Category Monetary policy
The 15-year old Liquidity Trap
Macroeconomists think of the zero lower bound liquidity trap as something that only became a problem in 2008 (Japan aside). JKH, a commenter on this blog, says it became a problem for banks about 15 years ago. "An interesting aspect of gap management is that the zero bound for interest rates has been a critical […]
Hair of the Dog
"Too much debt got us into this mess, and now central banks are trying to get us out of the mess by lowering interest rates to get us to borrow and spend more?" It sounds very much like the cure for hangovers: "take some hair of the dog that bit you". At best, drinking more […]
Central Banks should bet on recovery – literally
Ben Bernanke should publicly bet $1 trillion dollars that the US economy will recover quickly from deflation and recession. He should make that bet on the Fed's behalf. The Treasury should publicly disavow all responsibility for bailing out the Fed if Bernanke loses the bet. If he loses the bet, it would be paid for […]
Deflation may be on its way, but it’s still not here
Coverage of today's CPI release seems to be stressing the fall in the y/y all-items CPI inflation rate (example): The recent fall in prices appears to have been entirely generated by the fall in gasoline prices, which has had the effect of canceling out the spike we saw a few months ago. Here's what's happening […]
Buiter, Krugman, Steinbrueck, free-riding, and the exchange rate
Warning: this post is difficult, and I'm not at all sure I've got it right. But I'm going to post it anyway. What determines the exchange rate in a liquidity trap? [Prerequisite: second year Open Economy Macro] In case you hadn't noticed, there's a small war going on, with Willem Buiter (UK) and Paul Krugman […]
Let’s cut to zero too
OK, the US Federal Reserve has now cut interest rates essentially to zero. I think the Bank of Canada should now do the same.
But what would happen to the debt if we didn’t run a deficit now?
If the government runs a deficit now, the debt-burden on future taxpayers will increase. But maybe the debt-burden would increase even more if we didn't run a deficit now? The proper way to handle policy questions (in economics, or anywhere) is to compare what will happen with the proposed policy to what would happen under […]
Trading volume, liquidity crises, Carl Menger, and “off-the-run” bonds
An asset which becomes less liquid (the costs of trading it increase) will be traded less frequently. If an asset is traded less frequently, it will become even less liquid….. An asset which becomes more liquid (the costs of trading it decrease) will be traded more frequently. If an asset is traded more frequently, it […]
The Bank of Canada’s Financial System Review
The Bank of Canada published its December 2008 Financial System Review yesterday. I spent a few hours reading it through (something I had never bothered to do in the past). Some observations:
By Tuesday Morning, any proposed 0% Inflation Target will be dead
Before the financial crisis came along, the main question of Canadian monetary policy was whether to revise the Bank of Canada's 2% inflation target. Should the Bank target a lower inflation rate, like 1%, or even 0% inflation? Or should the Bank switch to a target path for the price level?
Worthwhile Canadian Initiative 
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