Category Monetary policy
Why do (bad) banks (really) matter?
I'm going to put forward two perspectives on why bad banks might be important in understanding the recession: an orthodox perspective; and a heterodox perspective.
Money, banks, loans, reserves, capital, and loan officers
Anyone who has taken ECON1000 has probably seen the simple model of how banks create money in a fractional-reserve banking system, and how an increase in reserves creates a multiple expansion of loans and the money supply. An alternative approach, cogently argued in comments here by JKH, says that it is bank capital, not reserves, […]
In praise of (a little bit of) fiscal dominance
Who makes sure the long run consolidated government-central bank budget constraint balances? Is it the government? Or is it the central bank? The former gives us a Ricardian regime; the latter gives us fiscal dominance. Most macroeconomists take a Ricardian regime as their unspoken assumption; and, if pressed, would recommend a Ricardian regime, as is […]
Maybe the Bank of Canada won’t have to intervene in the forex market after all
When we last left this story, inflation was drifting further and further below the Bank of Canada's inflation target, and the CAD was up to 0.97 USD. The case for intervening in the forex market to slow the appreciation of the CAD – and hence slow the drift to deflation – was starting to look […]
Accounting and Economics; and Money
To paraphrase Churchill, accountants and economists are divided by a common language. We seem to be using the same words to talk about the same things, but we don't understand what the other is saying. This is my attempt to provide an economist's perspective on the relation between accounting and economics. What I say here […]
Promising to keep nominal interest rates low for too long
I was lucky enough to be invited to a Bank of Canada conference on Thursday and Friday. The topic was "New Frontiers in Monetary Policy Design". One recurring theme in particular has stuck in my mind: that a credible promise to keep interest rates low for too long can help an economy escape a liquidity […]
Deflationary death-spirals and the social construction of monetary policy
I present a simple macro model and use it as a vehicle to explore the idea that it matters how monetary policy is framed. One framing leads to a deflationary spiral, which an alternate framing can avoid or escape. The model is an otherwise bog-standard New Keynesian/Neo-Wicksellian model, but with a minor modification in the […]
Interest rate targeting as a social construction
We always knew that interest rate targeting could never work in theory, because it left the price level indeterminate. But it seemed to work well in practice, and kept inflation close to target, so we eventually learned to overcome our theoretical squeamishness and embrace it as part of the reality of how modern central banks […]
Why current AD depends on expected future AD: Scott Sumner in ISLM
Scott Sumner argues that nominal interest rates are near zero because monetary policy (specifically expected future monetary policy) is too tight. He argues that tight (expected future) monetary policy makes expected inflation low, which makes nominal rates low. He also argues that tight (expected future) monetary policy makes real rates low as well. I want […]
Towards a Monetarist theory of Neo-Chartalism
I am going to start with an orthodox monetarist approach, make one trivial semantic change, and see how far I can get in deriving Neo–Chartalist results. The semantic change is to change what I mean by "fiscal policy". It's an unconventional definition of fiscal policy, from a monetarist perspective, but I don't think a monetarist […]
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