Just trying to get my head clearer on some related stuff.
I have a weird thought-experiment, that I think helps us understand fractional reserve banking better. Even though, paradoxically, there are no commercial banks in my thought-experiment. There is just One Big Bank, owned and controlled by the government, that issues the only form of money, that is used as the only medium of exchange and unit of account.
There are two parallel worlds:
In one world the Bank holds assets equal in value to its monetary liabilities.
In the second world, the Bank holds no assets at all. It has M on the liability side of its balance sheet, and absolutely nothing on the asset side. So if the Bank wants to expand or contract the money supply, it cannot use Open Market Operations, but can only use helicopter (lump sum transfers) and vacuum cleaner (lump sum taxes) operations.
I'm going to ask what happens, in both of those parallel worlds, in an extreme case - when we go to Milton Friedman's Optimum Quantity of Money (aka ultra-liquidity).
Suppose, just suppose, that you believed that printing money was irreversible, or just very hard to reverse. So central banks could increase the supply of base money by printing money, but could not (or could not easily) reduce the supply of base money again by burning money.
And suppose you knew that central banks had been printing very large amounts of money recently, because of special circumstances. Which they have. And suppose you thought that those special circumstances wouldn't last forever. Which they probably won't.
Would you be really scared of very high future inflation? I would be. Would you be saying that central banks should stop printing so much money, even if it did mean that aggregate demand is too low right now? I think I would be.
This is supposed to be a very simple post, mainly for non-economists.
"Printing money causes inflation" can mean three different things. What I will say here should be obvious to economists, but I'm not sure if it is obvious to non-economists. And it makes me wonder if sometimes things get lost in translation. Maybe, just maybe, some people are strongly opposed to central banks printing very large amounts of money because they misunderstand "printing money causes inflation". Who knows? Tell me what you think.
Those of us who teach Intro Economics know we have to spend some time carefully explaining the "other things equal" clause, and why it matters. Because the students won't get it unless we explain it. We tend to take it for granted that the silent "other things equal" clause is understood, but it might not be understood by all.
C'mon guys. If you are going to put forward a lefty conspiracy theory to explain why monetary policy is tighter than you (and I) think it should be, you at least need to get your story straight.
An extremely quick Google search convinces me that lawyers are massively over-represented in the Canadian Parliament. I am quite sure that something similar is true in other countries too. Lawyers are far more powerful in setting government policy than are ordinary middle-class people like me.
So if we want to understand why monetary policy is so tight, we really need to ask the question: why are lawyers opposed to higher inflation?
Paul Krugman is wasting his time trying to figure out why the rich and powerful don't like inflation. There's a simple answer, that also explains why the non-rich and non-powerful don't like inflation either.
And you don't need any fancy political economy to figure out the answer. If you want to know why non-economists don't like inflation: just ask a non-economist.
Inspired by Free Radical's post, I think I have figured out a simpler and clearer way to say what I want to say about Walras' Law.
Ask yourself the following question:
Q. Assume an economy where there are (say) 7 markets. Suppose 6 of those markets are in equilibrium (with quantity demanded equal to quantity supplied). Is it necessarily true that the 7th market must also be in equilibrium (with quantity demanded equal to quantity supplied)?
This is an open book exam, and you may Google if you wish.
This is a question for both macroeconomists and microeconomists. (And for non-economists too.)
A lot of US econobloggers are talking about the Tim Hortons-Burger King merger. But all they seem to talk about is corporate tax rates.
I think they are missing the big picture. The big picture is here:
[I can't figure out how to embed that picture in Typepad. That's okay, I did - SG]
To my eyes, it looks a lot like that satellite picture of North and South Korea at night, only the dots of light are in red, and North and South are switched.
Now I really like travelling in the US. And the US is a great country. And in many ways the US is a very advanced country. (You hear a "but" coming, don't you.)
But the US is sadly lacking in Tim Hortons.
(In July I drove for two days across Minnesota, Wisconsin, and Michigan, without seeing a single Tim Hortons. We were desperate by the time we re-crossed the border at Sault Ste. Marie.)
I mean, if you were talking about the economics of Nixon going to China, and China opening up for foreign investment, would you spend your whole time talking about relative corporate tax rates in the US and China? Of course you wouldn't!
This is primarily a question of development economics.
Can't we at least get a decent class analysis of this question? There are two sorts of people: Starbucks people; and Tim Hortons people. And this class distinction is far more important than anything based on superficial differences like income and occupation. As a Tim Hortons person, who feels deeply ill-at-ease in a Starbucks, and who does not understand the menu, I cannot stop myself asking the "barista"(?) the subversive question: "Can I have a small double-double please?"
Is all the economic analysis of this merger being done by SWPL Starbucks people, who can only see their own class perspective?
(I am only half-joking.)
Does anybody here remember 1982? When interest rates went very high, and so asset prices went very low. Just the opposite of today.
What were people saying back then?
1. Were they saying: "Central banks are setting high interest rates and making asset prices low, which is bad for the rich, who own all the assets"?
2. Or were they saying: "Central banks are setting high interest rates, which is good for the rich, who have all the money to lend"?
Because my memory isn't very good. But I thought they were saying the second, back in 1982. And nowadays I think I hear the first, only in reverse.
P.S. And is anyone today writing a book about "saving the hippo"?
P.P.S. Maybe the underlying problem is that many people think about policy actions, when they should be thinking about policy regimes. Thinking about policy regimes imposes a symmetry on our analysis.
[This post covers too much ground and stretches my brain too far. I'm trying to put Lipsey-Lancaster and game theory together, and apply it to monetary-fiscal. I blame Brad DeLong for making me think about this.]
"But as long as Nick Rowe recognizes that fixing situations of depressed activity by simply printing money gets us not to the first-best but the second-best in many situations, I can have no quarrel."
I think it is the job of monetary policy to take the world as it is, not as it should be. Monetary policy is always, in practice, about living in a second-best world. And that "world" includes fiscal policy.
And a game-theoretic analysis of monetary and fiscal policy in a second-best world leads to the conclusion that the fiscal authority must ignore the effect of fiscal policy on aggregate demand (NGDP), or else the Nash equilibrium will be far from second-best.
[This post is not as clear as I want it to be. Sorry.]
Most discussions of long run secular stagnation, and short run liquidity traps, ignore land. They shouldn't.
If a central bank runs out of other options to increase aggregate demand, it could always use helicopter money. Or it could buy land.
Is it possible that a central bank that was allowed to buy land would ever need to use helicopter money to prevent aggregate demand falling below target? Would it ever be desirable for central banks to issue helicopter money rather than buying land?
Let's look first at the long run, then at the short run.
[This is very long, and covers a lot of old ground for me, as well as some new. It was supposed to be a belated reply to Brad DeLong's post. But my thoughts wandered. (By the way, for some reason I never remember being annoyed at Simon Wren-Lewis, even when I disagree with him; but I do get very annoyed and frustrated when monetary policy does not do what I think it can do and is supposed to do.)]
I have what might appear to be a peculiar obsession with money as the cause of recessions, and monetary policy as the cure.
I am right. Those who do not share my obsession are wrong. Here's why:
On the face of it, the Bank of Canada has done absolutely nothing for nearly 4 years now, and most people think it won't do anything until sometime next year. The target of the overnight rate has stayed at 1% for a very long time.
This is very puzzling. I do not understand it.
But maybe the Bank of Canada has not been doing nothing for the last 4 years. Maybe it has been actively managing monetary policy by varying the length of its commitment to do nothing.
I hate driverless cars. That is the fact that needs to be explained. Not justified, but explained.
Driverless cars pose no threat to my job, my income, or my wealth. That's not it.
The insurance companies, or safety-nazis, might force us to use driverless cars. That would be a threat to my enjoyment of driving. But even if that threat were eliminated, so each of us always had the option to drive ourselves, I would still hate driverless cars. That's not it either.
What I hate is the very option to use a driverless car. Because being able to exercise that option, even if I did not have to exercise that option, would make "driving" something very different from what it is without that option. In much the same way that "hunting" means something very different today in an agricultural economy with supermarkets than it did for our ancestors. "Wouldn't it be cheaper and easier and safer to just buy some meat at the supermarket, or do you think it's fun to kill animals for sport?" "Why not just press the auto button, so you can sit back and relax and enjoy the scenery or read a book?"
...will an increase in the rate of interest paid for holding money be deflationary (because it increases the demand for money), or inflationary (because it increases the growth rate in the supply of money)?
This question crops up from time to time, in comments here and on other blogs, so I thought I would lay out a simple answer. Mostly as a "teaching" post, but also because it raises an interesting question about interest on reserves and central banks' communications strategy.
The answer is: an increase in the rate of interest paid for holding money will increase the equilibrium inflation rate; but it will not cause an additional one-time jump up or down in the equilibrium price level. (Yep, you gotta keep your head clear on the distinction between levels and rates of change over time.)
"If the central bank permanently doubles the stock of (base) money: all nominal variables will double [that's the Quantity Theory of Money]; all real variables will stay the same [that's the Neutrality of Money]."
The Quantity Theory of Money and the Neutrality of Money go together. It is very hard to have one without the other. They are only exactly true under very strict conditions (see e.g. Patinkin's "Money, Interest and Prices"), which I will ignore here.
As stated above, the QT and NM implicitly assume that (base) money is exogenous. But it is easy to define versions of QT and NM that are applicable when money is endogenous.
Money is fungible. And things get lost in translation, especially between micro and macro.
"Helicopter money" is when the central bank prints money, gives it to the government, and the government gives it to everyone, as a freebie.
When is helicopter money optimal?
30 years ago, IIRC, my colleague Steve Ferris said I should read Lloyd Metzler's Wealth, Saving, and the Rate of Interest, because he thought it was a great paper. Yesterday Brad DeLong said the same thing. David Glasner also thinks it's a classic paper. When three very good but very different economists recommend a paper that strongly, you figure they are probably right.
But when I re-read it now, I get the same impression I did 30 years ago. It's an OK theory paper, but nothing special. And not very important at all empirically. But the guys who think it's an important paper are at least as smart as me. Maybe I'm not quite getting something?