Category Monetary policy
Hydraulic Monetarism
There are two ways to increase your stock of money: 1. increase the flow in; 2. reduce the flow out. There is only one way to increase your stock of any other asset: 1. increase the flow in. (Unless you are a producer of that other asset. Or unless you are a dealer in that […]
The Parable of the Fruit Trees
The apple producer produces apples. The banana producer produces bananas. The cherry producer produces cherries. Every year they always work exactly the same number of hours and produce exactly the same quantity of fruit. If you define "recessions" as a decline in output and employment, there cannot be a recession in this economy. By assumption. […]
Could you pass a 1950s Econ 1000 exam?
Principles of economics final exams set out, implicitly, the core of the discipline. Their questions are designed to test understanding of fundamental economics concepts; the ideas that are the foundation of economic analysis. So when I came across Clifford L. James's Principles of Economics (first published in 1934; ninth edition in 1956), complete with final […]
Monetary and Fiscal Federalism, Debt, Canada, and the Eurozone.
A government that undertakes a commitment to target 2% CPI inflation does not, strictly speaking, "borrow in its own currency". Its bonds are an indirect promise to pay, via transversality transitivity (damn!), a specified quantity of CPI baskets of goods and services. In much the same way that bonds under the gold standard were an […]
Price Level Targeting targets the Stickiest Prices; Inflation Targeting targets the more Flexible Prices
And it's good to target the stickiest prices; and bad to target the more flexible prices. It means that recessions under inflation targeting can last as long as it takes for the stickiest prices to change. Which is bad. And it's especially bad for us old macroeconomists, who remember that the whole point of New […]
“Monetary Policy Accommodation” and Upward-sloping IS curves
If you believe that the IS curve slopes up, then what the Bank of Canada says about "monetary policy accommodation" makes sense. If you believe the IS curve slopes down, like in the textbooks, then it doesn't make sense. This is supposed to be a simple teaching post. My own mind is pretty simple anyway. […]
Don’t even try to “Normalise” interest rates
If you think that the rest of the economy is normalised, so it is time to normalise interest rates too, you are wrong. If the rest of the economy is normalised, then interest rates must already be normalised. Wicksell said there was some underlying "natural" rate of interest. If the central bank sets a rate […]
Monetary tightening can lower real interest rates
It's the investment accelerator. Monetary tightening means lower expected NGDP; real interest rates can go either way. Think of this as a teaching post, to explain the intuition. Or look at Miles Kimball's great post. Here's a thought-experiment. Do not take this thought-experiment literally. It's just my weird way of doing the math, where I […]
The Bank of Canada’s “Hot Hand” experiment and Price-level Targeting
This (pdf) might be the most important controlled experiment economists have ever run. The results of this experiment have been influential in the Bank of Canada's decision (so far) to stick with targeting inflation rather than a price-level path. And making the right decision on that question could save many billions of dollars (trillions worldwide) […]
Rip van Winkle on Price Level vs Inflation Targets
Rip van Winkle is put in charge of a New Keynesian central bank. He sets a nominal interest rate that he believes will keep inflation at 0% and the price level constant. (It doesn't matter if I change this to rising at 2% per year.) Then he falls asleep for 70 years, and that nominal […]
Worthwhile Canadian Initiative 
Recent Comments