting that we saw earlier in the recession
1/
wsj.com/articles/stock… We wrote this paper in mid-2020, when the market seemed to be recovering much faster than the economy

This lead to a seeming Wall/Main street "disconnect"

Some thought the markets were irrationally exuberant

Others blamed the Fed for saving the markets but not the economy
2/

Inflation made a comeback. Many criticized the Fed for tolerating high inflation

The Fed defended loose policy by emphasizing temporary supply shortages

In a new paper with Caballero, we analyze the OPTIMAL monetary policy with temporary supply shocks
1/
dropbox.com/s/x2i8a1o26ql6… As benchmark, in the textbook NK model, supply shocks alone do NOT create a rationale for inflation

In a temporary supply contraction, the Fed raises rates and contracts demand until the output gap is zero

Only after the supply recovers, the Fed cuts rates and boosts demand
2/

Turkiye cok yanlis bir yola girdi. Uygulanan para politikasinin cok hatali oldugunu gormek icin derin analizlere gerek yok. Ekonomi ders kitaplarinin "yapma" dedigi seyi yapip ders kitaplarini dogru cikariyoruz

Yine de dusuncelerimi kisaca not dusmeyi sorumluluk goruyorum 1/N Erdogan'in gorusleri cok siradisi. Fakat Bahceli makro teoriye nispeten uygun konusuyor. Ondan anladigim:
"Yuksek faiz talebi ve ekonomiyi daraltacak. Bunu istemiyoruz. Enflasyonla mucadeleyi talebi daraltarak degil arzi arttirarak yapacagiz."

Kulaga guzel geliyor fakat... 2/N

Persistent inflation was easy to predict from a basic IS-MP analysis with wealth effects, fiscal policy, and multipliers. The driving force is demand >> supply and this will remain so unless house and stock prices come down or supply recovers a lot 1/4

https://twitter.com/alpsimsek_econ/status/1418290116469084165

The question is not why we had inflation but whether it can be optimal monetary policy to allow for some inflation in these circumstances. In fact, there is one argument for having some overheating and inflation

2/4

The GameStop saga has many interesting dimensions. But there is an aspect that I don't think is sufficiently appreciated. In general, retail speculation hurts the retail traders the most. Platforms like Robinhood made the problem worse by making speculation cheaper and easier 1/n Empirical evidence shows that speculation by individual investors substantially lowers their returns, due to excessive risks, transaction costs, and a poor ability to pick stocks and to time the market. See the excellent review paper by Barber&Odean 2/n

sciencedirect.com/science/articl…

The Covid-19 shock almost caused a financial crisis. Central banks reacted aggressively to stop the free fall. My research with Ricardo Caballero sheds light on these events. Long thread! 1/N #EconTwitter

VoxEU tinyurl.com/y9wd9g98

Paper tinyurl.com/ybzl3wkn The economy produces goods and services that must be absorbed by spending by households, firms, governments... Much of modern macro is concerned with equilibrium in goods markets 2/N