Category Monetary policy
Could the natural rate of interest really be negative?
{Update: Preface: Is it possible that an economy could find itself in an absolute liquidity trap because the natural rate of interest went negative? Or is it only possible if mistakes in monetary policy caused expected inflation to go negative?] We argue that the nominal rate of interest cannot be negative. If it were, people […]
Good News! Interest rates rise.
This Bloomberg story reports the Fed saying that rising bond yields are a good sign. They don't precisely say that monetary easing is what caused the rise in interest rates; they are perhaps too modest to claim credit? But I will say it for them: by buying bonds, and easing monetary policy, the Fed has […]
Scott Sumner’s Plan for monetary policy
Thanks to Scott's recent post here, (and the last paragraph of his post here), I think I now have a better understanding of his proposal for how monetary policy should be conducted. The purpose of this post is to explain Scott's plan in my own words, and compare it to the Bank of Canada's current […]
Quantitative Easing circumvents banks’ capital constraints to increase M1
I'm still not sure I fully understand this, but I'm going to post it anyway. That's what blogs are for. [Updated, see halfway down the post.] The basic idea is that one of the ways quantitative easing may work (there are others) is that it allows the central bank to buy stuff directly from the […]
A modest proposal for paying negative interest on currency (or something)
Willem Buiter considers various ways to make interest rates negative. The problem is how to pay negative interest rates on currency. His most interesting proposal is to separate the unit of account from the currency. The dollar would remain the unit of account (at least, he hopes it will). But he would replace dollar notes […]
Why an excess demand for money matters so much
Suppose there were an excess demand for antique furniture. Antique furniture is not part of GDP. By Walras Law, if there were an excess demand for antique furniture, there must be an equal and offsetting excess supply of something else, like newly-produced goods for example. Could an excess demand for antique furniture cause a general […]
Bad banks, and the effectiveness of fiscal and monetary policies
I'm going to take another crack at this topic. Do bad banks (and a bad financial system) reduce the effectiveness of fiscal and monetary policies in shifting the Aggregate Demand curve to the right? The answer matters, because if they do reduce the effectiveness of fiscal and monetary policy (a lot), then we need to […]
Short run “Speed Limits” on recovery
Mark Carney, Governor of the Bank of Canada, spoke yesterday about short run "speed limits" to economic recovery. This is a concept you don't hear very often, so I thought I would briefly discuss it. It's easily confused with the much more familiar long run "speed limits" to economic growth. And those long run "speed […]
Banks, Aggregate Demand, and Aggregate Supply
What is the relation between banks, aggregate demand, and aggregate supply? Do bad banks shift the AD curve or the AS curve? Do bad banks make it harder for fiscal or monetary policy to shift the AD curve? Some economists argue that you need to fix the banks (and the financial system) to get an […]
Mechanical metaphors for monetary policy
This is a post for people who find mechanical metaphors useful. And remember, any theory that can be translated into math and put on a computer (even if it doesn't need to be) has a mechanical counterpart, because a computer is a machine. I am going to use mechanical metaphors to think about different monetary […]
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