Category Monetary policy
Price-level targeting as an automatic stabiliser for inflation
Targeting the price level could mean lower variation of inflation than targeting inflation. The best way to target inflation might be to target the price level instead. It's one of those paradoxes of pre-commitment. A promise to do something you don't want to do can affect others' expectations, and others' actions, and help you get […]
How can Halloween get started?
A day late, but whatever. It's easy to understand how money might get started. A non-smoker accepts cigarettes(pdf) he doesn't want in exchange for the jam he doesn't want. Then finds a smoker who will accept those cigarettes in exchange for biscuits he does want. That non-smoker has just used cigarettes as a medium of […]
If r < g, bond-finance is like currency-finance
A world where the interest rate on government bonds is (permanently) less than the growth rate of GDP ("r<g") is a weird world. The government can run a Ponzi scheme, where it borrows (sells more bonds) to pay for the interest on the existing bonds, so the stocks of bonds grows at the rate of […]
So, what *are* the differences between a Government’s Budget and a Household’s Budget?
You've probably seen examples. Some poor non-economist says something like: "Governments, like households, must live within their means". And economists all point their fingers and laugh and say that's a fallacy. So, what are the differences between a government's budget and a household's budget? And do those differences matter? This is just a simple "teaching" […]
Two Ways Central Banks can do Monetary Policy even if Bitcoin totally replaces Dollars as Medium of Exchange
Just a quickie, in response to Benjamin Vitaris' article about Warren E. Weber's Bank of Canada Working Paper (pdf) (HT Tony Yates on Twitter). [Update: and read Tony's post, on commercial banks and lender of last resort, as a complement to this post.] Suppose that Bitcoin totally replaces the Canadian Dollar (and every other currency) […]
Central Bank Communication and the Term Structure
It's a choice between being surprised by immediate small changes, and being surprised by warnings of much bigger future changes. A simple and maybe obvious point. I don't know if it's been made before; if not, it should have been. The Bank of Canada has eight Fixed Announcements Dates per year. At each FAD it […]
Hysteresis vs Full Recovery by creating a Boom?
Simon Wren-Lewis has an important post. Read it first. If he's right then what looks like hysteresis from the recession is due to deficient Aggregate Demand. But is he right? This post is my attempt to figure it out. I want to start with a very simple model with no hysteresis — where recessions have […]
Monetary Policy for a central bank with no balance sheet
How a central bank can do things with words. Imagine a central bank with no assets and no liabilities. It does not issue money. It does not buy or sell anything. It does not regulate the commercial banks. The only thing it controls is one word in the dictionary. Every morning it edits the dictionary, […]
Never mind the flatness, feel the length (of the observed Phillips Curve)
Sorry. It suddenly came to me this morning: a simple (and now blindingly obvious) way to reconcile an apparent contradiction in my own thoughts. As a lot of people in different countries have noticed, the observed Phillips Curve now looks very flat. Certainly a lot flatter than it did in the past. And I've been […]
Old and New Keynesian Multipliers: Cross-Section and Time-Series
Suppose you had an economy where half the agents are "Hand-To-Mouth" and have a Marginal Propensity to Consume of one (Ct=Yt), and the other half are "Autonomous" and have a Marginal Propensity to Consume of zero (Ct=At where At is exogenous with respect to their current income). If the two types of agents initially have […]
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