Greg Hess, the Russell S. Bock Professor of Public Economics and Taxation, spent seven weeks this summer as a Visiting Scholar for the Bank of Japan's Institute for Monetary and Economic Studies, where he researched margin rate monetary policy. This opportunity arose from Hess's meeting with a deputy director of the Institute for Monetary and Economic Studies, arranged by his former colleague at the Federal Reserve Board.
His research at the Bank of Japan grew from a paper he recently completed with colleague Marc Weidenmier, assistant professor of economics. "We examined the extent to which margin requirementsthat is, the extent to which individuals and firms can buy stocks on creditis a tool of monetary policy that the Federal Reserve Board used to use in response to economic activity," Hess explains. Hess served as an economist in the Federal Reserve Board's Division of Monetary Affairs from 1989-1993.
Manipulating margin rates in the U.S., which was last done in 1974, does not affect stock prices, Weidenmier and Hess concluded. Their research explained parallels between historical monetary policies of the U.S. and Japan and provided evidence that margin rates did not affect stock prices because there were too many other substitutes to buying on margin. These discoveries were shared with the staff of the Institute for Monetary and Economic Studies, which provides research support that helps the central bank's policymakers make decisions.
Hess will share his experience about real-world policy-making when he teaches Economics 102: Intermediate Macroeconomics. First, a key debate in the subject is whether monetary and/or fiscal policy can stabilize economic fluctuations. "I think that the important lesson of how the Federal Reserve Board and the Tokyo Stock Exchange ended their active management of margin rates can teach a useful lesson to students about monetary policy: Policies that don't work need to be abandoned."
Second, he emphasizes that his experience with the Japanese economy will help him with the international component to teaching macroeconomics.
During his stay in Japan, Hess gave seminar presentations on the economics of conflict at Osaka University, Hitotsubashi University and Tokyo University, and delivered speeches to the Institute for Monetary and Economic Studies staff on the cost of terrorism and effects it could have on economic growth. In addition, Hess gave a talk about U.S. economic policy at a CMC alumni gathering at the Ginza Bellevue Hotel in Tokyo, hosted by Leonard Co '02.
Hess has several projects in progress, including a series of research papers supported by the Kravis Leadership Institute examining leadership at the Federal Reserve during Alan Greenspan's chairmanship. The series is a collaboration with Michelle Bligh, assistant professor in the School of Behavioral and Organizational Sciences at Claremont Graduate University. He is also revising a theoretical and empirical paper on cycles of conflict and poverty in poor countries with S. Brock Blomberg, associate professor of economics at CMC.