Category The 2008-9 recession
Why does liquidity matter so much?
This question has been bugging me for the last few months. I see the financial crisis as largely a liquidity crisis. People only want to hold the most liquid assets, and shun the illiquid. So liquid assets have high prices and low yields; and illiquid assets have low prices and high yields. But if we […]
Is quantitative easing trying to raise or lower interest rates?
The Bank of England has switched to quantitative easing. It is buying long bonds (gilts). What would count as a signal of success? We could argue that falling yields would signal success, because it is trying to reduce long interest rates to stimulate investment. But we could equally argue that rising yields would signal success, […]
Temporary vs. permanent quantitative easing
A permanent increase in the money supply (or one that is expected to be permanent) will have a different, and bigger, effect today than a temporary increase in the money supply (or one that is expected to be temporary). To say the same thing a different way, an increase in the expected future money supply […]
GDP, GDI, terms of trade and why Canada is in a recession: It’s all about the beer and pizza
The Parliamentary Budget Office has released a report (pdf – h/t to Kady O'Malley) that makes note of the distinction between Gross Domestic Product (GDP) and Gross Domestic Income (GDI), and shows that by the latter measure, the fourth quarter of 2008 was even more dreadful than the GDP numbers that made all the headlines. […]
Liquidity and aggregate demand
Money is perfectly liquid. Other assets are not as liquid as money, but some are more liquid than others. One of the main features of the financial crisis is that some assets became less liquid than they had previously been. I want to look at the channels through which a fall in the liquidity of […]
Altruistic individual responses to the financial crisis
We don't rely solely on government to alleviate poverty. We don't rely solely on government to provide public goods. Altruistic individual responses can help too. Perhaps we shouldn't rely solely on government policies to help solve the financial crisis either. At the very least, asking what individuals could do to help alleviate the problem might […]
A model of wealth distribution, falling interest rates, ZIRP, unemployment, and quantitative easing
I will sketch a simple model in which the distribution of wealth gets more unequal over time, how the equilibrium real interest rate falls over time, eventually leading to a zero nominal interest rate, and unemployment. I will then show that an increase in the money supply can increase employment, despite zero nominal interest rates.
What are the odds of deflation in Canada?
For the better part of a generation, the Bank of Canada has followed this rule: If core CPI is around 2% and if there are neither inflationary or disinflationary pressures, do nothing. If core CPI inflation is above 2% and if there are disinflationary pressures, do nothing. If core CPI inflation is above 2% and […]
(Im)perfect financial markets and quantitative easing
If financial markets were perfect, quantitative easing would have no effect on aggregate demand. But if financial markets were perfect, we wouldn't have the financial crisis, and so wouldn't need quantitative easing.
The return of Monetarism vs. Keynesianism?
Maybe it isn't the return of Monetarism. Or rather, it isn't the return of only Monetarism. Maybe it's the return of Monetarism vs. Keynesianism, 1960's style, applied to unorthodox monetary policy.
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