Category Monetary policy
There can be an excess supply of commercial bank money
Commercial banks are typically beta banks, and central banks are typically alpha banks. Beta banks promise to convert their money into the money of alpha banks at a fixed exchange rate. Alpha banks make no such promise the other way. It's asymmetric redeemability. This means there cannot be an excess supply of beta money in […]
Liquidity pile-ups on the Wicksellian roundabout
I'm trying to model something, and failing miserably. So I'm going to try to articulate my vision, hoping for inspiration. Imagine a large number of cars forever circling around a very large roundabout. Initially they are all going the same speed, and are evenly spaced. What happens if one car slows down temporarily? (I saw […]
Alpha banks, beta banks, fixed exchange rates, market shares, and the money multiplier
Forget money and banking for a minute. Let's think about international macroeconomics. Just suppose the US Fed, for reasons unknown, pegged the exchange rate of the US dollar to the Canadian dollar. The Fed makes a promise to ensure the US dollar will always be directly or indirectly convertible into Canadian dollars at par. The […]
Two LM curves
Sometimes we borrow money from the bank because we plan to spend more than we expect to get in income. And sometimes we borrow money from the bank because our stock of money is too small relative to our flows of planned spending and expected income. Here is a rough sketch of a simple model […]
The sense in which the stock of money is “supply-determined”
Consider three positions: 1. The stock of money is determined by the demand for money, and not by the supply of money. 2. The stock of money is determined both by the demand for money and by the supply of money. 3. The stock of money is determined by the supply of money, and not […]
One general theory of money creation to rule them all!
The Bank of England has published a lovely clear article (by Michael McLeay, Amar Radia and Ryland Thomas) on "Money Creation in the Modern Economy". Thanks to JKH for the tip-off. (Here is JKH's blog post). But I disagree with it. Thinking about monetary policy in terms of interest rate policy just doesn't work. It […]
Coordination and the demand for money
Why do financial (and other) crises (sometimes) cause a recession? Because they increase the demand for money and so cause an excess demand for the medium of exchange. But why do financial crises increase the demand for money? Because the demand for money depends on the synchronisation of payments and receipts of money, and synchronisation […]
Keynes, New Keynesians, and the Keynesian Cross
Simplify massively. Ignore investment, government spending and taxes, and exports and imports. All output is consumed. Assume a Keynesian consumption function: Cd = a + bY. Draw Samuelson's "Keynesian Cross" diagram. Real consumption demand Cd on the vertical axis, and real output (real income) Y on the horizontal axis. Demand for consumption this current period […]
Swapping the assignment of targets to instruments
Before leaving on his pilgrimage, the King appoints two ministers. He gives the first minister control of instrument m, and tells him to set m so that the target variable M is equal to the target M*. He gives the second minister control of instrument f, and tells him to set f so that the […]
The anti-NK model and minimum wages
I present a simple model that has exactly the opposite predictions to the standard New Keynesian model: if the central bank sets the nominal interest rate too high (too low), that will cause an increase (a decrease) in output and employment. If you think that an increase in the minimum wage will cause increased employment, […]
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