Wednesday, November 26, 2008

A Macroeconomic Puzzle


(The blue line is the value of the dollar in foreign exchange markets. The red line is the yield on five-year inflation-indexed bonds.)

A question from Greg Mankiw:
You observe an economy sinking in recession. As this occurs, real interest rates are rising, and the currency is strengthening. What shock, or set of shocks, could have caused these events?

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