"Otherwise what I was mostly trying to suggest was that the banks anticipate the fact that the central bank won't let them double the supply of money and factor this into their loan and deposit pricing. The idea is that the current amount of deposits is not so much based on the curren[t] supply of base but the supply expected in the future." (That was from commenter HJC, with my emphasis added and one assumed typo fixed).
Now that is what I call a real and important critique of the money multiplier, as exposited in the textbooks. Because the textbooks are implicitly assuming a permanent increase in the money base, but none of them AFAIK make that assumption really explicit and talk about the difference between the current monetary base and the expected future monetary base. And it is a critique that has important real world implications, like for the US right now. And it is us Market Monetarists who should be making that critique.
Compare two different cases:
1. The Bank of Canada announces it will permanently double the monetary base relative to what it would otherwise have done. It recognises that doing so will permanently (approximately) double the price level relative to the price level path that it would otherwise have chosen under 2% inflation targeting, and it wants this permanent doubling of the price level to happen.
2. The Bank of Canada announces that a computer glitch will cause the monetary base to double, but only for one month. Because the techies are absolutely certain that they can fix it, but are currently all on holiday. The Bank of Canada assures everyone that normal programming of 2% inflation targeting will resume shortly, and that it will take steps to ensure that this computer glitch will have zero permanent consequences for the price level, if necessary by tightening monetary policy in future to restore the previously planned path for the price level.
In the first case I would expect an (approximate) doubling of currency in public hands and doubling of deposits. The money supply would double, as would the price level and all nominal variables like NGDP. Nominal interest rates would rise temporarily, then revert to normal.
In the second case I would expect approximately nothing to happen. The banks would roll their eyes and sit on (approximately) all the extra base as reserves for one month. (Since Canadian banks normally hold very small amounts of reserves, because none are legally required, and the base is currency+reserves, the stock of reserves would much more than double.) The overnight rate would fall 0.25% to equal the deposit rate (the rate of interest the Bank of Canada pays on reserves), and one month interest rates on liquid assets would fall a little too, but approximately nothing would happen to loans and deposits and the stock of currency in public hands.
I think that the current US case is much closer to case 2 than to case 1. Yes, the US banks have been sitting on the extra reserves for much longer than one month, but it is the conditionality that matters more than the duration. As someone (sorry I forget who) once said: the Fed has put out a large punchbowl of free booze, but no individual bank wants to drink much unless the other banks drink too, and the Fed says it will take away the punchbowl as soon as they start drinking. The full punchbowl just sits there. The Fed would need to announce that it wanted the price level (or NGDP) path to be permanently higher to give them permission to start drinking. And if it did that, a much smaller punchbowl would work much better than the current uselessly large one.
Other critiques of the money multiplier totally miss the point. Like "loans create deposits!" or "base is endogenous!" or "banks don't lend reserves!" or "other things affect the money supply too!". This critique matters because the textbook exposition is designed to show (among other things) how the central bank's control over its own balance sheet (which is all it really controls) allows it to control the money supply, in the same sense that I control my car. (Yes, the position of the steering wheel is endogenous, given the bends in the road I have chosen to take.) The current state of the balance sheet matters less than the expected future balance sheet, and the expectations about the conditions under which the central bank will change that balance sheet.
Worthwhile Canadian Initiative 
Actually, Nick is not a fan of representing reserves and currency as liabilities of the central bank. I don’t really get why (it seems like a natural thing to do to me), so maybe you and he have a bit of overlap on that score anyway! He wrote at least one post on the subject… you can try to find it using the search box at the top.
“Say for example the Fed bought land, gold and corporate stock directly from citizens. I don’t see how borrowing has to happen to expand deposits in that case (Fed deposits for citizens). The Fed could lend directly to citizens too I guess (which of course would create debt).”
What about all the people that dont have assets? These have the highest MPC. Imagine money transfers to all the students unemployed etc…
“I don’t see how you sell the concept of the Fed crediting everyone’s deposits for free. IMO that’s going to be a tough sell politically… tougher than MMT probably… or even straight out socialism.”
The key aspect is that money gets distributed evenly everywhere by interacting with everyone. Its like blood flowing to the whole body as opposed to just the arm. The amount of money creation wont be much per person, it will almost be like a tax return. Its rightfully free because a public entity is already owned by the public so issuing something to yourself free is correct I suppose. I understand your point but I think people will resist this idea because they don’t really understand the nature of a public institution. Its not like this organization is giving stuff away to random people, its issuing paper to its owners.
“At a deeper level, I’m not aware of the problems with the debt based system you claim, nor do I have any way to check your claims… I’m afraid I’d be very skeptical no matter what. I’d be fascinated though to sit back and see you have a conversation with Nick or somebody else that’s more qualified than I am!”
Click to access Debt-and-macroeconomic-stability.pdf
http://www.frbsf.org/economic-research/publications/economic-letter/2014/march/private-credit-public-debt-financial-crisis/
Danny, I read what you had to say above. It does sound like a radical proposal to me, and honestly I would love to see a good critique… but it’s well outside of my capability. You might be absolutely right, but I wouldn’t know where to began with it.
On a more prosaic topic, I did find that post Nick wrote:
http://worthwhile.typepad.com/worthwhile_canadian_initi/2012/03/is-modern-central-bank-money-a-liability.html
I know that Mark Sadowski wont agree that higher income people have a lower MPC becuase he only agrees with measures of income that dont include cap gains. Even though cap gains income is called income he doesnt agree that its income becuase it doesnt count towards GDP.
But transfer payments to all people including the unemployed and students should realize higher MPC than money received from asset sales.
Thanks for the links… …I’m happy they are both short. You seem determined to have a convo on this. Just to let you know where I’m at… I just ran a brief errand, but the whole way back I was trying to work out Marginal Purchasing…. Marginal Propensity… hmmm… well I just googled it, and now I know what MPC is. Lol. OECD is another new one for me. I’m glad to see it’s not a Maoist youth organization.
That’ll keep me busy for a bit.
This proposal toward the central bank is very capitalist in that people are seen as shareholders. The propensity to spend of money received is important becuase it will determine the effect on ngdp of money received.
Well, I don’t know enough to have an opinion on MPC yet. Also, I don’t know if you saw this or not, but I thought it was interesting: Sadowski lists his opinion the goodness and badness of various kinds of taxes:
http://www.themoneyillusion.com/?p=26468#comment-326323
“In other words taxes can be ranked according to their effect on long run growth in the following fashion:
1) Capital taxes (very bad)
2) Labor Taxes (slightly bad)
3) Consumption (moderately good)
4) Property (very good)”
We had a little bit more of a conversation on it here:
http://diaryofarepublicanhater.blogspot.com/2014/03/capital-gains-taxes-paul-krugman-and.html?showComment=1396279611063#c4642485410534569476
So by “consumption tax” … well that could mean “luxury tax” basically, according to Mark. I was most intrigued by the “property tax” ranked at “very good.” I have not followed that debate at all though… I went and posted Mark’s comments on Mike’s site because Mike makes no bones about being a liberal and is SUPER skeptical of MMists, especially Sumner. Nick says Mike has “Sumner derangement syndrome.” So basically I was amusing myself. Sadowski calls Mike a “troll blogger” … ha!
Well, Mark made some comments there he didn’t make on Scott’s site, so I thought you might like to know about that. I only dimly was aware of your previous discussion w/ Mark on this subject… I was interested in other things. If you’ve completed a degree in economics you’re way beyond me … there’s just a few things I zero in on purely out of my own curiosity. MPC isn’t on my radar.
I dont like the idea of taxing any type of income whether it be labour, capital (profits) or capital gains. I think all taxes should be levelled against spending like consumption, investment and asset purchases. This is becuase taxation affects incentives. You want to incentivise people earning incomes. I think I am more in favor of higher taxes against consumption and lower against investment spending. Spending on asset purchases like (property, shares) I think should be taxed. Also efficiencies would be found in taxing from fewer sources (just spending and opposed to spending and income) IMO becuase it is easier to perform.
I guess I agree with Mark. Since consumption accounts for about 65% of gdp you have to careful in taxing this as it could have a big effect gdp in short term. I would like to see an economy where a greater portion of gdp is investment and smaller is consumption so I would carefully try to increase taxes on consumption and reduce taxes on investment marginally in order to incentivise a more investment oriented system. Taxation isn’t going to be the only tool that can address the underinvestment issue though.
What about a “property tax?” That’s what Mark ranks as the best.
Nick – thanks for indulging me. However, I’m still not convinced of the causality. So I’m pushing on corner cases.
“1. Capital is endogenous. Banks can and will raise more capital if it is profitable to do so. (And to the extent that banks have real capital, as opposed to nominal, it will rise automatically).”
I originally posited that the banks were capital constrained. So the original setup assumes that either the banks are unable to raise capital or it was not profitable to do so. Why would an increase in monetary base make an otherwise unprofitable capital raise become profitable?
“2. First, solve for the equilibrium, where P and NGDP are doubled, so nominal money demand is doubled, and nominal loan demand doubles.”
The scenario was that there were no credit worthy borrowers (an extreme case of all subprime is underwater). Dead-beat squeeky wheel can demand all the loan he wants, but no bank will lend out the money. Nick in this case has maxed out his credit worthiness. Nick will need to get a raise before any bank will lend to him. Since no bank will lend to SqueekyWheel to pay more for worthwhile blog posts, Nick can’t raise prices, can’t borrow money, and then no change in price level.
You argued many times before that inflation requires that sellers be induced to raise their prices, and I don’t see the inducement. I only raise my prices if I think everyone else has more money. Until the monetary base changes results in more deposits or currency, everyone else doesn’t have more money, so I don’t raise prices.
One last thought I’ve had for a while is on the CB’s ability to force an expansion. Assuming a bond/reserve swap style of QE and a non-coercive legal structure, the CB cannot force anyone to sell bonds. This was my argument against Williamson – selling bonds doesn’t force inflation down, the inflation must be down first before I sell the bonds. So two scenarios could be constructed if the CB wants to do QE: 1) CB tries to buy bonds at or below pre-QE prices. Given the increased overall demand, no one agrees to sell to the CB at the old prices and QE fails to occur. Or 2) the CB buys at the new prices – ie higher prices than before the announcement. In this case the nominal value of all nominal assets increases and that itself forms the start of inflation (through wealth effect, etc). it strikes me that the ratio is empirically true, but the mechanism is needed for causation. Something has to induce prices to rise – the CB can do that through buying something (bonds/securities?) at higher prices. However if the CB simply prints a lot of currency and locks it in a vault, the base increases, velocity decreases, and nothing happens (until the vault is unlocked).
property tax = wealth tax I think. It’s not on income or consumption I guess.
Im not a big fan of property taxes other than to pay for whatever services the state provides to owners of property.
Squeeky Wheel,
“However if the CB simply prints a lot of currency and locks it in a vault, the base increases,…”
Actually, I don’t think that’s true: the face value of reserve notes doesn’t actually get created until those notes leave the Fed for the private sector. They lose their face value again when they are returned to the Fed. The Fed buys them for production cost (not face value) from the Bueaur of Engraving and Printing. Coins are different.
Of course I don’t know the details in Canada!… could be different I guess.
Under current system taxing wealth is good because wealth is so concentrated. But otherwise no I think. It depends on the system.
Tom,
I’m not an accountant, but your stuff looks good. I was trying to capture the idea that an increase in bank reserves does not necessarily cause bank loans. As JKH has often pointed out, as a practical matter bank loan officers don’t consider the bank’s reserve position when deciding on whether to make loans. So I’m guessing that there can be other (real?) constraints on bank lending which would result in a monetary base increase having less effect on lending than the ‘multiplier’ would normally imply.
… coins are different, but still if they aren’t in a commercial bank vault or out in circulation, they aren’t base money. Thus they aren’t base money if they’re stored at the Fed:
http://en.wikipedia.org/wiki/Money_supply
Ralph,
“thus while exchanging property, shares, etc, is inherently expensive, it wouldn’t happen all that often”
I disagree. When Singapore introduced the FAST payment system (< 30 sec round-trip inter-bank retail transfers – similar to the UK system), it went from settlement then clearing to clearing before settlement. In effect the banks became exposed to eachother’s settlement risk. Despite this being for low valued retail transactions, the banks required a fully collateralized system – all banks must post collateral for their maximum settlement upfront.
I suspect that a real property based settlement system would be similar.
Nick:”…allows it to control the money supply”
Controlling something means predictively making that something move in the desired direction. The central bank cannot do that. A car driver has a good control overall on the speed and direction of the car. This is not the case with “controlling the money supply”. So the analogy is far from perfect.
Of course the central bank has an influence on credit conditions and hence the money stock but that is a slightly different thing than saying “controlling”.
And before anyone points out, these are not semantic things. Whenever central banks have tried to control the money stock by announcing targets, they have failed miserably.
Squeeky, thanks. I’m not an accountant either. I got interested in how all that from Cullen Roche, JKH, and Fullwiler, but Carney’s argticle filled in the capital requirements part for me. I heard from multiple sources that “reserves don’t limit banks’ lending, capital does.” I have since learned to qualify that a bit… reserves don’t constrain bank lending as long as the CB has a completely accommodative policy (i.e. it’s targeting a fixed overnight rate). However, say the reserve level in the US is $2.5T and checkable deposits are at $1.5T (Those figures are in the ball park), then lending could be constrained in a hurry if the reserve requirement were raised to 2.5/1.5 = 167%, with no further accommodation from the Fed (i.e. no more OMOs).
Inflation targeting (I.T.) is less accommodative than overnight rate targeting. Fixed MB level targeting is not accommodative at all. I see it as a matter of degrees, like I see endogeneity and its complement, exogeneity. So I do think that MB constrains bank lending under I.T., but not at a hard limit: more like it sets a mean and variance around which it can bounce. Certainly both MB and the overnight rate will have a degree of endogeneity under I.T., but MB won’t be as endogenous (and the overnight rate won’t be as exogenous) as under interest rate targeting.
My current favorite analogy is that it’s like a set of jointly Gaussian variables. Then the magnitude of the correlation coefficient between any two of them describes the degree of exogeneity of one wrt the other. The complement of this magnitude describes the degree of endogeneity. That’s how I visualize it!… nothing official.
Ramanan: One important difference is that my car has a good speedometer, that responds very quickly to the car’s actual speed. Central banks get data on the money stock with a lag. Cruise control cannot even see whether the car is going uphill or downhill, which has a big effect on the speed, but cruise control can very quickly adjust for the hills, even though it can’t see the hills, because it can “see” the speedometer.
A second important difference is that my car has finite power and brakes. There is no limit to how much money a central bank can print, unless it runs out of paper and ink. Or buy back, unless it runs out of assets to sell.
The Bank of Canada abandoned money targeting, not because it couldn’t target money, but because it saw that the relationship between money growth and inflation wasn’t constant enough, and it wanted to bring inflation down, so it switched towards targeting inflation directly.
… and the other big difference is he’s actually riding a horse instead of driving a car. 😀
HJC: Yep. I can’t remember the last time I hoisted something from comments, and wrote a post about it. You are very honoured!
But it was a very good comment. And it was a good criticism. The only good substantive criticism of the money multiplier I have come across, despite all the haters out there.
You are now a Market Monetarist, whether you want to be or not!
Yes, to get strict Quantity-Theory results, a la Patinkin, new money would have to be helicoptered down proportional to existing stocks (and new bonds too). But the only difference this makes is distribution effects. A back of the envelope calculation suggests it doesn’t make a big difference if the central bank uses OMOs or helicopters to increase the base. Base is around 5% of NGDP, so if we double the price level by permanently doubling the base, that is a one-time inflation tax of 2.5% of GDP used to reduce the national debt by 2.5% of GDP. A much bigger non-neutrality would be the effect of the higher price level on the real value of the existing bonds. That would halve the debt/GDP ratio. Plus the non-neutralities that result from sticky prices.
So I don’t think the differences between OMO and helicopter money are big enough to worry about. Especially since that calculation is for a doubling of the base and price level, which is a very big change in monetary policy.
dannyb2b: I do have a bank account with the Bank of Canada. There are several Bank of Canada $20 notes in my wallet. Sure, it’s a paper account, and not an electronic account, but it’s the same thing. I have an account with the Fed too, and the Bank of England.
“I do have a bank account with the Bank of Canada. There are several Bank of Canada $20 notes in my wallet. Sure, it’s a paper account, and not an electronic account, but it’s the same thing. I have an account with the Fed too, and the Bank of England.”
Yeah but electronic money is generally more efficient. Otherwise probably nobody would have bank accounts. The fed could expand money by posting it to every citizen or just credit electronic accounts.
” Central banks get data on the money stock with a lag. ”
Not the base
“The Bank of Canada abandoned money targeting, not because it couldn’t target money, but because it saw that the relationship between money growth and inflation wasn’t constant enough, and it wanted to bring inflation down, so it switched towards targeting inflation directly.”
So instead it decided to target interest rates. Hmmm
Central banks have perfect data on Base becuase they created it all.
Nick: But (sorry to harp on) Metzler’s paper showed that there is a difference between helicopter money and OMOs. And does your doubling of money double the price level if we are not at full employment? I don’t think so. (I need to keep my post-Keynesian credentials intact!)
HJC
Do you have a link to Metzler’s paper?
Its title is ‘Wealth, Saving, and the Rate of Interest’ by Lloyd A. Metzler, 1951. I have it in a book, so sorry I don’t have a link. Maybe it’s not as influential as it perhaps was back then.
HJC: there is indeed a difference between helicopter money and OMO. I’m saying it’s not very big. For a doubling of the base and price level, the difference is equivalent to a change in the debt/GDP ratio of 2.5% of GDP. Base is small, so the number of bonds bought in an OMO to double the base is small too.
If we start away from full employment, we still get a doubling of the price level, relative to what would have happened otherwise. (Of course, that might mean the price level would have halved otherwise, and so doubling the base had no effect on the price level, ** relative to what it was previously**.)
danny: “So instead it decided to target interest rates. Hmmm”
No it did not. Instead it decided to target inflation. I don’t know of any central bank that targets interest rates. The only people who think otherwise have very short time-horizons. Like 6.5 weeks.
Nick: Got it, point taken. Your second paragraph, have you got any extra blog posts on that?
I thought the BOC abandoned monetary targets to target the interest rate.
http://www.bankofcanada.ca/core-functions/monetary-policy/key-interest-rate/
Its now targeting the interest rate to target inflation right? Before it was targeting the supply of money to target inflation, growth and employment?
HJC: I think I did a blog post on it years ago, but I don’t think I could find it. But it wouldn’t add much to what I have just said.
A lot of debates about whether X causes Y under what conditions could be avoided if we were all just clearer about this distinction. “Other things equal” is another way of talking about the counterfactual conditional, but it isn’t as clear.
danny: at a very high frequency (hours and days) the BoC adjusts the base using repos to hit its target for the overnight rate of interest. At a lower frequency, it adjusts the target for the overnight rate 8 times per year (if needed) to hit its inflation target.
In the late 1970’s, it announced a declining target path for M1 growth rate. And it adjusted the interest rate to try to hit that monetary target. And it adjusted the base to adjust the interest rate. Then it abandoned the target path for M1, and replaced it with an informal (implicit) target for inflation, then a formal explicit target for inflation.
You get a very different picture, depending on whether you zoom in or zoom out. You see different patterns depending on the zoom.
Nick Rowe
Do you agree that if the fed issued money directly to public in expansionary monetary policy the money supply would expand without debt expanding as much as the current system because a greater proportion of broad money would be base as opposed to bank deposits. Bank deposits are generally created through lending.
As a result of lower debt greater monetary policy efficiency would prevail because higher debt to GDP is correlated to greater financial instability and longer lasting recessions.
danny; reframe; fixed exchange rates are riskier than flexible exchange rates. Beta banks are riskier than alpha banks, because beta banks have fixed exchange rates.
Nick Rowe
So if I understand correctly banking with the alpha bank is preferable than with the beta banks. If the fed is alpha then it would be superior if the general public could hold electronic accounts with it instead of only the beta banks. Does this mean we agree?
Frances Coppola has a post on the money multiplier now too:
http://pragcap.com/on-the-persistence-of-inadequate-ideas/comment-page-1#comment-172291
And yet another view of the money multiplier, this one from Jason Smith… (I get a mention in this one):
http://informationtransfereconomics.blogspot.com/2014/04/broad-money-narrow-money-and-interest.html
… well now that I look more carefully, perhaps “money multiplier” isn’t the right way to describe it, but it does have to do with the ongoing discussion between Nick Rowe and David Glasner.
Among endogenous money enthusiasts Ramanan often writes things which I find interesting and non-objectionable. However, in this particular instance I have to pick on him.
March 31, 2014
The Phrase Money Multiplier Itself Is Inaccurate And Misleading
By Ramanan
“Some people
http://www.themoneyillusion.com/?p=26479
point out that the critique “there is no money multiplier” is wrong because it is a ratio whatever said. No! The phrase “money multiplier” itself is wrong because the phrase itself captures a wrong causal story. A phrase is a small group of words standing together as a conceptual unit and hence the phrase “money multiplier” is inaccurate and misleading.
So take the textbook Keynesian multiplier first. It suggests that a rise in government expenditure leads to a rise in output more than the increase in the expenditure. The ratio of rise in output to the rise in expenditure is the multiplier.
But this is not the case with the “money multiplier”. There is no direction of causality from a rise in bank settlement balances to the rise in the money stock. This is true even if the central bank is doing QE/LSAP, i.e., purchasing assets on a large scale. So if the central bank purchases government bonds in the open market, it leads to a rise in banks’ settlement balances at the central bank and also a rise in the money stock. But the rise in the settlement balances could not have been said to have caused the rise in broad monetary aggregates such as M1, M2 etc. It is the act of the central bank purchase which leads to a rise in the stock of both narrow and broad monetary aggregates…”
The first problem I have with this is the implicit assumption that the statement “a rise in government expenditure leads to a rise in output more than the increase in the expenditure” is obviously correct. In fact one of the most notable facts about the Keynesian multiplier is that empirical research has had great difficulty in detecting nonzero Keynesian multipliers, never mind multipliers greater than one, perhaps due to problems of endogeneity, but more likely due to the fact that monetary policy should routinely offset fiscal policy, unless the central bank is incompetent or lazy.
The second problem I have with this statement is the absurdity of claiming that the rise in reserve balances cannot be said to have caused the rise in deposits since it was the “act of the central bank purchase” that caused both. QE literally means a targeted increase in the monetary base (or its reserve balance component in the case of Japan) so how can its effect on deposits be disentangled from its effect on reserve balances?
In fact, provided QE consists of purchases of assets held by a non-banks (as has been effectively true, as of today, in the case of 100% of all QE done in the US and the UK), it creates a simultaneous entry on the liability and asset side of commercial bank balance sheets in the form of a commercial bank deposit-reserve balance deposit pair. How can one say that the the central bank’s intent of creating a reserve balance deposit did not cause the commercial bank deposit, since, as QE has been practiced, one could not come into existence without the other?
Moreover, using similar techniques to Post Keynesian economists such as Basil Moore, Thomas Palley, Robert Pollin etc. in empirical endogenous money research, I find that the US monetary base has Granger caused commercial bank loans and leases during the period of QE. So if “loans create deposits”, as the endogenous money enthusiasts keep chanting, this implies that QE, by encouraging loan creation, has catylized the creation of even more deposits.
Ramanan continues:
“…Now to the case of no QE.
Same story: the rise in banks’ settlement balances could not have been said to have caused a rise in broad monetary aggregates. The more appropriate phrase is “credit divisor”. Here’s Marc Lavoie from his 1984 paper The Endogenous Flow Of Credit And The Post Keynesian Theory Of Money…”
This reminds me of the several things I have read on how the “Keynesian multiplier” should really be called the “Keynesian divisor” by Kevin Hassett, Charles Gave, and so on:
Click to access keynsianDivisor.pdf
none of which I give much credence to either.
Something tells me that economics textbooks are not going to replace the word “multiplier” with “divisor”, in the case of either the monetary or Keynesian multiplier, in the near future.
Mark: Hi, if the reserve deposit and the bank deposit “could not come into existence without the other” (in non-bank QE), then any logical inference about direction of causality could work equally well either way. You could just as well say that the creation of the bank deposit caused the creation of the reserve deposit. Ramanan’s insistence that the purchase caused both seems pretty sound, for the first round effects anyway.
On your point about Granger causation, it was my understanding that bank credit had largely collapsed in the US and the UK and that instead it was QE keeping broad money stable. I wasn’t aware of QE encouraging loan creation (ignoring student loans), have you got any links for this?
Tom,
“I don’t see how you sell the concept of the Fed crediting everyone’s deposits for free. IMO that’s going to be a tough sell politically… tougher than MMT probably… or even straight out socialism.”
Notorious socialist Milton Friedman suggested the idea, he referred to it as dropping money out of a helicopter.
HJC,
The goal of the purchase is to create a reserve deposit. If the purchase must create a commercial bank deposit in order to create a reserve deposit it seems to me that the immediate cause of the commercial bank deposit is the central bank’s decision to create the reserve deposit.
“On your point about Granger causation, it was my understanding that bank credit had largely collapsed in the US and the UK and that instead it was QE keeping broad money stable. I wasn’t aware of QE encouraging loan creation (ignoring student loans), have you got any links for this?”
US commercial bank loans and leases are up by about $1.03 trillion in four years, or by 15.8%, and consequently are at record levels in nominal terms:
http://research.stlouisfed.org/fred2/series/TOTLL?cid=100
But even if that weren’t true, the question isn’t whether commercial bank loans and leases are up or down, but whether they are higher than they would have been in the absence of QE.
And, between 2008Q2 and 2013Q4, US deposits (demand, savings and time) increased by $3.12 trillion, or by 36.2% according to the flow of funds. During the same period of time reserve balances increased by $2.22 trillion.
I have no links for this but I will describe what I have done and am willing to email the estimation output (I’ve done as much for Dan Kervick for example).
I did my analysis using the Toda and Yamamato technique in Eviews. The data is the monetary base and commercial bank loans and leases at a monthly frequency over the period December 2008 through September 2013. The minimum order of integration such that both the monetary base and commercial bank loans and leases are stationary is four.
I set up a two equation VAR in the levels of the data including an intercept for each equation. The various information criteria suggest a maximum lag length of 2 for each variable. An LM test shows no serial correlation in the residuals.
Then I restimate the levels VAR with four extra lags of each variable in each equation. But rather than declare the lag interval for the two endogenous variables to be from 1 to 6 I left the interval at 1 to 2 and declared the four extra lags of each variable to be exogenous variables.
When I do the Granger causality test I fail to reject the null that commercial bank loans and leases does not cause the monetary base but I reject the null that the monetary base does not cause commercial bank loans and leases at the 5% significance level.
I’ve also conducted Granger causality tests on UK monetary base and the M4 lending counterpart and the M4ex lending counterpart over the period from May 2009 through September 2013, but the results are not statistically significant.
Phillipe
“I don’t see how you sell the concept of the Fed crediting everyone’s deposits for free. IMO that’s going to be a tough sell politically… tougher than MMT probably… or even straight out socialism.”
“Notorious socialist Milton Friedman suggested the idea, he referred to it as dropping money out of a helicopter.”
Base expansion in normal times works out to about 500 dollars a year per person. About 10 dollars a week if expansion is performed in weekly increments. Thats hardly socialism. Its capitalim. Its just issuing financial assets to owners of central bank which are the public (or it should be public anyway).
Mark: Thank you for your detailed reply. On the first point, assuming your interpretation of the goal of QE, then I don’t suppose you can be wrong, but that wasn’t my impression of its goal. Otherwise the talk of loan size counterfactuals and econometric testing takes me well beyond what I can offer in the time I have available, sorry. But it does look like valuable and I may get a chance to get back to it.
Phillipe and dannyb2b, if you can sell those ideas politically, great! If anything I’d guess I’m an easier sell than your average American. My impression of Milton Friedman (from what little I know of him) is he was probably too right wing for my tastes. And I notice we currently don’t have money dropping from helicopters or negative income taxes either for that matter. I was just giving you my impression of your chances. I’m not much of a revolutionary or activist… much more of an incrementalist, and thus I’d think if anybody has a chance of selling a new idea, it might be MMists… and the world isn’t exactly beating down their door for advice either I notice. So good luck!… and if you can sell one of the MMists on your ideas I’d truly be very impressed… which reminds me dannyb2b: Rowe never confirmed or denied that he agreed with you, right? But did you hear back from him anywhere else?
Philippe (sorry for misspelling your name above) and dannyb2b… I’d posted a question to Miles Kimball recently, and he answered, and it occurred to me that his proposal here (which he pointed me to in his answer):
http://blog.supplysideliberal.com/post/67342414250/pieria-2-the-costs-and-benefits-of-repealing-the
is something you’re both probably aware of, right? How does that stack up against yours in terms of being incremental vs sweeping? Also, what’s your view of it? Here’s my question to Miles BTW:
http://blog.supplysideliberal.com/post/23959666073/what-is-a-supply-side-liberal#comment-1320626945
My impression up till now has been that Miles’ proposal was less likely to fly politically than MM, but this will be the 1st time I really give it a good look, so perhaps my view will change.
Tom Brown
I think my proposal is incremental too. The fed is doing the same thing in my proposal just with a broader set of counterparties thats all. The BOE is actually begining to offer reserve accounts to non bank corporates too. I think this is key so that debt to gdp is lowered and spending from base increases is higher. Its pretty simple really.
Im not suggesting we abolish central banking or subsume it into the congress entirely or anything.
Negative interest rates are unnecesary. The only reason we are at the ZLB is becuase demand for reserves is suppressed. If the broader public could hold them then transactions demand for money would shift from deposits to reserves and rates would go up.