David Greenlaw

Bio: David Greenlaw is an academic researcher from Morgan Stanley (United States). The author has contributed to research in topics: Monetary policy & Interest rate. The author has an hindex of 5, co-authored 5 publications receiving 201 citations.

Crunch Time: Fiscal Crises and the Role of Monetary Policy*

Abstract: Countries with high debt loads are vulnerable to an adverse feedback loop in which doubts by lenders lead to higher sovereign interest rates which in turn make the debt problems more severe. We analyze the recent experience of advanced economies using both econometric methods and case studies and conclude that countries with debt above 80% of GDP and persistent current-account deficits are vulnerable to a rapid fiscal deterioration as a result of these tipping-point dynamics. Such feedback is left out of current long-term U.S. budget projections and could make it much more difficult for the U.S. to maintain a sustainable budget course. A potential fiscal crunch also puts fundamental limits on what monetary policy is able to achieve. In simulations of the Federal Reserve's balance sheet, we find that under our baseline assumptions, in 2017-18 the Fed will be running sizable income losses on its portfolio net of operating and other expenses and therefore for a time will be unable to make remittances to the U.S. Treasury. Under alternative scenarios that allow for an emergence of fiscal concerns, the Fed's net losses would be more substantial.

A Skeptical View of the Impact of the Fed’s Balance Sheet

Abstract: We review the recent U.S. monetary policy experience with large scale asset purchases (LSAPs) and draw lessons for monetary policy going forward. A rough consensus from previous studies is that LSAP purchases reduced yields on 10-year Treasuries by about 100 basis points. We argue that the consensus overstates the effect of LSAPs on 10-year yields. We use a larger than usual population of possible events and exploit interpretations provided by the business press. We find that Fed actions and announcements were not a dominant determinant of 10-year yields and that whatever the initial impact of some Fed actions or announcements, the effects tended not to persist. In addition, the announcements and implementation of the balance-sheet reduction do not seem to have affected rates much. Going forward, we expect the Federal Reserve’s balance sheet to stay large. This calls for careful consideration of the maturity distribution of assets on the Fed’s balance sheet. Our conclusion is that the most important and reliable instrument of monetary policy is the short term interest rate, and we discuss the implications of this finding for Fed policy going forward. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Crunch Time: Fiscal Crises and the Role of Monetary Policy

Abstract: Countries with high debt loads are vulnerable to an adverse feedback loop in which doubts by lenders lead to higher sovereign interest rates which in turn make the debt problems more severe. We analyze the recent experience of advanced economies using both econometric methods and case studies and conclude that countries with debt above 80% of GDP and persistent current-account deficits are vulnerable to a rapid fiscal deterioration as a result of these tipping-point dynamics. Such feedback is left out of current long-term U.S. budget projections and could make it much more difficult for the U.S. to maintain a sustainable budget course. A potential fiscal crunch also puts fundamental limits on what monetary policy is able to achieve. In simulations of the Federal Reserve's balance sheet, we find that under our baseline assumptions, in 2017-18 the Fed will be running sizable income losses on its portfolio net of operating and other expenses and therefore for a time will be unable to make remittances to the U.S. Treasury. Under alternative scenarios that allow for an emergence of fiscal concerns, the Fed's net losses would be more substantial.

A Skeptical View of the Impact of the Fed’s Balance Sheet

Abstract: We review the recent U.S. monetary policy experience with large scale asset purchases (LSAPs) and draw lessons for monetary policy going forward. A rough consensus from previous studies is that LSAP purchases reduced yields on 10-year Treasuries by about 100 basis points. We argue that the consensus overstates the effect of LSAPs on 10-year yields. We use a larger than usual population of possible events and exploit interpretations provided by the business press. We find that Fed actions and announcements were not a dominant determinant of 10-year yields and that whatever the initial impact of some Fed actions or announcements, the effects tended not to persist. In addition, the announcements and implementation of the balance-sheet reduction do not seem to have affected rates much. Going forward, we expect the Federal Reserve’s balance sheet to stay large. This calls for careful consideration of the maturity distribution of assets on the Fed’s balance sheet. Our conclusion is that the most important and reliable instrument of monetary policy is the short term interest rate, and we discuss the implications of this finding for Fed policy going forward.

Growth in a Time of Debt

Abstract: In this paper, we exploit a new multi-country historical dataset on public (government) debt to search for a systemic relationship between high public debt level growth and inflation our main result is that whereas the link between growth and debt seems relatively weak at “normal” debt levels, median growth rates for countries with over roughly ninety percent of gdp are about one percent lower than otherwise; average (mean) growth rates are several percent lower . surprisingly,

The Long-Term Budget Outlook

Abstract: : Projected growth in spending on the federal government's big health and retirement programs -Medicare, Medicaid, and Social Security dominates the long-run budget outlook. If current policies continue, that spending is likely to grow significantly faster than the economy as a whole over the next few decades. By 2040, the Congressional Budget Office (CBO) projects those outlays will rise to about 17 percent of gross domestic product (GDP)-more than double their current share. The expected surge in health and retirement spending stems from three fundamental factors. First, the large baby-boom generation will begin to reach retirement age within the next decade or so and become eligible to receive benefits from Social Security and Medicare. Second, people are likely to live longer than they did in the past and spend more time in retirement. Third, advances in medical technology will probably keep pushing up the cost of providing health care. The demographic changes projected over the coming decades will significantly increase the number of retirees per worker in the labor force and affect both sides of the federal government's budgetary ledger. In 1960, 5.1 workers supported each beneficiary in the Social Security program; today, the ratio is about 3.4 to 1, and in 2040, it is projected to fall to just 2.1 workers per beneficiary. As a result, the growth of federal outlays for Social Security and Medicare will climb rapidly, whereas the growth of revenues from payroll taxes (which largely finance those programs now) will slow.