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August 24, 2009

Jackson Hole: Not Just a Nice Place to Vacation

For the last 30 years, the Kansas City Fed has hosted a symposium for national and international central bankers in Jackson Hole, Wyoming. In general, these symposia are usually academic in nature and not terribly newsworthy. However, unlike 1985's rather staid symposium topic, The Challenge for American Agriculture, this year's Financial Stability and Macroeconomic Policy really highlighted the Fed's role and the role of other central banks during this crisis.

I bet if symposia were rated by audience participation, this one might top the list. Maybe the Fed should twitter the next one. On a more serious note, some of the papers presented were really interesting and worth highlighting. The first paper presented, "The 'Surprising' Origin and Nature of Financial Crises” by Roberto Caballero of MIT, was well done in that it warns the academic and practitioner community that we should not just assume that the origins of the crisis were all the usual suspects (leverage, poor underwriting standards, lax regulation, etc.) as that would automatically thwart any new thinking in terms of solutions. The author offers some 'surprising' causes and some proposed solutions. Check it out here.

The second paper I wanted to highlight was "Utilizing Monetary Policy to Stabilize Economic Activity." The author Carl Walsh of University of California- Santa Cruz argues that it is "inconsistent" for the Fed to advocate for an extended period of low rates while also aiming to have stable inflation. During the discussion section of the presentation, Governor Kohn addressed the author’s views. Check out the paper and some news coverage of the Kohn's response.

All the papers presented at the conference can be found HERE.

What do you think about the "linkages" argument in the first paper? And in the second paper, do you think Walsh has a point -- is this a case of the Fed trying to have its cake and eat it too -- or just a matter of timing?


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August 7, 2009

Big Mac Attack: Great way to teach PPP

By Cindy Ivanac-Lillig

The Economist magazine annually publishes the so-called "Big Mac Index." The index compares what a Big Mac costs here in the U.S. to what it costs in different countries. It is a tangible illustration of the Purchasing Power Parity (PPP).

The basic theory behind the index and behind the economic concept of PPP is to compare the price of a basket of common goods after taking into account the differences in the cost of living and inflation. The difficulty of doing this, of course, is choosing a basket that would be of similar quality and desirability that could be compared across many countries. The Economist chose the Big Mac as a proxy for the basket. The Big Mac is sold in over 100 countries and is similar in terms of quality. In fact Wikipedia even shows some fun images of Big Macs from different parts of the world --and they do look remarkably similar. Check out the pictures!

The Big Mac Index is a great way to have beginner students think about exchange rates in a tangible way and for more advanced students to look at long-term exchange rate parities and currency valuations.

The PPP rates in this table suggest what the exchange rate should trend towards in the long-run to have the Big Mac cost the same in real terms as in the U.S. If the actual exchange rate is higher than the PPP rate then the currency is undervalued relative to the U.S. dollar and vice-versa. (For a more advanced analysis, check out the Dismal Scientist blog on the Big Mac Index--click here).

Check out the index and let me know what you think. How about those poor Norwegians!

Have any of you ever used this index either professionally in a presentation or in the classroom?


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