I liked one of Harvard economics professor Greg Mankiw's recent posts so much that I decided to copy it in its entirety and re-post it here:A Solution of Sorts
Here is an intriguing pair of articles I ran across this morning. Jeff Frankel argues that the high prices of commodities like oil are being driven by low real interest rates. Anil Kashyap and Hyun Song Shin say that with oil prices so high, Middle Eastern sovereign wealth funds should come to the rescue of Wall Street.Put together, they suggest a new piece of the monetary transmission mechanism: The Fed's monetary expansion reduces interest rates, low interest rates drive up commodity prices, high commodity prices make OPEC rich, and finally OPEC uses its new wealth to recapitalize our struggling financial institutions.
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1 comment:
The problem with modeling crude prices is that in the SR, they don't trade supply/demand. There is too much emotion and market manipulation. I think it's an interesteing point, but it's probably not completely accurate. I would rather model oil prices with things like chaos math which can incorporate factors like OPEC and investor sentiment.
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