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It’s generally accepted that monetary policy consists of a number of different measures, e.g. interest rate adjustments, QE and so on. Likewise it’s generally accepted that fiscal policy consists of a number of measures. And it’s also generally accepted that it’s possible for a measure to be part monetary and part fiscal: e.g. helicopter drops.

Demonstrating that monetary policy can be made to work minus one of the normal elements in monetary policy, (adjusting interest rates and hence adjusting borrowing and lending) does not prove that monetary policy never involves adjusting interest rates and hence adjusting borrowing and lending. Nor does it prove that adjusting interest rates is not a useful measure.

Demonstrating that an internal combustion engine can be made to work without spark plugs (which is the case with diesel engines) does not prove spark plus are not a useful element in many internal combustion engines.

Nick: RE: "if it is literature, economics needs more science fiction. Paradoxically, imagining radically different worlds can help us understand better how the actual world works, as well as helping us consider policy alternatives." I believe in economic history this is referred to as counterfactual hypothesizing. You measure the significance of what actually has happened by constructing an alternate economic reality where alternate events took place and compare the difference.

Good post. It's Irving Fisher's compensated dollar plan, with land in the place of gold.

"...that might not be a very good monetary policy, but it is a perfectly coherent monetary policy."

Why isn't it good policy? When I look at China and Singapore, I see it doing something like this, except with the U.S. dollar (or a basket of currencies) in place of land. It seems to be working.

i.e. Singapore: http://www.mas.gov.sg/~/media/MAS/Monetary%20Policy%20and%20Economics/Monetary%20Policy/MP%20Framework/Singapores%20Exchange%20Ratebased%20Monetary%20Policy.pdf

When "the central bank issues money and buys land", the effect is identical to when a store owner issues gift certificates (good only in his store) to buy land. The selling land owner can buy anything available for sale in the economic zone where the money is accepted or in the store owned by the gift certificate issuer.

More on the gift certificate analogy with money can be found here.

This is a great post describing the principles of monetary policy abstractly. It's simple yet still gets into details.

The premise, IMO(which admittedly doesn't count for much), is 100% correct. CBs could use other tools to manage monetary policy.

This post is also important because of all the controversial attention directed at interest rates and banking. It highlights the purpose of these monetary policy programs. Regardless of how you feel about these institutional arrangements, we can discuss what these monetary policy programs do and their efficacy.

Monetary policy is about affecting people's behavior. It's goal is to resolve or address resource problems, such as financial recession.

How should we think about financial recession?

Is it a problem with people having or not having money? That is one valid way to think about it. But there are many ways to think about such problems.

I like to frame these problems in terms of social behaviors. The goal of lowering interest rates is to encourage savers to invest their savings in productive programs, or borrowers to do likewise. But I think there are issues in the modern marketplace that make this a challenging proposition, regardless of how generous you make the terms of lending, or how much you reduce the incentives to keep money in savings accounts.

What do I mean by this? Look at venture capital. I follow Paul Graham and others. The logic of this investment paradigm is that make 10, or 100, huge bets, and then one of them wins big. In average, it's a good deal, even though most bets lose. Compare that to a more traditional investment paradigm with much more modest risk and modest reward.

The "winner take all" nature of many modern markets makes commercial investment a complex and challenging endeavor. Thus, terms of lending and saving, may not be the most important inhibitor to individuals who would be inclined to make stuff happen.

How can we more directly address the things that inhibit productive engagement? MMT suggests the public more proactively create productive programs, especially directly targeting employment, and let people save what they like. Let them be!

But I think these suggestions of MMT is only a partial solution. Both public and private spheres need changes to better engage our potential productivity, and solve problems.

Current monetary policy tools primarily affect those with lots of financial wealth who are active financially. So in that dimension it is effective.

But at the same time, a HUGE portion of our population doesn't respond much to these monetary tools. There may be a lag as they are eventually affected indirectly by the actions of more significant market players, or they may not be affected at all.

I got to go now. sorry if I was a bit harsh on twitter. I just want to see this stuff get figured out.

"So clear your minds of all that nonsense about monetary policy being interest rate policy and working through borrowing and lending!"

Let's say the central bank fixes currency to the demand deposits of solvent commercial banks.

Now is monetary policy about borrowing and lending?

If the CB targeted a positive rate of price inflation then wouldn't it have to keep buying up more and more land, so increasing the chances of a ZLB experience , and eventually owning all the land in the territory?

Also as it buys land it will get more rent , and it will have to distribute that rent - so it will have to start to do fiscal policy.

If it wanted to avoid buying up too much land would it better starting off with some fiscal policy (of the helicopter variety) and then just using OLO (open land operations) to smooth out the kinks in money and land demand ?

A system which involves regulating demand without adjusting interest rates was set out by Positive Money and co-authors about five years ago (see p.10 in particular) here:


As it happens, that work also advocated full reserve banking. However full reserve banking is not an essential ingredient in a "no interest rate adjustment" system.

Continuing your science fiction question: Suppose that the quantity of central-bank-issued money is negligibly small compared to the aggregate value of land. Say we're talking about the central bank of New Zealand buying land worldwide, not just in NZ. The central bank's operations are way to small to affect the value of land. So every time NZ issues another dollar, they get a dollar's worth of land. Both sides of the balance sheet expand equally and the NZ$ holds its value. Then issuing more money would relieve a money shortage but would cause no inflation.

Mike, On 'Then issuing more money would relieve a money shortage but would cause no inflation. ' , what would happen if there was no money shortage, would there be inflation then ?

Very interesting!

This is how I view your suggestion:

Start with New Monetary Economics (Black-Fama-Hall, Greenfield & Yeager) and define "means of payment" as REIT shares. In your world we have a bunch of REITs, formerly called "banks". One of the REITs is so big, that it can (supposedly) control the price of land. This should ensure that even if rental income fluctuates, none of the REITs will never "break the buck".

Did I miss something?

I think the least clear part of your story is here: "If the central bank sets too low an inflation target (or pays too high a rate of interest to those who hold its money) there is a risk that everyone would prefer holding liquid money to holding illiquid land, and the central bank would run out of land to buy."

A couple of questions come to my mind: How can the central bank pay a higher rate of interest than its (cumulative) rental income allows? Isn't it rental income which matters for land owners, not the inflation rate/target?

How are the price of land and general price level connected to each other? Do you have some form of Quantity Theory in your mind? Well, I guess you point to liquidity-preference in your text.

Some stream of consciousness follows.... I connect the words "monetary system" and "monetary economy" to a world where entities can be indebted. To me, that's the whole point of "money". Your REIT world is a weird world... Not really a monetary economy. JP Koning made an interesting point (gold) -- I need to study that more. But perhaps related to that, it seems to me that we could replace your REITs with goldsmiths (big ones) that give out gold deposit certificates but never "over-issue" those. With the difference that then depositors would earn no interest, unlike REIT shareholders. I don't know how much that would change anything, though... Not being able to earn any interest -- which might not beat inflation anyway; how do you think your setting would affect the rental income? Make it low? --, people would need to do something useful to earn their living ;-) Not all of us can, nor should, be landlords, anyway.

Thanks for a thought-provoking article once again!

MF: If real GDP is growing (and the real stock of money demanded M/P grows with it), while the real value of land stays constant, then the central bank might have a problem with running out of land to buy. But inflation (so NGDP grows but RGDP stays constant) is not a problem. Remember that the CB earns profits from rental income and capital gains, and distributes those profits to the government that owns the CB, and the government distributes those profits to the people (in spending or tax cuts).

Mike: no. The money demand curve slopes down. The balance sheet does not say that the central bank's net worth must be zero.

Derek: thanks. (Twitter is Twitter!)

I see it a bit differently. There is only one form of "saving" that matters for recessions: saving in the form of money (the medium of exchange). Other forms of saving (and investment) are irrelevant. (I've got a post or two somewhere that lays it out more clearly)

JP: thanks!

The compensated dollar plan is good monetary policy. Holding the price of gold (or price of land) fixed permanently is bad monetary policy. That's what I meant.

Livio: Hmm. Yes. It is a bit like those counterfactual conditionals historians use. I must think more about the difference, if any.

Ralph: I think the analogy would be: the car still works, whether you pay for the gas with cash, credit card, your labour, or somebody gives it to you.

Antti: "Your REIT world is a weird world... Not really a monetary economy."

What is a monetary economy? Here is my (Clower's) answer:
Let there be n different goods. How many markets are there?
In a barter economy there are (n/2)(n-1) different markets, in each of which 2 goods can be exchanged.
In a Walrasian economy there is one market where all n goods are exchanged.
In a monetary exchange economy there are n-1 markets, in each of which one of the goods is exchanged for the nth good 9the medium of exchange).

"But inflation (so NGDP grows but RGDP stays constant) is not a problem. Remember that the CB earns profits from rental income and capital gains, and distributes those profits to the government that owns the CB, and the government distributes those profits to the people (in spending or tax cuts)."

I don't think I follow this. At any point in time the CB owns some land that generates rent, but this rent is just paid by the populace and then given back to the populace so is not a source of any new money. And you don't get capital gains without a rise in the price level - and you don't get a rise in the price (within the constraints of the thought experiment) without buying more land. I am therefor not seeing how ,if it wishes to maintain inflation at a positive rate through time, it can do so without owning ever more land.

I suppose the CB could after a land-purchase driven increase in the price level that gave it capital gains on its existing landholding decide to distribute these capital gains in the form of new money - but isn't that functionally the same as distributing new money by helicopter drops ?

Market fiscalist:

If there was no money shortage to begin with, then it remains true that an equal expansion of both sides of the money-issuer's balance sheet will not cause inflation. But the law of reflux implies that as money exceeds the public's need for it, money will reflux to the issuer as fast as it can be issued. Think of a mint stamping silver into coins. As coin issue becomes excessive, people will melt the coins as fast as they are issued.

MF: "I suppose the CB could after a land-purchase driven increase in the price level that gave it capital gains on its existing landholding decide to distribute these capital gains in the form of new money - but isn't that functionally the same as distributing new money by helicopter drops ?"

Yes. As I said in some previous post: helicopter money is normal and small beer. Assuming a constant Currency/NGDP ratio of 5%, and NGDP growing at 4%, that allows for a money-financed deficit of 0.2% of NGDP every year.

Would the following be correct ?

Assume a territory with limited and fixed land , no RGDP growth, and a CB that wants constant and positive inflation.

Assume it has 3 options

1. Buy land for new money
2. Distribute capital gains from previous land purchases as new money
3. Drop new money from helicopters

If it uses only option 1 it will eventually run out of land to buy.

If it uses option 1 and 2 combined , it will buy land less slowly, but ultimately will also run out of land as just distributing capital gains , even when this itself generates more capital gains, will not be sufficient to maintain the inflation rate.

Therefore if the CB wants to generate constant inflation and not own all the land in the territory it will eventually need to do 3

MF: I think that's right. But under option 1, the net worth of the central bank (as recorded on its balance sheet) is rising over time. It's equivalent to the government (assuming it's a government-owned central bank) using the revenue from the inflation tax to buy land.


"So clear your minds of all that nonsense about monetary policy being interest rate policy and working through borrowing and lending!"

I don't believe it is nonsense. I realize you believe in Chuck Norris style Kung-Fu monetary policy from this statement (and other prior statements to the same effect):

"How would monetary policy work in that world? The simplest answer is that the central bank issues money and buys land."

An obvious problem with land is that it lacks heterogeneity (there are no two identical pieces of land), but more than that your monetary policy prescription assumes that people don't have a choice on whether to sell land to, buy land from the central bank. I presume that you are aware of FDR's executive order:


So if people refuse to sell land to the central bank, your solution is what - outlaw private land ownership?

Also, how does monetary policy work when land ownership is concentrated?

Humble i/o guy trying to understand monetary economics: could we the define Monetary policy vs fiscal as "In fiscal, there is a human being between the issuer and the recipent of money"?
Mike Sproul: then NZ would have no influence on the worls. Just like now.

Frank said: "Also, how does monetary policy work when land ownership is concentrated?"

Frank, what do you think of Yellen's speech?



My second question asks whether individual differences within broad groups of actors in the economy can influence aggregate economic outcomes--in particular, what effect does such heterogeneity have on aggregate demand?

Many macroeconomists work with models where groups of individual actors, such as households or firms, are treated as a single "representative" agent whose behavior stands in for that of the group as a whole. For example, rather than explicitly modeling and then adding up the separate actions of a large number of different households, a macro model might instead assume that the behavior of a single "average" household can describe the aggregate behavior of all households.

Prior to the financial crisis, these so-called representative-agent models were the dominant paradigm for analyzing many macroeconomic questions. However, a disaggregated approach seems needed to understand some key aspects of the Great Recession. To give one example, consider the effects of negative housing equity on consumption. Although households typically reduce their spending in response to wealth declines, the many households whose equity positions in their homes were actually driven negative by the reduction in house prices may have curtailed their spending even more sharply because of a markedly reduced ability to borrow. Such a development, in turn, would shift the relationship between housing equity (which remained solidly positive in the aggregate) and consumer spending for the economy as a whole. Such a shift in an aggregate relationship would be difficult to understand or predict without using disaggregated data and models.

More generally, studying the effects of household and firm heterogeneity might help us better account for the severity of the recession and the slow recovery. At the household level, recent research finds that heterogeneity can amplify the effects of adverse shocks, a result that is largely driven by households with very little net worth that sharply increase their savings in a recession.9 At the firm level, there is evidence that financial constraints had a particularly large adverse effect on employment at small firms and the start-up of new firms, factors that may be part of the explanation for the Great Recession's long duration and the subsequent slow recovery.10 More generally, if larger firms seeking to expand have better access to credit than smaller ones, overall growth in investment and employment could depend in part on the distribution of sales across different types of businesses. Modeling any of these issues quantitatively will likely require the use of a heterogeneous-agent framework.

Economists' understanding of how changes in fiscal and monetary policy affect the economy might also benefit from the recognition that households and firms are heterogeneous. For example, in simple textbook models of the monetary transmission mechanism, central banks operate largely through the effect of real interest rates on consumption and investment. Once heterogeneity is taken into account, other important channels emerge. For example, spending by many households and firms appears to be quite sensitive to changes in labor income, business sales, or the value of collateral that in turn affects their access to credit--conditions that monetary policy affects only indirectly. Studying monetary models with heterogeneous agents more closely could help us shed new light on these aspects of the monetary transmission mechanism."

I want to emphasize this part:

"However, a disaggregated approach seems needed to understand some key aspects of the Great Recession."


"Frank, what do you think of Yellen's speech?"


I think she is a very smart economist, and I think Bernanke in some of his works also talks about heterogeneity.

"However, a disaggregated approach seems needed to understand some key aspects of the Great Recession."


Nick: Yes, that's where we don't agree. For me, money, not even "fiat money", should be viewed as a good. More like the opposite: the seller gets nothing in return from the buyer, and it is this fact which is recorded by our monetary system. So I'm pretty much in full disagreement with Clower. I'm writing a paper on all this. I'll get back to this later -- have to present a first draft on Friday.

Isn't giving land to a bank in exchange for money just a collateralised loan?

Antti: Typo? I think you meant to write: "For me, money, [not] even "fiat money", should NOT be viewed as a good."?

Simon: Well, in a repo you have the right to buy it back. (There was a funny story a couple of years back about Russian bootleggers borrowing money from people late at night leaving a bottle of vodka as collateral!)

Jacques Rene: Dunno. Since almost any monetary operation will have consequences for the government's budget constraint, it gets hard to draw a line.

TMF: this is not a place for you to hold random conversations with other commenters.

Very good post to focus the issue, Nick.

But it won't necessarily stop inquisitive minds from thinking about interest rates.

The central bank has a choice in setting the interest rate on deposits.

It has chosen a rate of 0 per cent.

This highlights money.

But it also highlights a very particular interest rate policy


Relative to that difference in focus as between money and interest rates:

It is not a major conceptual leap in shifting focus from a nominal interest rate on money to a nominal rate of return on land.

So in the case of both money and land, the focus on the asset is inextricably linked to the question of the return on that asset. This is true for monetary policy in general.

The interest rate is just a particular type of return.

And even if you declare no borrowing or lending, you can't avoid the question of the interest rate on money - for both central bank and commercial bank balance sheets. It is a conscious policy or strategy choice respectively.


"And even if you declare no borrowing or lending, you can't avoid the question of the interest rate on money..."

Nor can you avoid the question of interest in general terms. Nick's requisite condition was that no one can lend money. Does that preclude someone from lending land?

If a person can lend land, then presumably he will want to be compensated for the time that he gives up control of that land and will ask some form of risk compensation (interest or other).

You can't ban lending money unless you also ban lending anything else (including labor).

I can form a bank, accept deposits and purchase capital goods, rent out the capitol goods and pay out the interest to my depositors. I am lending out money for interest.

This applies to anything else that can be rented out. The same bank can hire labor with the deposits, rent out the labor, and distribute the proceeds.

But then you must also ban re-selling of goods, because instead of renting out a particular good, the bank can stock up on some real asset and then sell it later for a different price, again distributing the proceeds as interest.

But then you must also ban the initial sale of goods, because the bank could buy workshops and build goods to sell, distributing the proceeds to its depositors.

So what you are describing is possible only with autarky and no market exchange at all. Everyone is an island to themselves. We are all just picking bananas and eating them, but a taboo prevents anyone from eating a banana not picked by themselves. Such an economy could still have interest rates -- you can bury the banana -- but everyone would have their own idiosyncratic rate and there would be no market in which these rates could be jointly agreed upon. The retired could not hire the young to pick bananas for them, and the young would sit idle. E.g. what is destroyed by this process is not the interest rate but the market.

What makes money money in the legal sense -- the legal tender laws -- are that legal tender must be accepted to extinguish a debt. The legal tender laws mention nothing of exchange, but go to directly to the heart of the issue, which is extinguishing debt. Once you can extinguish debts, you have guaranteed settlement, and then you will have transactions and then you can get markets. Remove the debt part, and everything else tumbles as well.

Re interest rates, no one seems to have asked the crucial question: what's the GDP maximising rate? My answer is the zero rate advocated by Warren Mosler and Milton Friedman. Reasons are thus.

There are no good reasons for the state to borrow money when it can print the stuff as pointed out by Milton Friedman. Certainly there is no excuse for the state to issue so much base money that it then has to control the resulting inflation by borrowing some of that money back. I.e. the state as money issuer should not borrow.

As for the state is builder of infrastructure, the arguments for borrowing are pretty feeble, but if must borrow, the rate should be the same as private sector infrastructure suppliers borrow at. Plus lenders should stand the same chance of losing their shirts as is the case with loans to private infrastructure suppliers - the original investors in the French English Channel tunnel lost their money.

As to central bank loans to private banks, the latter just shouldn't run short of money: if they do, they should be charged the penalty rate suggested by Walter Bagehot. 10% should concentrate minds of big time criminals - I mean bankers.

JKH: "It is not a major conceptual leap in shifting focus from a nominal interest rate on money to a nominal rate of return on land."

Fair point. But thinking about comparing the rates of return on real assets (like land) to the rate of interest (if any) paid to holders of money is different to comparing the rate of interest paid on bonds to that paid to holders of money. And I think that is a better focus. Bonds (borrowing and lending money) are an unnecessary distraction.

rsj: "What makes money money in the legal sense -- the legal tender laws -- are that legal tender must be accepted to extinguish a debt. The legal tender laws mention nothing of exchange, but go to directly to the heart of the issue, which is extinguishing debt."

If I promise to pay you 100 apples, the courts may define what counts as 100 apples.
If I promise to pay you 100 dollars, the courts may define what counts as 100 dollars.
I can't really see the difference.

Ralph: I don't think that Milton Friedman and Warren Mosler are saying the same thing. Milton's Optimum Quantity of Money article argues for creating deflation equal to the natural real rate of interest, so that nominal interest is 0% even if real interest is (may be) positive and equal to the natural rate. And the reason for doing that is to create satiation in liquidity services, not to create the right amount of AD and GDP.

It is not random.

Let’s say a few commercial banks and a few rich entities own all of the land, referring to Frank’s comment about land ownership being concentrated.

The central bank buys some land from both. Both of those entities may just hold the money (basically saving it) while booking a capital gain.

There is no hot potato effect. There is no excess "money".

My guess is Nick would say something about representative agents and/or the amount of “money” desired to be held by the private sector as being fixed so there would be a hot potato effect.

I put Yellen’s comment(s) there to show a disaggregated approach may be needed to understand what is going on in an economy. I also believe rich entities do not have a fixed stock of “money” they want to hold.

Yes, Nick, there was a typo (well, a non-native speaker tried to write fast...). I meant what you thought I meant.

Isn't it quite strange that such a fudamental issue as the question about money being, or best viewed as, a (zero-th/nth) good or money *not* being a good at all (but somehow related to debt) seems to be unresolved? For instance, Friedman&Schwartz, and Pesek&Saving, defined (fiat) money as "consolidated net wealth of the community", in no meaningful sense a debt to anyone. There are many who disagree with this fully. I disagree only partly: the "money" itself is in no meaningful sense a debt to anyone, but that doesn't make it net wealth. This is because there is an offsetting entry in the accounting system (credit=debit). There is no direct connection between the credit balance ("money") and the offsetting debit balance (debt). Credit is not debit, but credit=debit.

You might know what is the latest understanding around this matter? Have we got forward since the 1960s (Friedman&Schwartz)?


Nice post!

My first reaction is that there *is* an interest rate here: the rate of return on land. This will be linked through arbitrage with other interest rates in the economy (e.g. the return on capital). You can then formulate monetary policy in terms of targeting this rate.

Does this really end up being any different than the standard model?

"If there's a shortage of money, ......... Each individual can get rid of excess money ......"


In one breath you say there is a shortage of money and then in the next you say there is an excess.

How does that work?

"If the central bank sets too low an inflation target .......... the central bank would run out of land to buy. ...... would mean the central bank owns all the land.


If the CB owned all the land, how did it get to do it? It had to buy it, pushing up the inflation rate which is in contradiction to the low inflation target.

Antti: in my green money world, money is positive net wealth. In my red money world, money is negative net wealth. In my red-green world, it can be either, depending on whether "net money" (green minus red) is positive or negative. Even theough money is just bits of paper (or accounting entries). Escape the mental strictures of "assets=liabilities" accounting! (Think about an OLG model, like Samuelson 58 for example, where money is net wealth.)

jonathan: thanks!

"Does this really end up being any different than the standard model?"

No, not really. Which shows that borrowing/lending are basically irrelevant to the standard model.

Henry: remember that the demand for money depends on the volume of trade. A shortage of money at the initial volume of trade causes trade to fall, until the demand for money falls enough to eliminate the shortage. But the volume of trade is now too low.

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