Category Monetary policy
Do the Greeks need Greek banks?
Or could they all use foreign banks? Dumb question. I don't know the answer. Are there some laws that make it hard to use foreign banks? Tourists seem to manage OK without opening a foreign bank account. It ought to be easier still if the foreign country uses the same currency. Could the foreign banks […]
Fixed exchange rates and Blame Thy Neighbour
There is a parallel universe in which the Euro was never invented, and the Eurozone countries kept their own moneys and their own central banks, with flexible exchange rates. I think the economic outcomes would have been better. But let's just suppose they weren't. Suppose that each of those independent central banks had screwed up […]
Money as closed-end mutual fund
[I don't think this is very original, but it's a fun and instructive metaphor to play with. The most important lesson is the way the metaphor fails.] Suppose I start a closed-end mutual fund. (Brits call it an "investment trust".) I issue shares, and use the proceeds to buy assets like bonds and stocks. Shares […]
Instrument independence vs target independence under flexible exchange rates
Sebastian Edwards (HT Mark Thoma) says that monetary policy independence under flexible exchange rates is an illusion. This conflates instrument independence with target independence. Instrument independence is always an illusion, given the target. Target independence is not an illusion.
If a central bank wants to shrink, it must threaten to grow (autographed edition)
[Nothing great or original here, except maybe the metaphor. It's supposed to be a simple teaching post.] Zimbabwe is only the most extreme recent example of this general rule; the central bank threatened to grow extremely large, and this caused it to shrink extremely small. The Swiss National Bank is another recent example, at the […]
What is the right sort of risky asset for central banks to own?
Should inflation targeting central banks hold a portfolio of assets that consists only of foreign lottery tickets? No, because if its portfolio of foreign lottery tickets became worthless, and the central bank were unable to get a bailout from the government, it would be unable to buy back the currency it has issued. So if […]
Why shouldn’t central banks buy risky (and illiquid) assets?
Like Greek bonds. Dumb question of the day. "Because risky assets are risky!" is not the answer. Other things equal, I would prefer to hold a safe asset than a risky asset, because I don't like risk. But other things are not equal, precisely because other people don't like holding risky assets either. So risky […]
Interest rates, exchange rates, and the Bank of Canada
Last week the Bank of Canada cut the overnight rate of interest from 1.00% to 0.75%. The exchange rate dropped 2 cents (about 2.5%) on the news. [Update: I forgot to add (because I figured Canadians already knew it, but then remembered others probably wouldn't) that the Bank of Canada has "done nothing" (with interest […]
Does monopoly power cause inflation? (1968 and all that)
Here's a question for you: Suppose there is a permanent increase in monopoly power across the economy (either firms having more monopoly power in output markets, or unions having more monopoly power in labour markets). Would that permanent increase in monopoly power cause a permanent increase in the inflation rate? Most economists today would answer […]
Negatively-valued (red) money in an OLG model
Samuelson 1958 (pdf) built an overlapping generations model in which intrinsically worthless green bits of paper have positive value. It is possible to build a mirror-image of Samuelson's model in which intrinsically worthless red bits of paper have negative value. My model actually makes more sense. Because any infinitely-lived productive asset, like land [or Frances' […]
Worthwhile Canadian Initiative 
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