Category Monetary policy
Paying back the loan of forward guidance
If I read Stephen Poloz correctly, the Bank of Canada will not normally be doing forward guidance in the future. But it will use forward guidance in an emergency. I do not clearly understand Steve's reasoning (see section 7 of his discussion paper), but I think this is the right decision. "Forward guidance" is a […]
The representative agent does not know what he is doing
[This is based on an informal talk I gave to Carleton students. There were first year students, and upper year undergraduates, and graduate students, and faculty, in the audience, which made it a little tricky.] Somewhere in Canada there is a person whose height is exactly equal (or almost exactly equal) to the average height […]
Helicopters, redemption, and the target
Tony Yates is arguing with Willem Buiter about helicopter money. Willem says that helicopter money increases aggregate demand even in a liquidity trap, because helicopter money increases net wealth, because money is irredeemable. Tony says that if money is irredeemable, the existence of an equilibrium in which intrinsically worthless money has positive value becomes problematic. […]
How to test whether the LMI (LMCI) is a good indicator
The Bank of Canada calls theirs the "Labour Market Indicator". I now learn from Tim Duy (HT Mark Thoma) that the US Fed has one too, and calls theirs the "Labor Market Conditions Index". I think that LMI and LMCI are roughly the same sort of thing. It's an index number that is supposed to […]
The relation between ZLB, NGDP, QE, and G
Nothing new here. This is just a brief summary of my views:
How can we know if government spending is money-financed?
I have a proposal that would improve aggregate demand management. I call my proposal "money-financed government expenditure on sacrificing goats". I propose that every time the government sacrifices one goat, the Bank of Canada is required by law to increase the base money supply permanently by $1 billion, relative to what it would otherwise have […]
The Bank of Canada vs the bond market
Carolyn Wilkins, Senior Deputy Governor at the Bank of Canada, gave a speech yesterday at noon. She said that the Bank of Canada had lowered its estimate of the (cyclically-adjusted) neutral rate of interest. "All told, we think that the neutral rate of interest is lower than it was in the years leading up to […]
Inventories of goods and money (I=S again)
Think waaaay back, to the Keynesian Cross model of the traditional first-year textbook: 1. Desired expenditure Yd is an increasing function of income (aka production) Y. So Yd = a + bY where a > 0 and 0 < b < 1 2. In equilibrium, Yd = Y What is the process that brings the […]
How scared of deflation were you, in 2008?
In normal times, like today, or 2004, my subjective probability distribution for the average annual inflation rate over the next 5 years looks something like this: The Bank of Canada tries to keep inflation between 1% and 3%, and targets the 2% midpoint of that range. In any one year, inflation will rarely fall below […]
The orthodox New Keynesian position on liquidity preference and loanable funds
I am not an orthodox New Keynesian macroeconomist (ONKM), but I can pretend to be one. Q: What determines the rate of interest? ONKM: "The central bank sets the rate of interest." Discussion: the above answer is a pure liquidity preference theory of the rate of interest. By having a perfectly elastic money supply curve, […]
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