Category Nick Rowe
CMHC reserves revisited
There are two questions that Canadian taxpayers need to ask about the Canadian Mortgage and Housing Corporation: 1. Are CMHC fees for mortgage insurance high enough? 2. Does CMHC have a big enough reserve against potential losses?
Land and the liquidity trap
Bill Woolsey has a very good post, written in response to my previous post. In this post I steal Bill's thought-experiment, but change "corporate bonds" into "land". There is an alternate universe, just like our own, with one exception. For historical reasons*, central banks do not own government bonds. They own land instead. They buy […]
Monetary policy, fiscal policy, the target, and the size of the central bank
Glen Hodgson asks whether the Bank of Canada's 2% inflation target is too low. He is right to ask that question. I want to explore the trade-offs. Suppose you are a macroeconomist (like Simon Wren-Lewis) who believes that the Zero Lower Bound on nominal interest rates will be a binding constraint in some circumstances, and […]
Media of exchange and the clearing house
What makes our chequable demand deposits at banks media of exchange? The answer is: the clearing house, where circles of offsetting IOUs are cancelled out. It is clearing houses that create money. Unless there is only one bank, where everybody banks, because it doesn't need a clearing house. Nothing revolutionary here (except maybe a little […]
Nominal-loss-aversion and its consequences
I understand risk-aversion. The assumption of diminishing marginal utility of consumption makes sense. And if you have diminishing marginal utility of consumption, you will prefer an investment with a certain return over an investment with the same expected return but a positive variance. Loss-aversion is harder to understand. You need to assume the utility function […]
BackedCoin vs UnbackedCoin
Imagine there is competition between two currencies. The two currencies are identical in every respect, except one is backed by assets and the other isn't. Which one would win the competition to become the preferred medium of exchange? I think the one that is backed by assets would win. For two reasons:
Banks with 100% capital ratios?
Why can't all banks be as safe from insolvency as the Bank of Canada? I put a question on my final exam: "What is a bank? Should banks have legally required minimum reserve ratios? What about 100% reserve ratios? Should banks have legally required minimum capital ratios? What about 100% capital ratios?" I wanted the […]
Two compulsory lotteries
Never reason from an increase in inequality. What the effects of increased inequality are, and whether it's good or bad, will depend on what caused that increased inequality. Inequality is an endogenous variable. So let's think of a government policy that would cause increased inequality, and talk about that. Suppose the government gave every Canadian […]
Long run, medium run, and short run Fisher curves
Here is a simple way to think about the correlations between nominal interest rates and inflation rates. We need to distinguish between three "Fisher curves": the long run; the medium run; and the short run Fisher curve. We need to distinguish between: the actual inflation rate; the central bank's inflation target; and what people expect […]
Nominal interest rates, inflation, and central banks’ communications strategy
I have been arguing with John Cochrane and Steve Williamson over whether central banks announcing higher nominal interest rates is inflationary or deflationary. The very fact that economists are arguing about that very basic question tells us something important about central banks' using nominal interest rates as a communications strategy: it sucks. This is a […]
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