Category Monetary policy
The Bank of Canada and the Fed are facing different problems, and will make different choices
David Rosenberg has been saying ([1], [2]) that the Bank shouldn't and/or won't start increasing interest rates until the Fed does, but I don't understand the reasoning behind this conclusion. Usually, the US and Canadian economies follow similar paths and since their monetary authorities have broadly similar goals, this has resulted in broadly similar decisions. […]
Canada, Australia, and New Zealand; does the Zero Lower Bound matter?
I want to compare the economies of Canada, Australia, and New Zealand over the last couple of years. I know I will get things wrong, and leave important things out. That's what comments are for. Especially comments from Australia and New Zealand. Why these three countries? Apart from any historical, cultural, and political similarities, all […]
What if price-level targeting were already in place?
A popular research topic at the Bank of Canada over the past few years has been price-level targeting: committing to a path for the level of core CPI, not just to its rate of inflation. The idea here is that standard inflation targeting forgets and forgives past deviations from target. But under price level targeting, […]
If we knew then what we know now: Comparing 2009Q1 forecasts with 2010Q1 reality
In February 2009, back when columnists were confidently writing stuff like this, I wrote a post with the title "Why forecasters are predicting a short Canadian recession" explaining the narrative behind the consensus forecast. I think it's fair to say that the OMGWTFBBQ!1!!1!!! narrative doesn't look so good now – although I defy you to […]
Shouldn’t Taylor Rules include Fiscal Policy? The Fiscal exit strategy.
Most economists believe that for a given path of nominal interest rates chosen by the central bank, a looser fiscal policy (higher deficits, through lower taxes and/or higher spending) will cause higher Aggregate Demand, and therefore higher real output and/or inflation. Therefore, if a central bank is choosing a path for nominal interest rates in […]
The simple money supply multiplier model and simple keynesian multiplier model
These two first-year textbook models — the simple money supply multiplier model; and the simple keynesian income-expenditure multiplier model — are formally identical. Translated into math, or game theory, you can't tell the difference between them. They contain exactly the same important insight: that what is true for the individual bank/household is not true for […]
Rethinking Canadian macroeconomic policy
Olivier Blanchard and a couple of colleagues at the IMF have circulated a paper with the title "Rethinking macroeconomic policy". Some of the ideas that are touched upon include Increasing inflation targets to 4% instead of the 2% goal that is more popular among central bankers. The idea is that when inflation and interest rates […]
Don’t read too much into the year-over-year inflation numbers
Today's CPI release has core inflation up 1.9% over last January. This is 45 bps higher than December's y/y numbers, renewing speculation that the Bank of Canada may increase interest rates sooner rather than later. But it's important to remember that there's nothing particularly special about the y/y numbers; we could write headlines for core […]
Fallacies of composition and decomposition: the supply of money and reserves
Does the supply of reserves matter? It certainly matters in the simple textbook ECON 1000 model of the money multiplier. But is that model fatally flawed, especially in the context of zero required reserves, and where central banks target an interest rate, so the quantity of reserves is demand-determined? Some people do argue that the […]
Strategy space and monetary policy
Or, "Why central banks should stop talking about interest rates". Game theorists know that a change in the "strategy space" can change the equilibrium of a game. The classic example, now over a century old, is the difference between the Cournot-Nash equilibrium and the Bertrand-Nash equilibrium in oligopoly theory.
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