Category Nick Rowe
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:
Destroying Lemons (or at least locking them up in a “Bad Bank”)
In a previous post I built a toy model to explain how some assets going bad could reduce market liquidity and reduce the total value of assets by a multiple of the original loss in value. My model was of course based on Akerlof's famous "Market for Lemons", but I introduced a demand for liquidity […]
Why did Liquidity Fall? How does Illiquidity affect asset values?
In a previous post, I argued that assets became less liquid in the last couple of months, and that the fall in liquidity might have been a major cause of the fall in asset values. So, why did liquidity fall? There's a literature based on a model of informed traders, uninformed traders, and "noise" traders […]
Liquidity, Time Preference, Brad DeLong, and the missing $20 trillion
Brad DeLong has an excellent short essay on the financial crisis. Read it. I disagree with one part of it: Liquidity Discount: The cash flowing to capital arrives in the present rather than the future, and people prefer — to varying degrees at different times — the bird in the hand to the one in the […]
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?
ZIRP Deficits cause Crowding In of Investment, by reducing Deflation
I am going to make a very simple point, which has (I think) been missed in the current blog debate over whether deficit spending will crowd out or crowd in investment: deficits reduce expected deflation, which crowds in investment.
International coordination with ZIRP, and Functional Finance
"Deficits and debt don't matter, we owe it to ourselves; we should run as big a deficit as needed to get our country out of recession." "International coordination of fiscal policy is needed to make sure each country runs a big enough deficit to get the world out of recession." Your choice. One or the […]
The Bank of Canada’s Assets
When I was writing my last post, on commercial and central bank solvency , I wasn't sure whether it was worth posting, because maybe everybody already knew this stuff. But I decided to post it anyway. Now I'm glad I did. I got some good comments from JKH, which opened up a new avenue to […]
Two perspectives on commercial and central bank solvency
I start a bank. I have zero capital. I borrow $100 and lend $100. What is the net worth of my bank? Looking at the balance sheet, the answer is simple and obvious: assets $100, liabilities $100, net worth = assets minus liabilities = $0. But looking at the income statement we may get a […]
Worthwhile Canadian Initiative 
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