Books
 The Fiscal Theory of the Price Level. Update, September 17 2018 Preliminary draft of part I of a book on fiscal theory. This will be revised, but it is still potentially interesting if you want to read about fiscal theory.
 Asset pricing Revised Edition. This link gives you a sample chapter. Click here to go to the Princeton University press website where you can order the book. (It is sometimes cheaper at Amazon.com or Barnes and Noble.com. In Chicago, it’s available at the seminary COOP bookstore.)
 Additional materials for Asset Pricing, lecture notes, new chapters, and the online class are now moved to their own page here, or via the Asset Pricing link at left.
 Financial Markets and the Real Economy Volume 18 of the International Library of Critical Writings in Financial Economics, John H. Cochrane Ed., London: Edward Elgar. March 2006. Edited volume of collected articles with an introduction surveying the field.
 The Squam Lake Report: Fixing the Financial System. Princeton: Princeton University Press 2010. With Kenneth R. French, Martin N. Baily, John Y. Campbell, Douglas W. Diamond, Darrell Duffie, Anil K. Kashyap, Frederic S. Mishkin, Raghuram G. Rajan, David S. Scharfstein, Robert J. Shiller, Hyun Song Shin, Matthew J. Slaughter, Jeremy C. Stein, and Rene M. Stultz
Some Notes
 Investments notes. Jan 2005. Notes for MBA investments classes. Summary of background (statistics, regression, time series, matrices, maximization) and a concise treatment of some of the standard topics (bond notation and expectations hypothesis, bond pricing)
 Time series for macroeconomics and Finance Jan 2005 Lecture notes for PhD time series course. This revision finally includes the figures!
 Continuous time. Note covering dz, dt, stochastic integrals, and how to do all of Asset Pricing Chapter 1 in continuous time.
 Continuoustime linear models
Foundations and Trends in Finance 6 (2011), 165219 DOI: 10.1561/0500000037 Manuscript How to do ARMA models, opreator tricks, and HansenSargent prediction formulas in continuous time.  A Brief Parable of Overdifferencing January 2012. This is a short note, showing how money demand estimation works very well in levels or long (4 year) differences, but not when you firstdifference the data. It shows why we often want to run OLS with corrected standard errors rather than GLS or ML, and it cautions against the massive differencing, fixed effects and controls used in micro data. It's from a PhD class, but I thought the reminder worth a little standalone note.
 Solving real business cycle models by solving systems of first order conditions 1993 Set of old lecture notes. Still, underground copies are circulating, so you can get a fresh one here.
 Writing tips for PhD students May 2005. Some tips on how to write academic articles. Do as I say, not as I do. Chinese Translation, 2013. (Original source of chinese translation. Thanks to Shihe Fu)
 More notes, related to Asset Pricing book, classes, and online class, are on the Asset Pricing page.
Articles. By topic, in reverse chronological order
Asset Pricing and Financial Economics
OK, the whole point of my research agenda is that asset pricing and macroeconomics are the same thing, but it's still a little helpful to separate papers by their main focus.

The Fama Portfolio
2017, University of Chicago Press. Edited with Toby Moskowitz. Collection of Gene Fama papers, with introductions
by myself, Toby, Ken French, Bill Schwert, René Stulz, Cliff Asness, John Liew, Ray Ball, Dennis Carlton, Cam Harvey,
Lan Liu, Amit Seru and Amir Sufi. The introductions explain why the papers are so important and how
we think about the issues today. My essays are here, other essays may be on other authors' webpages. For everything else you'll have to buy the book or e book. My essays (most joint with Toby):
Preface;
Efficient Markets and Empirical Finance;
Luck vs. Skill;
Risk and Return;
Return Forecasts and Time Varying Risk Premiums;
Our Colleague.
 MacroFinance 2017. Review of Finance 21(3): 945985. Links: Publisher (doi) , Last manuscript. This is a review paper. I survey many current frameworks including habits, long run risks, idiosyncratic risks, heterogenous preferences, rare disasters, probability mistakes, and debt or institutional finance. I stress how all these approaches produce quite similar results and mechanisms: the market's ability to bear risk varies over time, with business cycles. I speculate with some simple models that timevarying risk premiums can produce a theory of riskaverse recessions, produced by varying risk aversion and precautionary saving, rather than Keynesian flow constraints or newKeynesian intertemporal substitution. The July 2016 manuscript contains a long section with thoughts on how to make a macro model based on time varying risk premiums, that got cut from the above final version. (This is the "manuscript" referenced in the paper.) The Data and programs (zip, matlab). The slides for the talk. A very nice post on the Review of Finance Blog summarizing the paper, by Alex Edmans, the editor. Typo: equation (17) is wrong. The same equation, (3) is right.
 The Fragile Benefits of Endowment Destruction. November 2015. Journal of Political Economy 123(5) 12141226. With John Y. Campbell. (JSTOR / JPE Link.) A rejoinder to Ljungqvist and Uhlig "Comment on the CampbellCochrane Habit Model" (formerly titled "Optimal Endowment Destruction under CampbellCochrane Habit Formation"). The benefits of endowment destruction depend sensitively on how you discretize the model. Lesson: It's better to use the the continuous time version and make sure discretizations make sense. There is a nice lesson on how to extend diffusion models to jumps too. Computer program.
 A New Structure for U.S. Federal Debt November 2015 In David Wessel, Ed., The $13 Trillion Question: Managing the U.S. Government's Debt, pp. 91146. Washington DC: Brookings Institution Press. Last manuscript. I propose a restructuring of U. S. Federal debt. All debt should be perpetual, paying coupons forever with no principal payment. The debt should be composed of 1) Fixedvalue, floatingrate, electronically transferable debt. Such debt looks like a moneymarket fund, or reserves at the Fed, to an investor. 2) Nominal perpetuities: This debt pays a coupon of $1 per bond, forever. 3) Indexed perpetuities: This debt pays a coupon of $1 times the current consumer price index (CPI). 4) All debt should be free of income, estate, capital gains, and other taxes. 5) long term debt should have explicitly variable coupons. 6) Swaps. The Treasury should adjust maturity structure, interest rate and inflation exposure of the Federal budget by transacting in simple swaps among these securities.
 Toward a runfree financial system. November 4 2014. In Martin Neil Baily, John B. Taylor, eds., Across the Great Divide: New Perspectives on the Financial Crisis, Hoover Press. This is an essay about what I think we should do in place of current financial regulation. We had a run, so get rid of runprone liabilities. Technology and financial innovation means we can overcome the standard objections to "narrow banking." Some fun ideas include a tax on debt rather than capital ratios, the Fed and Treasury should issue reserves to everyone and take over shortterm debt markets just as they took over the banknote market in the 19th century, and downstream fallible vechicles can tranche up bank equity.
 Challenges for CostBenefit Analysis of Financial Regulation. Journal of Legal Studies 43 S63S105 (November 2014). Is cost benefit analysis a good idea for financial regulation? I survey the nature of costs and benefits of financial regulation and conclude that the legal process of current health, safety and environmental regulation can't be simply extended to financial regulation. I opine about how a successful costbenefit process might work. My costs and benefits expanded to a rather critical survey of current financial regulation. It's based on a presentation I gave at a conference on this topic at the University of Chicago law school Fall 2013, with many interesting papers. JSTOR link with HTML and nicer pdf. The JLS issue with all conference papers.
 A meanvariance benchmark for intertemporal portfolio theoryJournal of Finance, 69: 1–49. doi: 10.1111/jofi.12099 (February 2014) (link to JF) (Manuscript) Applies good old fashioned meanvariance portfolio analysis to the entire stream of dividends rather than to oneperiod returns. LongRun MeanVariance Analysis in a Diffusion Environment is a set of notes, detailing all the trouble you get in to if you try to apply longrun ideas to the standard iid lognormal environment, and also discusses shifting bliss points a bit.
 Finance: Function Matters, not Size May 2013 Journal of Economic Perspectives 27, 29–50 JEP link (Previous title "Is Finance Too big?" December 2012.) Is finance "too big?" Is this the right question? .
 Discount Rates Joural of Finance 66, 10471108 (August 2011). My American Finance Association Presidential speech. The video (including gracious roast by Raghu Rajan) The slides. Data and programs (zip file) Price should equal expected discounted payoffs. Efficiency is about the expected part. The unifying theme of today's finance research is the discounted part  characterizing and understanding discountrate variation. The paper surveys facts, theories, and applications, mostly pointing to challenges for future research.
 Lessons from the financial crisis Jan 2010 Regulation 32(4), 3437. The financial crisis is mainly about too big to fail expectations. The only way out is to limit the government’s authority to bail out.
 StateSpace vs. VAR models for Stock Returns Manuscript July 24 2008. In a “statespace” model, you write a process for expected returns and another one for expected dividend growth, and then you find prices (dividend yields) and returns by present value relations. I connect statespace models with VAR models for expected returns. What are the VAR or returnforecastregression implications of a statespace model? What statespace model does a VAR imply? I start optimistic. An AR(1) statespace model gives a nice returnforecasting formula, in which you use both the dividend yield and a moving average of past returns to forecast future returns. The general formulas leave me pessimistic however. One can write any VAR in statespace form, and we don’t really have solid economic reasons to restrict either VAR or statespace representations. Still, the connections between the two representations are worth exploring, and if you’re doing that this paper might save you weeks of algebra.
 Decomposing the Yield Curve Manuscript, first big revision, March 14 2008. With Monika Piazzesi. We work out an affine term structure model that incorporates our bond risk premia from “Bond Risk Premia” in the AER. There are lots of interesting dynamics – level, slope and curvature forecast future bond risk premia, and we discover that market prices of risk are really simple. We use the model to decompose the yield curve – given a yield (forward) curve today, how much is expected future interest rates, and how much is risk premium? How does the yield or forward rate premium correspond to the term structure of expected return premia? Was the conundrum a conundrum? Slides from 2010 AFA meetings Data and Programs.
 Portfolio theory Feb. 20 2007 This is a draft of a portfolio theory chapter for the next revision of Asset Pricing. I (of course) take a p = E(mx) approach to portfolio theory before covering the classic Mertonstyle direct approach. I emphasize the importance of outside income.
 The Dog that Did Not Bark: A Defense of Return Predictability Review of Financial Studies 21(4) 2008 15331575. Taken alone, returns may not look that predictable. However, pricedividend ratios vary, so either returns or dividend growth must be forecastable (or both). Implications for dividends, and longrun forecasts give strong statistical evidence against the null that returns are not forecatsable. I address the GoyalWelch finding that forecasts do badly out of sample, and the long literature criticizing longrun forecasts. The most important practical takeaway: even if you assume that all variation in market p/d ratios comes from timevarying expected returns, and none corresponds to dividend growth forecasts, you will typically find that markettiming strategies based on fitting the regression don’t work. Corrected Table 6. Three numbers were wrong in the published version. Thanks to Camilla Pederson for catching it.
 Two Trees (with Francis Longstaff and Pedro SantaClara), Review of Financial Studies 21 (1) 2008 347385. We solve the model with two Lucas trees, iid dividends and log utility. Surprise: it has interesting dynamics. If one stock goes up it is a larger share of the market. Its expected return must rise so that people are willing to hold it despite its now larger share. Typo: Equation 39 (page 363), the numerator should read (1s/(1s))ln(s)/V, not 1s/(1s)ln(s)/V. Thanks to Egor Malkov.
 Financial markets and the Real Economy in Rajnish Mehra, Ed. Handbook of the Equity Premium Elsevier 2007, 237325. Everything you wanted to know, but didn’t have time to read, about equity premium, consumptionbased models, investmentbased models, general equilibrium in asset pricing, labor income and idiosyncratic risk.
 This article appeared four times, getting better each time. (Why waste a good article by only publishing it once?) The link above is the last and the best. The previous versions were NBER Working paper 11193, Financial Markets and the Real Economy Volume 18 of the International Library of Critical Writings in Financial Economics, John H. Cochrane Ed., London: Edward Elgar. March 2006, and in Foundations and Trends in Finance1, 1101, 2005.
 Bond Risk Premia with Monika Piazzesi. American Economic Review 95:1, 138160 (2005). We forecast one year bond excess returns with a 44% R2! More importantly, a single factor, a single linear combination of yields or forward rates, forecasts oneyear returns of all maturity bonds. Read here the Appendix with lots of extra analysis. (Updated Sept 2006 to fix typos in forward rate formulas.) The NBER working paper has lots of cool stuff, including links to macro and the covariance with level result, that got trimmed from the published paper. Data and programs. Look at the pretty plot of how our forecasts work out of sample since we wrote the paper (Until the 2008 financial crisis, in which the FamaBliss procedure breaks down.) Read the Response to Ken Singleton regarding his criticism of our results in a paper with Dai and Yang, and then published in his book Empirical Dynamic Asset Pricing (Princeton, 2006). Overheads, useful if you want to teach the paper A summary with color graphs, and treatment of the period since the 2008 financial crisis, in lecture note form. Start on p 567.
 International Risk Sharing is Better Than You Think, Or Exchange Rates are Too Smooth with Michael Brandt and Pedro Santa Clara. Published Journal of Monetary Economics 53 (4) May 2006 671698. Original July 2001 (NBER WP 8404) The equity premium means that marginal rates of substitution are very volatile, with more than 50% standard deviation. Exchange rates are the ratio of marginal rates of substitution, and they only vary by about 12%. Therefore, marginal rates of substitution must be highly correlated across countries. Risk sharing is better than you think.
 Liquidity, Trading and Asset Prices. NBER reporter, Jan 2005. A review of these issues in asset pricing.
 Stocks as Money: Convenience Yield and the TechStock Bubble. May 2002. Published in William C. Hunter, George G. Kaufman and Michael Pomerleano, Eds., Asset Price Bubbles Cambridge: MIT Press 2003. The “arbitrage opportunity” in Palm vs. 3Com stock might be like the arbitrage opportunity between money and treasury bills. I document many similar features, including high turnover in the “overpriced” security. Presented at the Chicago Fed Conference on asset price bubbles, April 2002.
 The Risk and Return of Venture Capital (published version) Journal of Financial Economics, Volume 75, Issue 1, January 2005, 352. Last Manuscript Estimates the mean return, standard deviation, alpha and beta of venture capital investments, correcting for selection bias that we only see returns for successful projects. Even if you don’t like venture capital, the selection bias correction is interesting. Original December 2000. Appendix containing data and program descriptions plus extra algebra. See above data and programs link for data and programs.
 Review of Famous First Bubbles: The Fundamentals of Early Manias Journal of Political Economy 109, (October 2001),11501154. Review of the very nice book by Peter Garber, looking at the facts behind the tulip “bubble” and related myths. It turns out they are mythical. I had a lot of fun with this one.
 “By Force of Habit: A ConsumptionBased Explanation of Aggregate Stock Market Behavior” Journal of Political Economy, 107, 205251 (April 1999) (With John Y. Campbell) JSTOR Manuscript with extra appendices A utility function with a slowmoving habit generates slowmoving countercyclical risk aversion. In turn this generates timevarying price/dividend ratio that forecasts stock returns, does not forecast dividends, and so forth. Balancing intertemporal substitution with precautionary savings gives a constant interest rate, the usual problem with habit models. The NBER working paper version includes a timevarying interest rate, which also generates yield spreads that forecast bond returns.
 Explaining the Poor Performance of ConsumptionBased Asset Pricing Models (With John Y. Campbell). Journal of Finance 55(6) (December 2000) 28632878. The CAPM outperforms the consumptionbased model in artificial data from the habit persistence model used in "By force of Habit.."
 Beyond Arbitrage: GoodDeal Asset Price Bounds in Incomplete Markets (With Jesus SaaRequejo.) Journal of Political Economy 108, 79119, 2000 We add a Sharpe ratio or discount factor volatility constraint to the standard noarbitrage restriction and obtain useful bounds on option prices in environments that don't allow perfect replication. Most importantly we show how to do this in multiperiod and continuoustime, continuoustrading environments, and there are lots of applications and pretty pictures. Final manuscript with algebra appendix
 "Gooddeal option price bounds with stochastic volatility and stochastic interest rate." (With Jesus SaaRequejo) Manuscript Jan 1999 A real continuoustime, twostate variable application of the good deal technology.
 A rehabilitation of stochastic discount factor methodology Manuscript, July 2000 A short note showing how Kan and Zhou (1999) went wrong. Adapted from comments I gave to Jagannathan and Wang given at the spring 2000 NBER asset pricing meeting. The Journal of Finance does not publish corrections, even to flatout mistakes, alas.
 A trio of review papers: These are fun, but I updated the themes and expanded them in subsequent reviews, including Asset pricing, Discount Rates and Financial markets and the real economy.
 New Facts in Finance Economic Perspectives XXIII (3) Third quarter 1999 (Federal Reserve Bank of Chicago), also NBER working paper 7169. This is a review essay of the transition from unpredictable returns and CAPM to predictable returns and multifactor models.
 Portfolio Advice for a Multifactor World Economic Perspectives XXIII (3) Third quarter 1999 (Federal Reserve Bank of Chicago), also NBER working paper 7170. This is a review and interpretation of how portfolio theory should adapt in a multifactor, predictable world described in New Facts in Finance. See especially the three dimensional update of the two fund theorem.
 "Where is the Market Going? Uncertain Facts and Novel Theories" Economic Perspectives XXI: 6 (November/December) 1997 (Federal Reserve Bank of Chicago), also NBER Working paper 6207. Will stocks average 9% for the next 50 years? The equity premium, return predictability, and a review of theories and facts.
 Rethinking Production Under Uncertainty Manuscript 1993. Standard production technologies y(t) = shock(t) f(k) allow transformation across time but not across states of nature. Hence, the marginal rates of transformation needed to construct a true “production based asset pricing model” are undefined. This paper starts to think about how one might sensibly construct a technology that allows producers to transform goods across states of nature, and hence to construct a real “productionbased” model, independent of preferences. Also did not result in a published paper, as I got stuck on an identification problem.
 Production Based Asset Pricing 1988. NBER working paper 2776. This one uses two technologies and two states to infer contingent claims prices from production decisions, and matches the equity premium and term premium. It has nothing to do with the “Productionbased” papers that came later in the Journal of Finance and JPE. I abandoned the project because it’s too easy – there are no probabilities in firm decisions with this standard technology, so it’s very easy to get contingent claims prices that differ from probabilities.
Recent work by Frederico Belo and Urbann Jermann may finally break through the identification problems and make the approaches of these last two papers work.  “A CrossSectional Test of an InvestmentBased Asset Pricing Model” Journal of Political Economy, 104 (June 1996) A factor model with two investment returns (roughly, investment growth) to explain the cross section of stock returns. It is also where I first thought about conditional vs. unconditional models, scaling factors in GMM, and (somewhat dangerous) plots of average returns vs. predicted.
 “Asset Pricing Explorations for Macroeconomics”,1992 NBER Macroeconomics Annual 115165. (With Lars Peter Hansen) Many variations on HansenJagannathan bounds, including bounds that reflect the low correlation of consumption growth with asset returns, and bounds that reveal interest rate variation by variation in the conditional mean discount factor. A plea to take macrofinance seriously, aimed both at macro and finance audiences. It’s the only way to tell or even define if prices are “rational”, and what else sets marginal rates of transformation to marginal rates of substitution?
 “Explaining the Variance of PriceDividend Ratios” Review of Financial Studies (1992) 5:2, 243280 Variance of p/d = its ability to forecast returns + its ability to forecast dividend growth. It’s all the former, none the latter. The paper includes an alternative to CampbellShiller decomposition, and discount factor bounds coming from pricedividend moments.
 “Volatility Tests and Efficient Markets: A Review Essay” Journal of Monetary Economics 27 (May 1991) 463485. A review essay supposedly about Shiller’s book. It got me to think hard about volatility tests, and prove that they are exactly equivalent to regressions that forecast returns from pricedividend ratios.
 ProductionBased Asset Pricing and the Link Between Stock Returns and Economic Fluctuations. Journal of Finance 46 (1) (March 1991) 209237. The q theory works pretty well if you difference it – investment growth is nicely correlated with stock returns, and the I/K ratio forecasts future stock returns. JSTOR
Macroeconomics, Monetary Economics, and Fiscal Theory of the Price Level
"A prince, who should enact that a certain proportion of his taxes be paid in a paper money of a certain kind, might thereby give a certain value to this paper money." (Adam Smith, Wealth of Nations, Vol. I, Book II, Chapter II. Thanks to Ross Starr for the quote).
 The Fiscal Theory of the Price Level. July 14 2018. This is a preliminary and incomplete draft of of a book on fiscal theory. The fiscal theory needs a book, where everything is in one place, and with the clarity of hindsight. I also want to stress how to use the fiscal theory, not theoretical controversies. I'm posting it as it comes alone for anyone who is interested, and in the hope of getting feedback. Warning, it's incomplete, not well written, and will be revised many times. But it is still potentially interesting if you want to read about fiscal theory.
 MichelsonMorley, Fisher, and Occam: The Radical Implications of Stable Inflation at the Zero Bound. 2018. NBER Macroeconomics Annual 32 (1) 113226, Jonathan A. Parker and Michael Woodford Eds. The fact that inflation is quiet and stable at zero rates cleanly invalidates the standard oldKeynesian model, which predicts a deflation spiral, and almost as cleanly invalidates newKeynesian sunspots. New Keynesian price stickiness plus fiscal theory selection works well, and solves the puzzles of newKeynesian models with selection by postbound active policy. Stable inflation suggests a higher rate will raise inflation. That conclusion is hard to escape, even temporarily. The fiscal theory with long term debt does it. Even that does not rescue traditional views of monetary policy. A shortish nontechnical summary. Data and Programs. Last manuscript. Published version (pdf) at the University of Chicago Press website. Full text html of the published version.
 Stepping on a Rake: the Fiscal Theory of Monetary Policy" January 2018. European Economic Review 101, 354375. The fiscal theory of the price level can describe monetary policy: interest rate targets, quantitative easing, and forward guidance. With long term debt, a higher interest rate can produce temporarily lower inflation. The paper starts with a completely frictionless environment, and then replicates Chris Sims's "stepping on a rake" paper, which has the latter result along with elaborations that smooth out the impulseresponse functions. I boil Sims down to the central ingredient,long term debt. The replication is useful if you want to know how Sims derived his model or solved it; also useful as a guide to solving continuoustime stickyprice models with jumps. matlab program archive
 The NewKeynesian Liquidity Trap December 2017. Journal of Monetary Economics. 92, 4763. First link includes the online appendix. matlab program. In standard solutions, newKeynesian models produce a deep recession with deflation at the zero bound. Useless government spending, technical regress, and capital destruction have large positive multipliers. The recession, deflation and policy paradoxes are larger when prices are less sticky, and news has larger effects for events further in the future. These features are all artifacts of equilibrium selection. For the same interestrate policy, equilibria that limit a downward jump of inflation on news of the trap, for the same interest rate policy, reverse all these predictions. They predict mild inflation, little output variation, and negative multipliers during the liquidity trap. Their predictions approach the frictionless model smoothly, and promises in the faroff future have less effect today. A big deflation requires that the government raise taxes or cut spending a lot to pay a windfall to bondholders. Such fiscal considerations suggest the equilibria with limited jumps and effects.
 Monetary Policy with Interest on Reserves Journal of Economic Dynamics & Control 49 (2014), 74108. ( ScienceDirect link to published version, html and pdf) I analyze monetary policy with interest on reserves and a large balance sheet. I argue for the desirability of this regime on financial stability grounds. I show that conventional theories do not determine inflation in this regime, so I base the analysis on the fiscal theory of the price level. I find that monetary policy  buying and selling government debt with no effect on surpluses  can peg the nominal rate, and determine expected inflation. With sticky prices, monetary policy can also affect real interest rates and output, though not with the usual signs in this model. Figures 2 and 3 are the best part  the effects of monetary policy with and without fiscal coordination. I address theoretical controversies, and how the fiscal backing of monetary policy was important for the 1980s disinflation. A concluding section reviews the role of central banks. Matlab program.
 Inflation and Debt National Affairs 9 (Fall 2011). html An essay summarizing the threat of inflation from large debt and deficits. The danger is best described as a "run on the dollar." Future deficits can lead to inflation today, which the Fed cannot control. I also talk about the conventional Keynesian (Fed) and monetarist views of inflation, and why they are not equipped to deal with the threat of deficits. This essay complements the academic (equations) "Understanding Policy" article (see below) and the Why the 2025 budget matters today WSJ oped (on oped page).
 Determinacy and Identification with Taylor Rules. Journal of Political Economy, Vol. 119, No. 3 (June 2011), pp. 565615. Online Appendix B. JSTOR link, including html, pdf, and online appendix.
Manuscript with Technical Appendix The technical appendix documents a few calculations. Don't miss starting
on Technical Appendix page 6 a full analytical solution to the standard three equation model. I include the manuscript just so equation references in the Technical Appendix will work, the previous links to the published version are better.
Most people think Taylor rules stabilize inflation: Inflation rises, the Fed raises interest rates; this lowers “demand’’ and lowers future inflation. NewKeynesian models don’t work this way. In the models, the Fed reacts to inflation by setting interest rates in a way that ends up increasing future inflation. Inflation is “determined” as the unique initial value that doesn't set off accelerating inflation. Alas, there is nothing in economics to rule out accelerating inflation or deflation. I conclude that newKeynesian models with Taylor rules don’t determine the price level any better than classic fixed interest rate targets. Price level determinacy requires ingredients beyond the Taylor principle, such as a nonRicaridan fiscal regime. I survey the newKeynesian literature to verify that no simple answer to this problem exists. All of the fixes slip in a commitment by the government to blow up the world at some point.
Even if the newKeynesian model did work, The parameters of the Taylor rule relating interest rates to inflation and other variables are not identified. You can't measure "off equilibrium" behavior from data in an equilibrium. Thus, Taylor rule regressions cannot be used to argue that the Fed conquered inflation by moving from a "passive" to an "active" policy in the early 1980s.
The appendix uncovers an interesting mistake in the classic Obstfeld and Rogoff (1983) attempt to prune inflationary equilibria, but also shows that reversion to a price level target can do the trick. The Techical Appendix has algebra for determinacy regions and solutions of the threeequation NewKeynesian model, as well as other issues.
This article supersedes the two papers titled "Inflation Determination with Taylor Rules: A Critical Review"and "Identification with Taylor Rules: A Critical Review" (September 2007).
 A response to Sims (2013) January 2015. Chris Sims' (2013) "Paper Money" seems to include a criticism of my "Determinacy and Identification with Taylor Rules." In fact, there is no fundamental disagreement between the two papers.
 Understanding fiscal and monetary policy in the great recession: Some unpleasant fiscal arithmetic. January 2011 European Economic Review 55 230 ScienceDirect Link.
Why there was a big recession; will we face inflation or deflation, can the Fed do anything about it? Many facets of the current situation and policy make sense if you ask about joint fiscal and monetary policy. A fiscal inflation will look much different than most people think. Slides that go with the paper. Appendix with the algebra for government debt valuation equations. A short simple version, my presentation at the Fall NBER EFG conference. A video of a short presentation given to the University Alumni Club in New York, October 2010. Slides for the New York talk if you were there  Can Learnability Save NewKeynesian Models? Journal of Monetary Economics 56 (2009) 1109–1113. JME link .This is a response to Bennett McCallum’s “is the NewKeynesian Analysis Critically Flawed” which says yes. I think McCallum got it backwards  the bounded equilibrium is not learnable, the explosive ones are learnable. Furthermore, I’m not convinced that a hypothetical threat by the Fed to take us to an “unlearnable” equilibrium is a satisfactory foundation for price level determination.
 Money as Stock Journal of Monetary Economics 52:3, (2005) 501528. Revision of NBER Working Paper 7498 Feb. 2000. The fiscal theory of the price level made simple. The `government budget constraint' is not a constraint. I reopen the security market at the end of the day in a cash in advance model, and show that the price level is still determinate. I also resolve the criticism that the fiscal theory mistreats the "government budget constraint."
 "Long term debt and optimal policy in the fiscal theory of the price level" Econometrica 69, 69116 (2001). The fiscal theory with long term debt, and how to match the fiscal theory with businesscycle variation in debt and inflation. We typically write fiscal theory models with oneperiod debt, but the maturity structure turns out to matter a lot. For example, if the government pays off a perpetuity, then the price level is determined by the coupon coming due each year and that year’s taxes, with no present value of future taxes. I also resolve the empirical puzzle that inflation and deficits seem not to commove. That’s exactly what we expect of a government that’s trying to smooth inflation in the face of fiscal shocks.
 The fiscal foundations of monetary regimes (paper, and powerpoint presentation) January 2003. The choice of monetary regime – interest rate rule, exchange rate peg, currency board, dollarization, etc. depends on fiscal constraints, especially for developing countries. Talk given at the 2003 NBER/NCAER Neemrana conference, India.
 The Fed and Interest Rates – a High Frequency Identification American Economic Review 92 (2002), 9095. With Monika Piazzesi (previously NBER WP 8839) . We measure monetary policy shocks by how they surprise daily bond markets. There's a beautiful Taylor rule in interest rate forecasts.
 A Frictionless model of U.S. Inflation, in Ben S. Bernanke and Julio J. Rotemberg, eds., NBER Macroeconomics Annual 1998 Cambridge MA: MIT press, p. 323384. My first foray into the fiscal theory. It includes a proof that you can't test for regimes  the government debt valuation equation and the money demand equation hold in both equilibria, and there is no Granger causality prediction. I also explain the intuition of the fiscal theory. The goal was to write a "Fiscal history", to understand the path of US inflation via the fiscal theory. That turns out to be harder than I thought, and is still an ongoing project.
 What do the VARs Mean? Measuring the Output Effects of Monetary Policy Journal of Monetary Economics 41:2 April 1998 277300 (Revision of NBER WP 5154 June 1995; (Manuscript with a bit clearer pdf). Responses to monetary policy shocks seem long and drawn out. Do we need models with extensive frictions? No, because the response of policy to policy shocks is also drawn out. If you allow expected policy to affect output and inflation, you can make sense of drawn out impulseresponse functions with a very short structural response, but a longlasting impulse.
 Macroeconomics in Russia” in Economic Transition in Eastern Europe and Russia: Realities of Reform, Edward Lazear Ed., Hoover Institution Press, 1995. Imagine for a moment that the Federal Reserve imposed the following policies in the United States: Every company must pay for all its inputs before they are shipped, and taxes must also be prepaid. But there is no trade credit, and banks do not make working capital loans to purchase inputs. Checks take 90 days to clear… Chaos would result… This is roughly what happened in Russia during the summer of 1992. The story… points to the importance of macroeconomic policies, and the unintended macroeconomic effects of policy, in understanding developments in Russia and the Former Soviet Union. It also suggests that many macroeconomic problems are not inevitable consequences of the transition to a market economy, but rather that they are avoidable unintended effects of partial liberalizations.
 “Shocks” CarnegieRochester Conference Series on Public Policy 41, (December 1994) 295364. A comprehensive look at which shocks matter and which don’t, including technology, money, oil and credit. None of the above accounts for much of economic fluctuations or inflation. Monetary policy shocks in particular account for very little output fluctuation and zero inflation variation. “Consumption” shocks, reflecting information agents see but we do not see do a pretty good job, but are harder to integrate into economic theory.
 Inflation Stabilization in the Reforming Socialist Economies: The Myth of the Monetary Overhang” Comparative Economic Studies 33:2 (1991) 97122. (With Barry W. Ickes.)
 A Simple Test of Consumption Insurance” Journal of Political Economy 99:5 (October 1991) 957976. Are consumers effectively insured against idiosyncratic shocks, either by formal institutions such as charities, private insurance, government programs, or by informal mechanisms such as gifts and “loans” from relatives, friends and neighbors? I test for insurance using regressions of consumption growth on exogenous variables. Thinking through the specification of the regressions is not easy. I reject full insurance for long illness and involuntary job loss, but not for spells of unemployment, loss of work due to a strike and an involuntary move.
 “The Sensitivity of Tests of the Intertemporal Allocation of Consumption to NearRational Alternatives” American Economic Review 79 (June 1989) 319337. Many tests of the permanent income model or consumption based asset pricing models exploit predictions that imply trivial utility costs. For example, adjusting consumption when you get the check rather than when you get the news can have utility costs of a few cents. Since our models abstract from small realworld costs and frictions, I proposed the idea of using the region of trivial utility costs as a measure of “economic standard errors” for model predictions.
 The Return of the Liquidity Effect: A Study of the Short Run Relation Between Money Growth and Interest Rates” Journal of Business and Economic Statistics 7 (January 1989) 7583. In the short run, we expect money growth and interest rates to be negatively correlated – the “liquidity effect.” In the long run, they should be positively correlated – the “inflation effect.” I used bandpass filters to isolate the “runs” and confirmed this prediction. This paper was part of my PhD thesis, and inspired by reading a misleading graph in a Wall Street Journal Op Ed that claimed we were in a new “superneutrality” regime in which the correlation was always positive.
This was my job market paper, many years ago. Morals: write your thesis on something interesting, not a complex extension of your adviser's latest theory. Do something fun in your job market talk, like demonstrate bandpass filters by swinging your keys. Have Lars Hansen discover a really interesting mistake in technical Appendix C of your job market paper. You too might get a job at Chicago
Health insurance, health economics
 After the ACA: Freeing the market for health care Sept 2015 In The Future of Healthcare Reform in the United States Edited by Anup Malani and Michael H. Schill, p 161201, University of Chicago Press. An essay on health care, first presented at the conference, The Future of Health Care Reform in the United States, at the University of Chicago Law School. Most of the policy discussion is focused on health insurance. But the health care market is dysfuctional, and needs to be fixed as well. Where are the Southwest Airlines, Walmart and Apple of health care, bringing cost saving, efficiency, and innovation? I argue that we need a big freeing up of health care markets. I also focus more than usual on supply restrictions. It doesn't do much good for people to pay with their own money if suppliers cannot respond to that demand. Last manuscript in case of copyright problems with the published version above.
 HealthStatus Insurance. Feb. 18 2009. In Cato's Policy Analysis No 633. If you get sick and lose health insurance you are stuck  your premiums skyrocket or you may not be able to get insurance at all. The article shows how private markets can solve this problem. If you get sick, your health premiums go up but a separate "premium increase insurance contract" pays a lump sum so that you can afford the higher health premiums. The big advantage is freedom and competition: now health insurance can freely compete for all customers all the time. This piece is written for a nontechnical popular audience, with a lot of policy discussion. This paper explains the basic framework of TimeConsistent Health Insurance (next) and thinks through lots of realworld issues and answers to "what ifs." "What to do about preexisting conditions" in the Wall Street Journal August 14 2009 and Health Status insurance Investors Business Daily (local link) April 2 2009 are opeds explaining the basic idea.
 “TimeConsistent Health Insurance” Journal of Political Economy, 103 (June 1995) 445473. None of us has health insurance, really. You get sick, you lose your job or get divorced, and now you have a preexisting condition. This paper shows how to implement “premium increase insurance” that gets around the problem. If you get sick, you get a lump sum that allows you to pay higher insurance premiums. It allows a privatemarket solution to the main problem of health insurance attracting regulation.
Timeseries; Unit roots; Permanent and transitory components
 A Brief Parable of Overdifferencing January 2012. This is a short note, showing how money demand estimation works very well in levels or long (4 year) differences, but not when you firstdifference the data. It shows why we often want to run OLS with corrected standard errors rather than GLS or ML, and it cautions against the massive differencing, fixed effects and controls used in micro data. It's from a PhD class, but I thought the reminder worth a little standalone note.
 Continuoustime linear models Foundations and Trends in Finance 6 (2011), 165–219 DOI: 10.1561/0500000037 Manuscript How to do ARMA models, opreator tricks, and HansenSargent prediction formulas in continuous time. Why, you ask? I needed to teach myself these tricks in order to solve a Linearquadratic asset pricing economy with complex habits and durability. In turn, I was hoping that model would provide a good example for A MeanVariance Benchmark for Intertemporal Portfolio Theory. It didn't, but now I, and I hope you, know how to do all the discretetime tricks in continuoustime models.
 Time series for macroeconomics and Finance Jan 2005 Lecture notes for PhD time series course. This revision finally includes the figures!
 Permanent and Transitory Components of GNP and Stock Prices” Quarterly Journal of Economics CIX (February 1994) 241266. This is my favorite solution to the permanent/transitory decomposition issue for GNP and stock prices. I use bivariate autoregressions of consumption and GNP, and of dividends and stock prices. Consumption and dividend growth are unpredictable, so act as stochastic trends for GNP and stock prices. A movement in stock prices with no current change in dividends is completely transitory, so can be labeled an “expected return” shock. A movement in stock prices with a change in dividends is permanent and so is a “permanent earnings” shock. Note the QJE switched Figure II and III.
 A Critique of The Application of Unit Root Tests Journal of Economic Dynamics and Control 15 (April 1991) 275284. Running a battery of unit root/cointegration tests and then imposing the answers on subsequent analysis is a bad idea. Alas, there is no substitute for plotting the data and thinking about what makes sense.
 Multivariate Estimates of the Permanent Components in GNP and Stock Prices Journal of Economic Dynamics and Control, 12 (June/July 1988) 255296. (With Argia M. Sbordone). This paper sits halfway between the “random walk in GNP” JPE and “permanent and transitory components” QJE. The “random walk” is univariate. Here, we realized that consumption could tell you a lot about the permanent component of GNP. Here, we use that insight in spectral and varianceratio calculations. The answers are the same as in “permanent and transitory components”, but I now prefer the simpler VAR treatment in that paper. When GNP or stock prices are cointegrated with a random walk the subtle longhorizon and “nonparametric” techniques needed in the “random walk in GNP” really are no longer needed; short order models to produce good longterm forecasts.
 How Big is the Random Walk in GNP? Journal of Political Economy 96 (October 1988) 893920. Shortorder ARMA models suggest that GNP looks a lot like a random walk. But shortorder ARMA models are fit to match onestep ahead forecasts, and can do a poor job of capturing longterm forecastability. I used a varianceratio statistic (variance of longterm differences / variance of oneyear differences) to show that there is a lot of meanreversion in GNP that shortorder ARMA models miss. I think the subsequent “permanent and transitory components” answers the substantive question better, but the warning about using longterm implications of shortterm models remains worthwhile today.
Talks and Comments
(Most are written, some are published, a few are only the slides)
 Lessons of the long quiet zero bound May 2018. Comments for the session "Monetary Policy, Conventional and Unconventional" at the Spring 2018 Nobel Symposium on Money and Banking. A lightning summary of recent papers including "Fiscal theory of monetary policy" "MichelsonMorley" and "New Keynesian Liquidity Trap." Lots of pictures. Fun. Slides. Video of the presentation. Link to the whole conference including video and slides for all the presentations.
 Inflating away our troubles? April 22 2017 Comments on "Inflating away the public debt? An empirical assessment" by Jens Hilscher, Alon Aviv and Ricardo Reis. A little inflation will not likely help our debt problems. An interest rate rise could make matters much worse, and precipitate a debt crisis, which would cause a lot of inflation. Slides
 Comments on "A Behavioral NewKeynesian Model" by Xavier Gabaix. Comments presented at the October 21 2016 NBER EFG meeting. The model is really important. It is an alternative to active Taylor rules in NK models, solving zero bound and other problems. But it puts a lot of irrationality deeply at the heart of monetary economics. Slides
 Volume and information. Comments on "Random Risk Aversion and Liquidity: a Model of Asset Pricing and Trade Volumes" by Fernando Alvarez and Andy Atkeson. Comments presented at the Conference in Honor of Robert E. Lucas Jr., BeckerFriedman Institute, October 7 2016. Andy and Fernando have a nice paper, which I pretty much ignored and summarized some thoughts on the big puzzle of volume instead.
 MichelsonMorley, Occam and Fisher: The radical implications of stable inflation at the zero bound Slides for talk at the European Financial Association, August 2016. This turned in to the paper by the same name above. It's an evolution of the similar slides for my talk given at the ColumbiaNew York Fed conference honoring Michael Woodford May 1819 2016. The ZLB is a deeply revealing moment for monetary economics, like MichelsonMorley's famous experiment. Nothing happened. Many theories say big things should have happened, and those theories are wrong. (Well, unless you add epicycles, ether drag, or other ugly complications. Hence Occam's razor.) In the new version I incorporate Sims' insight for how to get a temporary negative inflation out of a rate rise. In the same vein slides for a 1.5 hour MBA class covering all of monetary economics from Friedman, SargentWallace, Taylor, Woodford, and FTPL.
 Equityfinanced banking and a runfree financial system Talk given at the Minneapolis Federal Reserve's "Ending too big to fail" symposium, May 16 2016.
 Comments on 'the Fundamental Structure of the International Monetary System' by PierreOlivier Gourinchas. April 2017. In Rules for International Monetary Stability edited by Michael D. Bordo and John B. Taylor, p. 186195, Stanford: Hoover Institution Press. (The link includes the final paper and my comment.) The comments, presented at the conference, "International Monetary Stability: Past, Present and Future," Hoover Institution, May 5 2016, refer also to the original paper 'Global Imbalances and Currency Wars at the ZLB,' by Ricardo J. Caballero, Emmanuel Farhi, and PierreOlivier Gourinchas. The papers model "Global imbalances," "savings gluts," "safe asset shortages," and so forth, with a dramatic "tipping point" at the zero bound. At the bound "inability to produce safe assets" in one country spills over to output gaps at another one. I outline a different world view and contrast the two worlds.
 The fiscal theory of the price level and monetary policy: An agenda April 1, 2016. Slides for a talk at the Next Steps for the Fiscal Theory of the Price Level conference at the BeckerFriedman Institute, April 1 2016. The Fiscal Theory is that the real value of nominal debt equals the present value of primary surpluses. The agenda is making this fact come alive in the analysis of history, of data, of policy, and of better monetary and fiscal regimes. To that end, I argue we've paid to much attention to surpluses, and not enough to discount rates or to debt and monetary policy. I show how we need discount rates to understand the cyclical variation of inflation, and how monetary policy is quite strong in the fiscal theory, by the ability to control nominal interest rates and thus expected inflation.
 Comments on Bauer and Hamilton. Nov 5 2015. Comments on Robust Bond Risk Premia by Michael Bauer and Jim Hamilton, at the 5th Conference on Fixed Income Markets, San Francisco Federal Reserve, Nov 5 2015. I look at the evidence whether macro variables help to forecast bond returns. It turns out a trend does even better, pushing the R2 up to 62 percent! That finding suggests that specification issues rather than distribution theory are the central problems. I don't find that the BauerHamilton effect size distortion is big. I document measurement errors in the data, which are a good target for econometric help. I opine we need to spend less attention on one asset at at time forecasting and more attention on the factor structure of expected returns across assets, and how that structure lines up with covariances of returns with shocks. There is also a little example of perfect nonspanning in a term structure model; bond yields have an exact one factor model, but a nonspanned factor drives expected returns. Programs and data (zip)
 Comments on "How Can Central Banks Deliver Credible Commitment and be 'Emergency Institutions'" By Paul Tucker. In John H. Cochrane and John B. Taylor, Eds., Central Bank Governance and Oversight Reform, Hoover Institution Press May 2016, p. 3136. (Chapter pdfs available here) Comments presented at the Hoover conference by the same name, May 21, 2015. Tucker's paper here. Tucker wisely advocates rules for mop ups, lender of last resort, bailouts, etc. I agree, but wouldn't lots more equity so you don't have to mop up be simpler?
 Comments on Gary Hansen and Lee Ohanian, "Neoclassical Models of Aggregate Economies" at the Conference on the Handbook of Macroeconomics, Volume 2, Hoover Institution, April 11 2015.
 Comments on Gauti Eggertsson and Neil Mehrotra, "A Model of Secular Stagnation," slides presented at the NBER EFG meeting, July 2014.
 Comments on Aytek Malkhozov, Philippe Mueller, Andrea Vedolin, and Gyuri Venter, "Mortgage Risk and the Yield Curve," slides presented at the NBER AP meeting, July 2014.
 Having your cake and eating it too: The maturity structure of US debt November 12 2012 How the US Treasury can both lengthen and shorten its debt at the same time, to buy insurance against interest rate rises and provide "liquidity." A short paper diguised as comments on Greenwood, Hanson, and Stein “A Comparative Advantage Approach to Government Debt Maturity” at the Second Annual Roundtable on Treasury Markets and Debt Management , US Treasury, Nov. 15 2012
 Comments on "Volatility, the Macroeconomy and Asset Prices, by Ravi Bansal, Dana Kiku, Ivan Shaliastovich, and Amir Yaron, and “An Intertemporal CAPM with Stochastic Volatility” by John Y. Campbell, Stefano Giglio, Christopher Polk, and Robert Turley. Also slides. April 13 2012 Comments presented at the spring NBER asset pricing meeting. I took the opportunity to offer a sceptical apparisal of longrun risks, and whether stochastic volatilty really works as a state variable, especially in the long run.
 The Fiscal Theory of the Price Level and its Implications for Current Policy in the United States and Europe November 19, 2011 This is the text of my presentation at the concluding panel of the conference, “Fiscal Policy under Fiscal Imbalance,” hosted by the BeckerFriedman Institute and Federal Reserve Bank of Chicago.
 Quantitative Easing 2, March 3 2011 Comments on Jim Hamilton and Jing Wu, 2011, "The Effectiveness of Alternative Monetary Policy Tools in a Zero Lower Bound Environment", at the spring NBER Monetary Economics meeting. Slides. (The Oped section contains several opeds and blog posts on qe2.)
 Nova/Atrium Lecture in Macro/Finance. (Video) (Also web page on the event) Lecture given at NOVA school of business and economics in Lisbon, Portugal, 2010. Thinking through fiscal and monetary policy, along the lines later written up in Inflation and Debt and Understanding fiscal and monetary policy in the great recession.
 Bond Supply and Excess Bond Returns May 2008. Comments on Robin Greenwood and Dimitri Vayanos’ paper for the IGM “Beyond Liquidity ” conference at the GSB Gleacher center, May 910 2008. The paper from Dimitri’s website . I learned two important lessons in reading and thinking about this paper. 1) When arbitrageurs are limited by riskbearing capacity, “downwardsloping” demands depend on correlations. The paper and my comments have a lovely example in which arbitrageurs are asked to hold more longterm bonds and less shortterm bonds. The result is that all yields go up! Why don’t long yields go up and short yields go down? Because risks are described by a onefactor model, so all that matters is how much overall duration risk arbitrageurs have to hold. 2) We’re probably doing a bad job of correcting for serial correlation in all predictive regressions. Typically, we think expected returns move slowly over time. The right hand variable also moves slowly over time, but doesn’t capture all of the expected return variation. This situation means that residuals have a slowmoving AR(1) plus an unforecastable component, which is the same thing as an ARMA(1,1). This structure will be very poorly captured by standard “nonparametric” procedures such as NeweyWest, since you’re unlikely to put in enough lags to capture the longrun component, and also poorly captured by parametric procedures like fitting an AR(1). “Short” samples make the problem worse. More in the comments.
 Risks and Regimes in the Bond Market. April 2008. Comments on Atkeson and Kehoe’s paper for the 2008 Macroeconomics Annual. Risk premia are important for understanding interest rates, and monetary policy. I see no evidence for “anchored expectations” in interest rate data. Once you take account of risk premiums, expected long run interest rates are still very volatile. The yield curve has not become more downward sloping on average, as it should if inflation risks have decreased. If anything, risk premia in longterm bonds are increasing. Atkeson and Kehoe advocate a fascinating view that risk premia cause monetary policy, not vice versa.
 Daily Monetary Policy Shocks and the Delayed Response of New Home Sales by James D. Hamilton. April 2007 Comments given at NBER Monetary Economics program meeting, NY. Includes some new thoughts on what a monetary policy shock is.
 “The Returns to Currency Speculation” by Craig Burnside, Martin Eichenbaum, Isaac Kleshchelski and Sergio Rebelo. Comments given at Jan 2007 AEA/AFA meetings. (Slides only)
 ‘Macroeconomic Implications of Changes in the Term Premium’ by Glenn Rudebusch, Brian Sack and Eric Swanson. Comments given at the conference “Frontiers in Monetary Policy Research” at the St. Louis Federal Reserve, October 19 2006. Of course, I can’t stick to the topic and offer a survey instead. In particular, lots of salty comments on the “conundrum” in long bond prices (silly, in my view). The paper from the St. Louis Fed website.
 Anomalies by Lu Zhang, 2004 presented at the November 2004 AP meeting. A great paper, but a firstorder condition is not an "explanation."
 “A new measure of Monetary Policy” by Christina and David Romer, presented at the July 2004 EFG meeting.
 What ends recessions? by David and Christina Romer, 1994 NBER Macroeconomics Annual 5874. JSTOR What are monetary policy shocks? The fed never says “and another 50 bp for the heck of it.” This led to “What do the VARs mean?” above
 “Why Test the Permanent Income Hypothesis? European Economic Review 35 (4) May 1991. Comments on ‘The Response of Consumption to Income: a CrossCountry Investigation’” by John Campbell and N. Gregory Mankiw, Why indeed, now that we think of equilibrium models, not a “consumption function.”
 What Should Macroeconomists Know About Unit Roots? 1991 NBER Macroeconomics Annual 6, (1991), 201210. Comments on ‘Pitfalls and Opportunities: What Macroeconomists Should Know About Unit Roots’” by John Campbell, JSTOR Another blistering critique of the (mis) use of unit root econometrics.