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What is the impact of large swings in economic policy on the risk-return trade-off faced by i nvestors? What is the impact of changes in policy regimes on investment strategies? In this paper we study the impact on returns of switches between periods of market-friendly economic policies and periods of populist policies. To quantify the impact of policy instability, we use data from Argentina--a country that has experienced frequent and very large regime changes--and find that the risk-return for individual assets and minimum variance portfolios are quite different across regimes. We then develop a dynamic model to understand optimal portfolios when investors are cognizant that regimes can change. We find that when portfolios are unrestricted, it is optimal for investors to take a large amount of risk. On the other hand, when portfolios are restricted to include only long positions, a real asset (real estate) dominates financial assets. [ABSTRACT FROM AUTHOR]

The decentralized autonomous organization (DAO) represents a radically new way to manage databases. Since money and payments are all about managing databases and since banks play a central role in money and payments, DAO-based money and payments systems are potentially a disruptive force in the banking system--which includes central banks. One would normally expect regulatory frameworks to evolve with a changing technological landscape. However, the decentralized governance structure characteristic of DAOs renders it near impossible to regulate these entities directly--a property that makes them ideal vehicles to exploit regulatory arbitrage. In this article, I discuss some of the monetary policy implications of DAO-based money and payment systems. I highlight the prospect of a globally accessible DAO-based stablecoin that may conceivably end up financing a large fraction of global trade. To the extent that such a structure imposes systemic financial risk and to the extent it cannot be regulated directly, an alternative strategy is to offer a competing product. A central bank digital currency accessible to firms involved in the global supply chain may be one way to mitigate the systemic risk associated with an emergent, unregulated global stablecoin. [ABSTRACT FROM AUTHOR]

This study investigates how fiscal policy shocks affect the external sector through markup dynamics in advanced and developing economies. We focus on the role of markup dynamics as a channel through which fiscal policy has a distinct effect on real exchange rates. Using panel data from 32 countries, we employ a local projection to evaluate the impact of expansionary fiscal policy shocks on real exchange rates, markups, and current a ccounts. Our empirical findings show distinct responses to the shocks among advanced and developing countries regarding the real exchange rate, due to different markup d ynamics. Expansionary fiscal measures result in an appreciation of the real exchange rate and an increase in markup for developing countries, whereas advanced economies experience a decrease in markup and a depreciation of the real exchange rate. Markup dynamics vary between advanced and developing economies due to differences in firms' entry and exit conditions in their institutions. In advanced economies, expansionary fiscal policy shocks promote competition and new firm e ntry, r esulting in a reduced m arkup. On the other hand, unfavorable conditions in developing countries maintain or increase existing firms' market p ower. Our research highlights the heterogeneous effects of fiscal policy shocks on the external sector, emphasizing the need for policymakers to consider institutional and entry conditions while designing and implementing fiscal policies. [ABSTRACT FROM AUTHOR]

This article is based on the Homer Jones Memorial Lecture delivered at the Federal Reserve Bank of St. Louis, November 2, 2023. Headline inflation in the euro area declined rapidly to 2.9% in October 2023 from its peak of 10.6% one year earlier. The bulk of this large drop reflected the substantial decline in the contributions from energy and food inflation. Once these base effects reverse, continued disinflation relies critically on monetary policy succeeding in reducing underlying inflation in a steady and timely manner. The last mile is about this change in the disinflation process. Large uncertainty around the appropriate calibration and effective transmission of monetary policy, together with the risk of new supply-side shocks pulling inflation away from our target once again, makes this part of the disinflation process the most difficult. In particular, monetary policy transmission may be weaker, or less direct, than in the past, given the share of less-interest-rate-sensitive services industries in total activity has increased steadily in the euro area and globally over the past few decades. In addition, persistent worker shortages have muted the transmission through the labor market, with unemployment at record low levels despite the sharp increase in interest rates. So, although progress on inflation so far is encouraging, the disinflation process during the last mile will be more uncertain, slower, and bumpier. Continued vigilance is therefore needed. [ABSTRACT FROM AUTHOR]

This article investigates patterns in real wage growth in 2022 to determine whether wages have kept up with rising price levels and how this differs among labor market participants. Using the consumer price index for wages and imputing expenditure data from the Consumer Expenditure Survey, we separately measure nominal wage growth and inflation rates at the micro level. We find that there is more heterogeneity in the former, meaning that when we combine them, an individual's real wage growth is primarily driven by their nominal wage growth. In 2022, 57 percent of individuals experienced negative real wage growth, with older and less-educated workers, as well as job stayers, being hit the hardest. Conversely, younger and highly educated workers, as well as job switchers, had higher real wage growth. [ABSTRACT FROM AUTHOR]

To better understand the tight post-pandemic labor market in the US, we decompose the decline in aggregate hours worked into extensive margin changes (fewer people working) and intensive margin changes (workers working fewer hours). Although the preexisting trend of lower labor force participation, especially by young men without a bachelor's degree, accounts for some of the decline in aggregate hours, the intensive margin accounts for more than half of the decline between 2019 and 2022. The decline in hours among workers was larger for men than women. Among men, the decline was larger for those with a bachelor's degree than those with less education, for prime-age workers than older workers, and also for those who already worked long hours and had high earnings. The reduction in workers' hours can explain why the labor market is even tighter than what is expected at the current levels of unemployment and labor force participation. [ABSTRACT FROM AUTHOR]

The US labor force participation rate (LFPR) experienced a record drop during the early pandemic. While it has since recovered to 62.2 percent as of December 2022, it was still 1.41 percentage points below its pre-pandemic peak. This gap is explained mostly by a permanent decline in the LFPR for workers older than 55. This article argues that wealth effects driven by the historically high returns in major asset classes such as stocks and housing may have influenced these trends. Combining an estimated model of wealth effects on labor supply with micro data on balance sheet composition, we show that changes in net worth caused by realized returns explain half of the drop in LFPR in the 2020-21 period and over 80 percent of "excess retirements" during the same period. [ABSTRACT FROM AUTHOR]

The Federal Reserve System (Fed) is a regular feature in the media. When the Fed communicates with the public, its focus is on forward guidance related to monetary policy--specifically, for achieving low unemployment and low inflation. Fed participants on the Federal Open Market Committee (FOMC) convey what they see as the likely path of policy, including changes in the federal funds rate, a standard monetary policy tool. Because financial markets find this information useful, news stories thoroughly cover Fed communication. However, such communication fails to explain the structure of the economy that disciplines how the FOMC achieves its objectives for employment and inflation. The FOMC necessarily conducts monetary policy based on assumptions about this structure. What is now implicit should be made explicit. Such explicitness by the FOMC is necessary for the public to understand the monetary standard that it has created. That is, the Fed needs to explain the framework it assumes to then explain how its actions translate into achievement of its objectives. Such transparency will be challenging. The standard Fed narrative implicitly assumes that a free-market economy and financial markets are inherently unstable. Economic instability originates in the private sector, and an independent Fed is required to mitigate this instability. Again, implicitly, the assumption is that the Fed understands the structure of the economy so that it knows the origin of instability and how its actions will offset that instability. Despite the Fed narrative, there is a need for a debate over the optimal monetary standard. In the 1960s, the monetarist-Keynesian debate raised the key issues relevant to the design of the optimal monetary standard. Is inflation a monetary or a nonmonetary phenomenon? What accounts for the simultaneous occurrence of monetary instability and real instability. Does the direction of causation go from monetary to real instability or vice versa? The intent of this article is to revive the earlier debate. To do so, it will be necessary to re-exposit monetarism in a way relevant to current central bank practice. To do so, I re-exposit monetarism in a way that is relevant to current central bank practice, using the term "Wicksellian monetarism" as the descriptive label. Such a debate is especially urgent at present given the FOMC's current policy of disinflation. The FOMC needs to articulate a monetary policy in terms of a long-term strategy (rule) that will restore price stability and then maintain that stability. How does current policy ensure that a declining rate of inflation will stop at 2 percent and then remain there? That is, for the long run, the policy needs to provide a stable nominal anchor. Such a policy should allow the FOMC to lower the federal funds rate to prevent a serious recession while maintaining credibility for a long-run policy to restore price stability. [ABSTRACT FROM AUTHOR]