Category Monetary policy
One good thing about Bitcoin
Is that it is (sometimes) used as a medium of exchange but is not (yet) used as a medium of account. (Is that right?) Quite probably, someone else has already said this, but just in case they haven't:
Another weird monetary world
Imagine you lived in a world where the central bank issued two types of money: paper money; and electronic money. If you want to pay for something with the paper money, you have to physically transfer it. If you want to pay for something with the electronic money, you just need to tell the central […]
Is the macroeconomic importance of finance an artefact of current monetary policy?
Suppose the Bank of Canada pegged the price of gold. If an increased demand for gold caused a recession, would macroeconomists be told they needed to pay more attention to the theory of the demand for gold? Or would the Bank of Canada be told to change its policy? Suppose the Bank of Canada pegged […]
Land and the liquidity trap
Bill Woolsey has a very good post, written in response to my previous post. In this post I steal Bill's thought-experiment, but change "corporate bonds" into "land". There is an alternate universe, just like our own, with one exception. For historical reasons*, central banks do not own government bonds. They own land instead. They buy […]
Monetary policy, fiscal policy, the target, and the size of the central bank
Glen Hodgson asks whether the Bank of Canada's 2% inflation target is too low. He is right to ask that question. I want to explore the trade-offs. Suppose you are a macroeconomist (like Simon Wren-Lewis) who believes that the Zero Lower Bound on nominal interest rates will be a binding constraint in some circumstances, and […]
Media of exchange and the clearing house
What makes our chequable demand deposits at banks media of exchange? The answer is: the clearing house, where circles of offsetting IOUs are cancelled out. It is clearing houses that create money. Unless there is only one bank, where everybody banks, because it doesn't need a clearing house. Nothing revolutionary here (except maybe a little […]
When Will Low Interest Rates End?
A recent piece in the Financial Post titled “How many times can economists cry wolf about interest rates” caught my interest because I – like many economists in Canada – have been expecting interest rates to eventually start to rise and yet they do not. So when will Canadian interest rates start to go up? […]
Nominal-loss-aversion and its consequences
I understand risk-aversion. The assumption of diminishing marginal utility of consumption makes sense. And if you have diminishing marginal utility of consumption, you will prefer an investment with a certain return over an investment with the same expected return but a positive variance. Loss-aversion is harder to understand. You need to assume the utility function […]
BackedCoin vs UnbackedCoin
Imagine there is competition between two currencies. The two currencies are identical in every respect, except one is backed by assets and the other isn't. Which one would win the competition to become the preferred medium of exchange? I think the one that is backed by assets would win. For two reasons:
Banks with 100% capital ratios?
Why can't all banks be as safe from insolvency as the Bank of Canada? I put a question on my final exam: "What is a bank? Should banks have legally required minimum reserve ratios? What about 100% reserve ratios? Should banks have legally required minimum capital ratios? What about 100% capital ratios?" I wanted the […]
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