Category Monetary policy
Immaculate transfers and the monetary transmission mechanism
Assume that corn is identical across all countries, and is freely traded with zero transportation costs. We then know that "the law of one price" will hold for corn. The price of corn in Canada will be the same as the price of corn in the rest of the world. Why? Suppose it weren't. First […]
The best cure for “easy money” is easier monetary policy
Reading Bank of Canada Monetary Policy Reports doesn't normally annoy me, but reading this latest one did. Specifically, this bit: "Although the Bank considers the risks around its projected inflation path to be balanced, the fact that inflation has been persistently below target means that downside risks to inflation assume increasing importance. However, the Bank […]
Forward guidance and the term structure in New Keynesian models
Take a standard New Keynesian macroeconomic model, where the central bank sets the one-period interest rate. Now let's hit it with an unexpected shock. For simplicity and concreteness, let the shock be a reduction in government spending that will last for n periods, after which government spending will return to normal. So government spending was […]
If banks bought houses
One more for the Banking School. This is a thought-experiment to help us clarify our thinking about banks. If banks bought houses, instead of lending people the money for people to buy houses, what would be different? Not much. But we students of money and banking would avoid some common mistakes, like confusing the demand […]
Two Neo-Wicksellian indeterminacies
To misquote Milton Friedman: macroeconomics has only regressed one derivative since Wicksell. The old Wicksellian indeterminacy has long been known: the equilibrium price level is indeterminate if the central bank sets an interest rate. The neo-Wicksellian/New Keynesian model has two indeterminacies. I've been worrying about the indeterminacy of the level of output; John Cochrane has […]
Teaching comparative advantage: barter vs money (bleg)
When we teach comparative advantage in Intro Econ we assume barter exchange. We swap Canadian apples for US bananas. But the students, quite naturally, are thinking of monetary exchange. What happens if Canadian apples and bananas cost more dollars [to produce] than US apples and bananas? That's possible, isn't it? Wouldn't that mean [US prices […]
Interest rates and Aggregate Demand
What happened in 2008? Why didn't the cut in interest rates prevent Aggregate Demand from falling? Was it just that the cut in interest rates wasn't big enough? Or is the rate of interest the wrong thing to look at? Because it's only a relative price, and relative prices only matter for relative demand? Suppose […]
Teaching notes on banks and money
[This is aimed at intermediate-level students. It's "big picture" stuff, and doesn't go into all the institutional details. And it's already too long.] Banks are financial intermediaries that create money. Banks are special because money is special. If we used cows as money, then dairy farms would be special, because dairy farms would create money. […]
Bertrand, Cournot, and the Simple Money Game
I'm writing this post mostly to try to get my own head straight. Read at your own risk. Strategy space matters. The order of moves matters. What I call "the Simple Money Game" is a three-stage mixed Bertrand-Cournot general equilibrium game. Bertrand moves are made before Cournot moves. Each player is both a producer of […]
MOE vs MOA: the battle of the paintings
I used to think that whoever controlled production of the Medium of Account controlled the price level. Now I think that's wrong. Unless the Medium of Account is also the Medium of Exchange. In an economy with a single MOA, and with n goods, there are only n-1 prices. (And in an economy with a […]
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