Macroeconomics Homework
1. If you were in Fed Chair Yellen's shoes, what would you recommend that the FOMC do at its upcoming FOMC meetings over the next 6-12 months? Explain your recommended policy position and make a compelling set of arguments to support it. Include the following topics in your discussion:
a) What is the current economic situation and how did we get here? Give your policy recommendation with some detail, including the timing of policy normalization, especially in light of the current and leading indicators on your US Economic Dashboard. In a few sentences, summarize the points and questions you plan to raise with the foreign business leaders you encounter in either Lima or Santiago (i.e., show off the knowledge you gained in the Dashboard exercise).
b) What monetary policy actions have been taken during and since the financial crisis, and which ones were most helpful in improving the economy? Which actions might prove to have negative, unintended consequences? Should financial stability considerations be specifically included in making decisions on the fed funds rate?
c) (Will we be Zimbabwe, or will we be Japan?) Discus the long-term inflation implications of three rounds of QE and prolonged ZIRP.
d) Is there any helpful information provided by the current Treasury Yield Curve? Why or why not?
e) What complications does a strong US dollar pose for the Fed's exit strategy? What about negative interest rates, here in the US and abroad? What special communications issues does the Fed face as talk of "helicopter money" goes viral?
2. Describe how the Fed (and the US Treasury) dealt with Bear Stearns, Lehman and AIG. With the benefit of hindsight, how would YOU have handled these situations if you had been Fed Chairman at the time? Defend your position using more than ideology.
In addition:
a. Summarize the principal changes to the law made by the Dodd-Frank Act. Would having the Dodd-Frank Act in place in 2008 have resulted in better outcomes?
b. What would YOU DO NOW to prepare for the next, inevitable, financial crisis to avoid another Lehman/AIG moment? Be sure to discuss how best to limit moral hazard while maintaining sufficient financial stability to support the basic tenets of our capitalist system. Include the lessons from LTCM, and the insights from Wessel and other readings, including Prof. Rosenblum's class lectures, and the Dallas Fed's 2011 and 2012 Annual Reports.
c. How can improved communications on the part of the Fed lead to possibly better outcomes?