Yin-Wong Cheung, Menzie Chinn, Antonio Garcia Pascual, Yi Zhang, 27 April 2017

Previous assessments of nominal exchange rate determination have focused on a narrow set of models. Using data for six currencies, this column examines the performance of an expanded set of models at various forecast horizons. No model consistently outperforms a random walk benchmark, although the purchasing power parity model does fairly well. Overall, combinations of model, specification, and currency that work in one period will not necessarily work well in another.

Gauti Eggertsson, Neil Mehrotra, Jacob A. Robbins, 27 April 2017

The Federal Reserve has raised rates twice since the 2016 US election and eyes are now on the future path of the Federal Funds rate, which depends crucially on the Fed’s view of the neutral rate of interest. This column argues that that current policy may be at or close to the natural rate, and that the forces that have led to the low rates are unlikely to be reversed in the immediate future. It also identifies measures that could eliminate secular stagnation via appropriate policy, should negative rates persist.

Lorenzo Caliendo, Robert Feenstra, John Romalis, Alan Taylor, 26 April 2017

Tariff barriers today are small on average, suggesting only limited welfare gains from their removal. This column argues, however, that the current generation of standard trade models have missed an important source of gains from trade by neglecting the more complex case of a world with production linkages and multiple sectors. Under monopolistic competition, the effects of firm entry may be so powerful, that optimal tariffs are not positive but negative. Even the removal of small positive tariffs could thus produce significant welfare gains.

Ernesto Dal Bó, Frederico Finan, Olle Folke, Torsten Persson, Johanna Rickne, 26 April 2017

Ancient Athenians drew lots to determine who served in public office, but oligarchs at that time (and ever since) have argued that there is a trade-off between competence and fair representation. This column uses Swedish population data on cognitive and leadership ability to argue that democracy in Sweden has created government by competent people who are representative of all walks of life. Sweden’s inclusive meritocracy suggests that electoral democracy can help us avoid the tension between representation and competence.

Ken Mayhew, 25 April 2017

Higher education authorities are concerned about the implications of Brexit for the income and international standing of UK universities – the possible reduction in the numbers of EU students and staff and the loss of EU research funding. This column explores these threats and argues that there may be real cause for concern among lower ranking institutions faced by the perfect storm of Brexit, a general toughening of immigration rules, and greater competition promised in the UK government’s recent White Paper on higher education. 

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