Ivan Werning
@ivanwerning.bsky.social
MIT Robert M. Solow Professor of Economics | Macro, International, Public, Monetary, Taxes, Finance | v = u + β v | Beatles | Boston | Argentina | Patagonia
Finally we have our day
October 17, 2025 at 1:22 PM
Finally we have our day
That was my feeling too. Has so much potential though. Cleaner. Etc.
October 17, 2025 at 1:20 PM
That was my feeling too. Has so much potential though. Cleaner. Etc.
Final thought...
Optimal Currency Area literature (Mundell) studied when a common currency is not too costly for stabilization.
But if coordination is valuable, our mechanism says a common currency can be strict benefit!
So maybe the Euro was a good idea?... 🤔
Optimal Currency Area literature (Mundell) studied when a common currency is not too costly for stabilization.
But if coordination is valuable, our mechanism says a common currency can be strict benefit!
So maybe the Euro was a good idea?... 🤔
June 9, 2025 at 12:51 PM
Final thought...
Optimal Currency Area literature (Mundell) studied when a common currency is not too costly for stabilization.
But if coordination is valuable, our mechanism says a common currency can be strict benefit!
So maybe the Euro was a good idea?... 🤔
Optimal Currency Area literature (Mundell) studied when a common currency is not too costly for stabilization.
But if coordination is valuable, our mechanism says a common currency can be strict benefit!
So maybe the Euro was a good idea?... 🤔
Unlike most prior work on issues of coordination...
Our results are not driven by traditional beggar-thy-neighbor (on output, not inflation as here) nor by terms-of-trade-effects (market power, our countries take global price as given).
Our results are not driven by traditional beggar-thy-neighbor (on output, not inflation as here) nor by terms-of-trade-effects (market power, our countries take global price as given).
June 9, 2025 at 12:51 PM
Unlike most prior work on issues of coordination...
Our results are not driven by traditional beggar-thy-neighbor (on output, not inflation as here) nor by terms-of-trade-effects (market power, our countries take global price as given).
Our results are not driven by traditional beggar-thy-neighbor (on output, not inflation as here) nor by terms-of-trade-effects (market power, our countries take global price as given).
This leads to what we call an expansionary bias.
In response to a negative supply shock (say, an oil shock), decentralized monetary policy is too loose.
Inflation is too high, output too high. Relative to the coordinated optimum.
In response to a negative supply shock (say, an oil shock), decentralized monetary policy is too loose.
Inflation is too high, output too high. Relative to the coordinated optimum.
June 9, 2025 at 12:51 PM
This leads to what we call an expansionary bias.
In response to a negative supply shock (say, an oil shock), decentralized monetary policy is too loose.
Inflation is too high, output too high. Relative to the coordinated optimum.
In response to a negative supply shock (say, an oil shock), decentralized monetary policy is too loose.
Inflation is too high, output too high. Relative to the coordinated optimum.
Pictures speak louder than words... (Q is the global input price).
Equilibrium must be on red line: world Phillips curve...
...yet countries think they can deviate along the flatter blue line...
...but all that does is raise the price Q and shift their curve! 😳
Equilibrium must be on red line: world Phillips curve...
...yet countries think they can deviate along the flatter blue line...
...but all that does is raise the price Q and shift their curve! 😳
June 9, 2025 at 12:51 PM
Pictures speak louder than words... (Q is the global input price).
Equilibrium must be on red line: world Phillips curve...
...yet countries think they can deviate along the flatter blue line...
...but all that does is raise the price Q and shift their curve! 😳
Equilibrium must be on red line: world Phillips curve...
...yet countries think they can deviate along the flatter blue line...
...but all that does is raise the price Q and shift their curve! 😳
Intuitive step #1: we show world Phillips curve is typically steeper than the individual country's Phillips curve.
Each central bank thinks 💭 “The cost of lowering inflation is too damn high.”
An ideal world planner 💭 “No! Those global supply disruptions are relative!”
Each central bank thinks 💭 “The cost of lowering inflation is too damn high.”
An ideal world planner 💭 “No! Those global supply disruptions are relative!”
June 9, 2025 at 12:51 PM
Intuitive step #1: we show world Phillips curve is typically steeper than the individual country's Phillips curve.
Each central bank thinks 💭 “The cost of lowering inflation is too damn high.”
An ideal world planner 💭 “No! Those global supply disruptions are relative!”
Each central bank thinks 💭 “The cost of lowering inflation is too damn high.”
An ideal world planner 💭 “No! Those global supply disruptions are relative!”
Thus, we uncover an inflationary externality:
Higher output → higher global input demand → higher global input prices → higher global inflation 😭
No country internalizes this feedback.
Higher output → higher global input demand → higher global input prices → higher global inflation 😭
No country internalizes this feedback.
June 9, 2025 at 12:51 PM
Thus, we uncover an inflationary externality:
Higher output → higher global input demand → higher global input prices → higher global inflation 😭
No country internalizes this feedback.
Higher output → higher global input demand → higher global input prices → higher global inflation 😭
No country internalizes this feedback.
Key mechanism...
1. Each country takes the world input price (that rises!) as given
2. But jointly, they are affecting it!
Result: Countries do not internalize that by tightening more, they could (collectively) lower the supply in the input. Ergo, they don't tighten enough!
6/N
1. Each country takes the world input price (that rises!) as given
2. But jointly, they are affecting it!
Result: Countries do not internalize that by tightening more, they could (collectively) lower the supply in the input. Ergo, they don't tighten enough!
6/N
June 9, 2025 at 12:51 PM
Key mechanism...
1. Each country takes the world input price (that rises!) as given
2. But jointly, they are affecting it!
Result: Countries do not internalize that by tightening more, they could (collectively) lower the supply in the input. Ergo, they don't tighten enough!
6/N
1. Each country takes the world input price (that rises!) as given
2. But jointly, they are affecting it!
Result: Countries do not internalize that by tightening more, they could (collectively) lower the supply in the input. Ergo, they don't tighten enough!
6/N
This turns out to be key and imply that well-acting independent central banks can respond in a manner that creates global inflation.
We model a world with...
– Symmetric small open economies
– Wage & price rigidity (both key)
– A global input (e.g. oil) with world price
We model a world with...
– Symmetric small open economies
– Wage & price rigidity (both key)
– A global input (e.g. oil) with world price
June 9, 2025 at 12:51 PM
This turns out to be key and imply that well-acting independent central banks can respond in a manner that creates global inflation.
We model a world with...
– Symmetric small open economies
– Wage & price rigidity (both key)
– A global input (e.g. oil) with world price
We model a world with...
– Symmetric small open economies
– Wage & price rigidity (both key)
– A global input (e.g. oil) with world price
Our perspective is that this misses a key mechanism that operates during global shocks.
There is little doubt that the recent inflation had two features: it was global in nature (similar across countries), coincided with supply shocks (energy prices, shipping costs etc).
There is little doubt that the recent inflation had two features: it was global in nature (similar across countries), coincided with supply shocks (energy prices, shipping costs etc).
June 9, 2025 at 12:51 PM
Our perspective is that this misses a key mechanism that operates during global shocks.
There is little doubt that the recent inflation had two features: it was global in nature (similar across countries), coincided with supply shocks (energy prices, shipping costs etc).
There is little doubt that the recent inflation had two features: it was global in nature (similar across countries), coincided with supply shocks (energy prices, shipping costs etc).
This flips the usual narrative. For example, here is Maurice Obstfeld...
"by simultaneously all going in the same direction, they risk reinforcing each other’s policy impacts without taking that feedback loop into account. The highly globalized nature of today’s world economy amplifies the risk."
"by simultaneously all going in the same direction, they risk reinforcing each other’s policy impacts without taking that feedback loop into account. The highly globalized nature of today’s world economy amplifies the risk."
June 9, 2025 at 12:49 PM
This flips the usual narrative. For example, here is Maurice Obstfeld...
"by simultaneously all going in the same direction, they risk reinforcing each other’s policy impacts without taking that feedback loop into account. The highly globalized nature of today’s world economy amplifies the risk."
"by simultaneously all going in the same direction, they risk reinforcing each other’s policy impacts without taking that feedback loop into account. The highly globalized nature of today’s world economy amplifies the risk."
Adding an atlernative non-NBER link in case anyone has trouble with that
economics.mit.edu/sites/defaul...
economics.mit.edu/sites/defaul...
economics.mit.edu
May 13, 2025 at 3:31 PM
Adding an atlernative non-NBER link in case anyone has trouble with that
economics.mit.edu/sites/defaul...
economics.mit.edu/sites/defaul...
Hope this adds some clarity to the tariff debates.
Thanks for reading!
Link to paper: www.nber.org/system/files...
Thanks for reading!
Link to paper: www.nber.org/system/files...
www.nber.org
May 12, 2025 at 11:05 AM
Hope this adds some clarity to the tariff debates.
Thanks for reading!
Link to paper: www.nber.org/system/files...
Thanks for reading!
Link to paper: www.nber.org/system/files...
Our equivalence result gives a simple way to map these shocks onto classic macro models—and solve them analytically
In the process justifying simple intuitions that serve as guiding lines. It's important to check and ground good intuitions!
In the process justifying simple intuitions that serve as guiding lines. It's important to check and ground good intuitions!
May 12, 2025 at 11:05 AM
Our equivalence result gives a simple way to map these shocks onto classic macro models—and solve them analytically
In the process justifying simple intuitions that serve as guiding lines. It's important to check and ground good intuitions!
In the process justifying simple intuitions that serve as guiding lines. It's important to check and ground good intuitions!
ots of policy commentary says “central banks shouldn’t respond to tariffs.”
That’s not what our model says.
A better rule: Don’t overreact, but don’t ignore either.
Bottom line...
Tariffs create inflation-output tradeoffs that monetary policy can’t ignore.
That’s not what our model says.
A better rule: Don’t overreact, but don’t ignore either.
Bottom line...
Tariffs create inflation-output tradeoffs that monetary policy can’t ignore.
May 12, 2025 at 11:05 AM
ots of policy commentary says “central banks shouldn’t respond to tariffs.”
That’s not what our model says.
A better rule: Don’t overreact, but don’t ignore either.
Bottom line...
Tariffs create inflation-output tradeoffs that monetary policy can’t ignore.
That’s not what our model says.
A better rule: Don’t overreact, but don’t ignore either.
Bottom line...
Tariffs create inflation-output tradeoffs that monetary policy can’t ignore.
The effects show up in the nominal exchange rate too...
In our setup, tariffs raise prices and depreciate the currency.
This echoes recent empirical patterns during trade tensions.
(capital flight is surely another reason, but basic macro+trade can already explain it)
In our setup, tariffs raise prices and depreciate the currency.
This echoes recent empirical patterns during trade tensions.
(capital flight is surely another reason, but basic macro+trade can already explain it)
May 12, 2025 at 11:05 AM
The effects show up in the nominal exchange rate too...
In our setup, tariffs raise prices and depreciate the currency.
This echoes recent empirical patterns during trade tensions.
(capital flight is surely another reason, but basic macro+trade can already explain it)
In our setup, tariffs raise prices and depreciate the currency.
This echoes recent empirical patterns during trade tensions.
(capital flight is surely another reason, but basic macro+trade can already explain it)
A common idea in policy circles is the "see through principle" (not really grounded in economic theory).
It makes some sense as a simple communication device or slogan, but our model says...
... optimal inflation typically exceeds the mechanical pass-through from tariffs.
It makes some sense as a simple communication device or slogan, but our model says...
... optimal inflation typically exceeds the mechanical pass-through from tariffs.
May 12, 2025 at 11:05 AM
A common idea in policy circles is the "see through principle" (not really grounded in economic theory).
It makes some sense as a simple communication device or slogan, but our model says...
... optimal inflation typically exceeds the mechanical pass-through from tariffs.
It makes some sense as a simple communication device or slogan, but our model says...
... optimal inflation typically exceeds the mechanical pass-through from tariffs.
The results hold with sticky wages, but then inflation control is even costlier.
Zero inflation now requires deeper recessions and wage deflation.
The optimal policy is still to accommodate—with some inflation.
Zero inflation now requires deeper recessions and wage deflation.
The optimal policy is still to accommodate—with some inflation.
May 12, 2025 at 11:05 AM
The results hold with sticky wages, but then inflation control is even costlier.
Zero inflation now requires deeper recessions and wage deflation.
The optimal policy is still to accommodate—with some inflation.
Zero inflation now requires deeper recessions and wage deflation.
The optimal policy is still to accommodate—with some inflation.