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Excellent post!

I have a question. If as you mention "the government-owned central banks were required to buy the index of all marketable financial securities, of which central government bonds would comprise only a fraction" , would this also largely take the ZLB issue out of the equation ? Even if govt bonds had yields close to zero it is unlikely that the kind of index you mention would in aggregate also have yields that low..

MF: Thanks!

Theoretically, no. We could imagine a world (perhaps if the inflation target were set far too low) where everybody would prefer holding *all* their assets in central bank currency, so the central bank would run out of things to buy. But in practice, for reasonable targets, I think the answer would be yes.

[recommended links?]

Here is Selgin's Theory of Free Banking: http://oll.libertyfund.org/titles/2307

Nick, where in your dichotomy do you place policies that allow for negative nominal rates, such as Kimball/Buiter's variable peg between central bank cash and deposits?

> But from that perspective, insisting that government-owned central banks can only print money to lend to the government that owns them seems equally to violate the same spirit of rules vs discretion.

I think that the overarching idea is that the central bank isn't committing fiscal policy if it only changes the level of the government's consolidated position; it does engage in fiscal policy when it changes the composition of the government's balance (with respect to the "other stuff" part of "money and other stuff").

If the government is a net debtor, then we get our current world: the central bank uses new money to buy and sell the government's debt. If the government is a net creditor, then things are more difficult -- just what is the government a net creditor *of*?

If the government's accumulated surplus is stored in some kind of sovereign wealth fund, then the natural monetary instrument is to buy and sell shares in that wealth fund. If the government accumulates that surplus in works of fine art, then that's the instrument. If the government prints money and stores it in a vault, then the government itself is engaging in monetary policy and that's poor form.

> Suppose instead, for example, that government-owned central banks were required to buy the index of all marketable financial securities, of which central government bonds would comprise only a fraction.

That would be very interesting, since it would put the central bank in more of an equity-holder position with regards to the economy. But dealing in any real-valued instrument has very odd implications for monetary policy, possibly to the point of making neo-Fisherism truer.

Buying and selling assets looks a great deal like buying and selling NGDP shares, at least insofar as GDP is correlated to return on capital. Similar automatic stabilization might apply: if I believe that the central bank's peg is going to be incorrect (lower-than-expected real return with fixed inflation), then I want the central bank to be holding the asset side of that transaction. In return, that means I want money now, but me going for my free lunch means that the price level unexpectedly increases.

Nick,

"Imagine a central bank in a country where there are no government bonds. It's easy if you try. Because the government has paid off the whole of the national debt. Does this mean that monetary policy is, by definition, impossible? That doesn't seem to be a very useful way to define "monetary policy". What word would we use to describe what central banks do in such a world?"

See United States, 1913-1933.
Federal Reserve Act was enacted in December of 1913.
http://en.wikipedia.org/wiki/Federal_Reserve_Act

Open market operations did not begin until the Banking Act of 1933 (otherwise known as the Glass-Stegal Act).
http://en.wikipedia.org/wiki/1933_Banking_Act

Various portions of the Glass-Stegall Act were repealed by the Graham-Leach-Bliley Act of 1999 with support from both the Left (Larry Summers, Bill Clinton, Robert Rubin) and the Right (Alan Greenspan, Phil Gramm, Jim Leach, Thomas Bliley) including the separation between commercial and investment banking. Open market operations survived the operating table

"Because the government has paid off the whole of the national debt. Does this mean that monetary policy is, by definition, impossible? That doesn't seem to be a very useful way to define monetary policy."

"Monetary policy" in the U. S. existed for 20 years prior to open market operations.

What I don't understand is if the "non-lunatic" left (like Brad Delong) is on board with open market operations, why shouldn't the private banking industry be eliminated entirely and just have one central bank that everyone borrows from? No need for the central bank to buy anything since they are creating every loan that exists at an interest rate they dictate.

"Suppose instead, for example, that government-owned central banks were required to buy the index of all marketable financial securities, of which central government bonds would comprise only a fraction."

Who decides what and how much is in "the index"?

Thanks for the George Selgin link JP.

I see the Kimball/Buiter proposal (and similar) as not really on the left/right spectrum. In principle the non-lunatic right would look at them favourably, as being better than resorting to fiscal policy, but I'm not sure how practical they are.

Majro: "I think that the overarching idea is that the central bank isn't committing fiscal policy if it only changes the level of the government's consolidated position;..."

I don't see it that way (or maybe I misunderstand you). That sounds like helicopter money, which seems to me to be both monetary plus fiscal. (Though if the government owns the central bank, and gets the profits of the central bank, then almost anything the central bank does will affect its profits, which eventually affects government spending and/or taxation.)

"If the government prints money and stores it in a vault, then the government itself is engaging in monetary policy and that's poor form."

I disagree. The Bank of Canada has loads of old banknotes stored in the basement, but they don't count as part of the money supply. It wouldn't have any economic effect if they all caught fire (except for the cost of paper and ink if they were needed next year, and new ones needed to be printed).

It seems to me that for a central bank to credibly hit any target, intermediation by the private banking sector must be eliminated. With private banking intact, any target by the central bank can be contravened by the private banking sector.

Frank: your 12.08 comment is obviously wrong, and is totally off-topic. Stop commenting on this post.

Trivia: there actually exists at least one government that issues debt for the sole purpose of monetary/industrial policy. I don't know if there are more such governments.

The problem with buying private-sector bonds here is, I think, broadly same as currency board monetary policy - it damages the political neutrality of the monetary authority (recall the political sensitivity of threatening to unilaterally adjust a currency peg way back when). You can't just own the market portfolio at this scale, all developed governments are huge relative to GDP and it would be large enough to distort corporate governance, even as non-voting institutional shareholders.

Worse, it's not clear how a government would avoid indirectly owning significant-as-a-percentage-of-GDP assets in other government jurisdictions, including those without a rigorous sanctity of private property. A risk-free bond isn't really risk-free, it's just risk-free in jurisdictions where men with guns are loyal to the bond-issuer. Conversely, the PBoC holding a trillion+ in US bonds is not plausibly a purely technocratic monetary policy decision.

Trivia: there actually exists at least one government that issues debt for the sole purpose of monetary/industrial policy. I don't know if there are more such governments.

The problem with buying private-sector bonds here is, I think, broadly same as currency board monetary policy - it damages the political neutrality of the monetary authority (recall the political sensitivity of threatening to unilaterally adjust a currency peg way back when). You can't just own the market portfolio at this scale, all developed governments are huge relative to GDP and it would be large enough to distort corporate governance, even as non-voting institutional shareholders.

Worse, it's not clear how a government would avoid indirectly owning significant-as-a-percentage-of-GDP assets in other government jurisdictions, including those without a political tradition of private property but instead a nationalist tradition of appropriating colonial holdings. A risk-free bond isn't really risk-free, it's just risk-free in jurisdictions where men with guns are loyal to the bond-issuer. Conversely, the PBoC holding a trillion+ in US bonds is not plausibly a purely technocratic monetary policy decision. At some level these considerations apply, even for non-lunatics.

Hmm, I thought my comment got eaten by a grue and re-posted it. Still no dice. I guess the spam filter didn't like the link.

Thanks for the plug, Nick. Concerning references, since The Theory of Free Banking is getting pretty long-in-tooth, I encourage your readers to have a look at my and Larry White's JEL review essay, "How Would the Invisible Hand Handle Money" ([Link here NR]) and (for U.S. experience) at our and Bill Lastrapes' "Has the Fed Been a Failure?" (working paper version here: [Link here pdf NR]). I also have a collection of mostly previously-published papers in the works, to be published by Cato under the title "Money: Free & Unfree."

By the way, I fully agree that governments have historically looked upon money as an instrument of national defense. I'm hosting a Liberty Fund colloquium on the question whether its treatment as such by governments of otherwise free societies is either necessary or desirable.

Non-linky version, to save Nick the trouble of trawling the spam bin:

Trivia: there actually exists at least one government that issues debt for the sole purpose of monetary/industrial policy (Singapore issues bonds despite being in total surplus for the express purpose of open market operations). I don't know if there are more such governments.

The problem with buying private-sector bonds here is, I think, broadly same as currency board monetary policy - it damages the political neutrality of the monetary authority (recall the political sensitivity of threatening to unilaterally adjust a currency peg way back when). You can't just own the market portfolio at this scale, all developed governments are huge relative to GDP and it would be large enough to distort corporate governance, even as non-voting institutional shareholders.

Worse, it's not clear how a government would avoid indirectly owning significant-as-a-percentage-of-GDP assets in other government jurisdictions, including those without a political tradition of private property but instead a nationalist tradition of appropriating colonial holdings. A risk-free bond isn't really risk-free, it's just risk-free in jurisdictions where men with guns are loyal to the bond-issuer. Conversely, the PBoC holding a trillion+ in US bonds is not plausibly a purely technocratic monetary policy decision. At some level these considerations apply, even for non-lunatics.

Excellent post. I take the first DeLong quote in a slightly different direction here:

[Link Here NR]

On right-vs-left lunacy or lack thereof:

1. should unemployment or estimated output gap appear in the objective function at all to begin with (presuming rules-based)? This is nonobvious, esp outside the US Fed's explicit dual mandate. I recall this being an active topic of contention prior to the GFC.

1b. how should the monetary authority respond to microeconomic policy hammers to unemployment (eg welfare extensions) or ideological contests in assessing potential output (should the BoE be able to publicly reject a sitting government's announced growth projections, as a matter of democratic electoral political philosophy)? The point that there's no Schelling point of neutrality applies here as well, I think

2. Is the money multiplier stable? Exactly how unstable is it? (this is the historic converse of your #2, of course, where the hard monetarists likewise mostly converged to the New Consensus)

3. Non-US open economy issues. Whose responsibility is Dutch disease, fiscal or monetary or neither? How about hot money flows and 1997-style privately-held foreign-denominated debt, should this belong to the frame of deregulation/growth/equity or the frame of monetary policy instruments and stability? If restrictions on real estate inflows are motivated by housing problems rather than capital control motives, does it still count as a capital control? How about attacks on tax havens motivated by social equity concerns? There's a swathe of development-econ-style problems of optimal policy construction when a foreign government (or conflicting arms of a domestic government) is thought to be an inept regulator. Lots of these over the years, in assorted countries.

@Nick Rowe:

> I don't see it that way (or maybe I misunderstand you). That sounds like helicopter money, which seems to me to be both monetary plus fiscal. (Though if the government owns the central bank, and gets the profits of the central bank, then almost anything the central bank does will affect its profits, which eventually affects government spending and/or taxation.)

You're right, that's not specific enough. Thinking about it, "pure" monetary policy would have to mean:

*) Seigniorage profits go exclusively to the government. That precludes helicopter drops and asset purchases below fair-market value.
*) The composition of real, risky assets owned by the consolidated government is decided exclusively by the fiscal authority. This would mean that the purchase of mortgage-backed securities was stepping onto fiscal policy.
*) The level of real, risky assets owned by the government is decided exclusively by the fiscal authority. This is easy for a net-debtor government, but it may have to fall by the wayside for a net-creditor government.

> The Bank of Canada has loads of old banknotes stored in the basement, but they don't count as part of the money supply. It wouldn't have any economic effect if they all caught fire (except for the cost of paper and ink if they were needed next year, and new ones needed to be printed).

I wasn't thinking of the monetary authority here, but instead the fiscal authority. If the government ran a surplus but used its surplus to stockpile $100 bills in a cellar, then it is engaging in monetary policy by withdrawing those bills from circulation. The level of circulating cash would go down unless the Bank of Canada acted to compensate, but if it did so then the treasury could again change the monetary aggregate by buying stocks with the cellar-cash.

david: I fished all your comments out of spam, even though there's some duplication, because I want to train Typepad to recognise you as a good guy.

Neat example of Singapore. But I don't fully understand it. What does the Singapore government hold on the asset side of its balance sheet, to offset the bonds it issues?

Central bank currency is normally around 5% of NGDP for most countries (about double that for the US). The total wealth/GDP ratio is much higher than that, so central banks normally own a trivial proportion of total wealth. And buying the index means they are following the market passively, as opposed to being an "active investor".

But if the central bank did seem to be getting too big for comfort, that suggests that the implied inflation target is too low, so the demand for central bank currency is too high. It is indeed true that too low an inflation target means the government-owned central bank owns everything, so you end up in communism!

Thanks George. If I were better at history, I would learn more from it. But I'm not (I always get muddled, and forget things) so I rely on people like you.

Thanks Scott! I just read your post, we are on the same page. It's funny how this problem goes all the way back to ECON 1000. We draw an AD curve, implicitly assuming the central bank holds *something* constant when we draw it, then talk about it shifting when shocks hit the economy, and then talk about "activist" monetary policy trying to shift it back. But whether or not the AD curve does in fact shift when there's a private sector shock (plus the shape of the AD curve too) depends on what precisely it is that the central bank holds constant.

david:

1. I think we need to make a distinction between the social welfare function, and the central bank's rule. We don't talk about judges' social welfare functions; we tell them to enforce the rules. We ask what rules would maximise the social welfare function.

2. The ratio of M1 (or Mx) to money base varies over time. But holding money base constant is not a reasonable monetary rule (though we could imagine much worse), so it doesn't really matter.

3. Dutch Disease is not a disease (see Stephen Gordon's good posts on DD on this blog). But if you did think it was a disease, and wanted to "cure" it, you should use fiscal policy. Monetary policy won't work. There are lots of things that monetary policy cannot do, and shouldn't try to do.

Majro: Ah! I misunderstood you on the $100 bills in the cellar. What you say makes sense.

@Nick Rowe:

> Dutch Disease is not a disease (see Stephen Gordon's good posts on DD on this blog). But if you did think it was a disease, and wanted to "cure" it, you should use fiscal policy. Monetary policy won't work. There are lots of things that monetary policy cannot do, and shouldn't try to do.

I wish that more people thought about barter. All of the essential features of Dutch Disease are present if money doesn't exist. Resource extraction still offers a comparative advantage over other industries, leading to specialization and possibly over-exposure to commodity supply/demand shocks. But since money doesn't exist in this story, we can't pretend that it's the central bank's problem.

I find that to be a really good shorthand for my own thoughts re: politics and economics -- if the problem still exists in Barterland, it's a fiscal policy problem.

Nick, I find also sorts of strange distinctions when I talk to people:

1. Suppose the demand for US currency soars in developing countries, for hoarding purposes (this is not a hypothetical.) If the Fed accommodates that increased demand for base money in such a way that interest rates are stable and NGDP keeps rising, it's not viewed as an activist policy.

2. If the demand for liquidity soars because of financial stress, and the Fed accommodates that extra demand by increasing the base enough to keep NGDP growing, that's viewed as an activist policy.

Why? Because in case #2 market interest rates would probably fall. That minor distinction (in the eyes of many) is the difference between the Fed doing nothing and being activist. Weird.

"central banks (mostly) only lend to the governments that own them"

This creates a danger of inflationary feedback. The Mexican central bank's bonds (issued by their own government, and denominated in pesos) fall in value. The peso therefore has less backing, so the peso falls in value, which makes the bonds fall more, which makes the peso fall more, etc.

Smart central bankers should never hold assets denominated in their own currency, but they all do it, and nobody ever talks about it.

David & Nick,

I always bring up Singapore because it's instrument policy is very different from US/UK/Canada/EU and because it's net position is very different. So let me clarify David's comment.

First, Singapore's monetary policy is a crawling exchange rate band. The central bank (MAS) buys and sells other currencies (mostly USD) to keep the nominal exchange rate index within the band. By my estimate, the crawl is currently about 1% per year and the level is in the middle of a 2% wide band.

So that means that Singapore Government Securities are *not* used primarily for monetary policy (I don't think they are used at all in practice). SGS have two flavours - the standard public SGS and the Special SGS (SSGS) which are purchased by the public pension fund (CPF). The purpose of the SGS are to create a risk free term structure to support the local bond market and for local banks to manage their reserve positions. The SSGS are sort of like Social Security holding Treasuries as savings. In the CPF system, every citizen and PR in Singapore holds an defined contribution account with CPF. CPF holds those accounts at the central bank (*So every Singapore citizen has an account at the central bank!!!* helicopter money can be easily done through retirement accounts). CPF puts those amounts into SSGS.

Now, Singapore's government is a net creditor - it has long run a net surplus. The government puts funds from SSGS into GIC and Temasek - the two sovereign wealth funds. Temasek owns things like ports, airlines, telecoms (domestic and foreign), commercial property in London, etc etc - it's a hedge fund / private equity firm owned entirely by the government. GIC is the conservative investment firm and owns foreign bonds, real estate, probably some equity indexes, etc (details are state secret).

So - what does Singapore hold on the asset side? Exactly the things Nick suggests a central bank could buy if it was allowed to - a share of the global economy. How does MAS execute monetary policy with a net asset position? Well it *could* just buy government bonds, and tell the government to issue more if needed (the proceeds of which would go into the sovereign wealth funds). In practice it prints SGD and uses that to buy USD/Euro/RMB/Yen/Ringgit. Those foreign reserve positions may be later used to tighten by buying back SGD.

The Monetary Authority of Singapore tries to target a strong Singapore dollar (SGD) in the long term and a stable exchange rate in the short term. These are obviously conflicting goals, so as I understand it, there is a longstanding policy of resisting internationalization of the SGD through capital controls limiting the ability of non-residents to market-make SGD-denominated assets (whilst there are no restrictions on buying or selling these assets and repatriating them per se, Singapore banks cannot lend SGD to non-residents for trade purposes so it is not hospitable for a market maker to operate. It's a light touch capital control).

But if there are capital controls slowing the movement of currency, then currency board OMOs cause liquidity problems. This is resolved through OMOs in SGSes. The MAS monograph says that they're sold every trading day, so Squeeky Wheel's suggestion that they are not used might be incorrect.

As for what the government holds on the asset side: yup, GIC and Temasek Holdings. A startling bit is that the Singapore government asserts that it earns a systematically higher return on GIC/Temasek than it pays out on SGSes, which is either exaggeration or maturity transformation.

Observe that the currency band is a secret, the sovereign wealth fund's exact holdings are a secret, etc., which reduces foreign political sensitivities. Not perfectly, though. In 2006 Temasek bought a telecom company in Thailand and unintentionally triggered a coup d'etat, so to speak. Thailand doesn't seem to have taken it personally, but it's still not favourable for neighbourly relations.

Singapore certainly does inch alarmingly close to owning such a large share of its own domestic assets that it can be questionable just how marked-to-market they are. As Squeeky Wheel noted, Temasek got the port, the broadcaster, the state TV and radio broadcaster, the state press, the telecom, the post, even the zoo when these were privatized. Toss in the Housing Development Board and and the Singapore government portfolio turns out to contain numerous assets whose value is heavily determined by government policy. IAPW a sovereign wealth fund holds the world portfolio but Singapore is very much not in that situation; there are good reasons for that (cf Thailand).

david,

"A startling bit is that the Singapore government asserts that it earns a systematically higher return on GIC/Temasek than it pays out on SGSes, which is either exaggeration or maturity transformation."

why is that surprising?

its just risk/return isn't it?

Nick,

"Imagine a central bank in a country where there are no government bonds. It's easy if you try."

Channelling you and John Lennon into the Eurozone, the ECB situation is a bit like that in that the standard (non-crisis) ECB balance sheet finances banks instead of acquiring treasury bonds.

In a way, that's more direct, since the reserve drain resulting from commercial banks responding to currency demand is replaced by direct lending back to the banks, in effect ("refinancing operations").

What does Singapore hold on the asset side? Location, people, and political sanity, looks like.

"Singapore is one of the world's major commercial hubs, the fourth-largest financial centre and one of the five busiest ports. Its globalised and diversified economy depends heavily on trade, especially manufacturing, which accounted for around 30 percent of Singapore's GDP in 2013. Singapore places highly in international rankings with regard to standard of living, education, healthcare, and economic competitiveness. Singapore has one of the highest per capita income and one of the longest overall life expectancy in the world. The country is one of nine countries in the world with top AAA rating from all credit rating agencies."

A full third of their population are not citizens, but temporary workers (the largest fraction of non-citizens) or permanent residents. Sitting in the epicentre of human population density, they can fine tune their population to meet various needs. I am guessing that they wouldn't have such a huge manufacturing sector if they had to base it on their own permanent population, as these days manufacturing is a rather unsafe basket to keep all your eggs in.

But they will not lack for people as needed-- people fight to get into Singapore. Their sane politicians have fashioned a country that is secure and wealthy, and thus can draw on any and all talents as needed.

Their location and history gives them the shipping, and finance follows along. Especially tax sheltering. I wonder how that would tie into their fiscal policy, do tax sheltered funds somehow lend stability to the rest of ones economy?

And it's a tiny country. 5.5 million people, of whom only 3.1 million are citizens.

As much as I can admire their success, they are in a very different category from almost all other nations. This means a fiscal policy that suits them is unlikely to be a universal template.

Noni

I just looked at a map -- Singapore, including all her islands, is about the size of the city of Winnipeg. Roughly eight by ten miles. That's got to drastically cut people's commute, eh?


http://www.mapsofworld.com/singapore/maps/singapore-map.gif

Squeeky: "(*So every Singapore citizen has an account at the central bank!!!* helicopter money can be easily done through retirement accounts)."

But that would be like a savings account, right, rather than a chequing account? And helicopter money would be where the central bank adds $100 to every citizen's account. (Or it could raise the interest rate it pays on those accounts, like in a Woodfordian model).

JKH: Interesting. And I hear the Bank of Canada (announced last week) from now on about 10% of the asset side of its balance sheet will be in the form of repos (or is it reverse repos?), where government bonds are the collateral.

CPF is a mandatory savings account, so it can affect lifetime income but not current disposable income. It is also funded from separate employer and employee contributions, giving even more policy hammers to affect the cost of labour or current disposable income share directly. Policy precedent has been to abruptly reduce the employer rate in the face of domestic recessions before slowly inching it up again - it was dropped 25% to 10% in the 1985 Singapore recession, 20% to 10% in the 1997 Asian financial crisis, and 16% to 13% for the 2003 SARS crisis. It was not used during the 2001 9/11 recession or the GFC, since those were considered to be foreign shocks.

If that's not enough, there's also a simultaneous incomes policy - the National Wages Council is still a thing in Singapore.

There is also the infrastructure for fiscal stimulus to chequeing accounts, as demonstrated via the so-called "Growth Dividend" or "Workfare Bonus" packages in 2008-2011; this was further tuned to age, income, and even the value of primary residence - the infrastructure for instantly wiring about $800-$1200 or so to every adult is set up and proven.

I suspect that at the level of policy engineering Singapore is used to, debates over "helicopter money" is passé; Singapore can and has helicoptered sums of money fine-tuned to $50 increments in monthly income.

All the macroeconomic stability in the world cannot mitigate the raw fact that it's phenomenally expensive to keep 5.4 million people on an island at a high quality of life, though. Non-negotiable supply side issues limit growth.

Wow, david has finally launched a big discussion on Singapore here.

OMOs - my understanding from reading the MAS policies is that OMOs are used solely for managing bank liquidity positions related to reserve requirements and RTGS (real-time gross settlement, think FedWire) system. If you read through the MAS rules on OMOs, they have an unlimited bid/ask as determined by the needs of the commercial banks available daily near the end of the day. I would compare this to repo+fed window. Again, the purpose here is to ensure the correct amount of reserves for the needs of the banks - the banks drive the amounts.

The actual monetary policy is through exchange rate targeting. Again, Singapore is not a currency board, and "stable" does *not* mean "pegged". The twice yearly policy statements show that the exchange rate is targeted to drift. The short term goal is not too much daily fluctuation (the band is officially secret, but it's fairly easy to show that it is around +-2% of the nominal exchange rate index. For comparison that's roughly USD/SGD = 1.24 to 1.4, but depends on movements in other currencies too). Since the medium term target for controlling inflation is usually an appreciating crawl, it is consistent with the long term objective.

""A startling bit is that the Singapore government asserts that it earns a systematically higher return on GIC/Temasek than it pays out on SGSes", JKH nails it. SGS are government guaranteed and pretty close to risk free. Singapore Airlines stock is not. So it's all risk capacity.

Nick - "But that would be like a savings account, right, rather than a chequing account? And helicopter money would be where the central bank adds $100 to every citizen's account. (Or it could raise the interest rate it pays on those accounts, like in a Woodfordian model)"

Yes. CPF is a savings account and it's locked until retirement (and even after, as annuitization is becoming mandatory); mostly I just think it's cool that people have central bank accounts. But note that this *does* have an impact on monetary base; CPF is net accumulating funds - ~15% of wages are returned to the central bank. That's a meaningful reduction of monetary base. And as David noted, Singapore has been able to do cash transfers to commercial bank accounts. So helicopter money for fiscal (political?) purposes is not new.

One of the largest asset positions is that the government owns almost all the land. Most housing (Housing Development Board - a government entity) is on leased land. So yes, the government owns an enormous portion of total national wealth.

Nusi - Singapore is about 60km by 80km, but fitting near 6 million into that is dense. And you are right that Singapore is not a template for most. What interests me however is what really makes it so different? Is it being a highly open economy (trade > 200% of GDP)? Is it a relative position, being slightly more developed than the neighbours so that it has a strong labor import position? Is it high infrastructure spending? Is it the net exporter position? Is it high educational attainment? Which combination of the above?

Back to monetary policy - I find Singapore interesting because it's instruments are so different from US/UK that it tends to defy assumptions. Singapore doesn't target interest rates. And easing tends to raise rates, not lower them (due to interest rate parity). Having a net asset position is no problem for bond markets. Etc.

The link for "Has the Fed been a failure?" needs to be fixed.

Thx.

JKH, if the reserve requirement is 0%, demand for currency is 0, and demand for central bank reserves is 0, can the fed still set the fed funds rate?

Too much F.,

Yes – or at least it can set a reasonably contained trading range for the fed funds rate – with a slight change in operating procedures.

The central bank can set a rate at which it will lend settlement balances to the banks and a rate at which it will pay (if necessary) on surplus settlement balances (i.e. excess reserves or settlement balances in excess of a reserve requirement of 0) in order to keep the funds rate trading within that range.

So even if the reserve requirement is zero and the demand for currency is 0, those rates will set a channel within which the funds rate will trade. Arbitrage forces will keep it in that range.

In this situation, in theory, the central bank could have nothing on its balance sheet in aggregate at the end of the day – other than its aggregate loans to banks and the corresponding excess settlement balance position (i.e. excess reserve position).

And in pure theory, it might include situations where the market clears itself, with no central bank lending and no excess settlement balances at the end of the day. In other words, a balance sheet with “nothing” on it at the end of the day.

But the trading range for the fed funds rate will still be determined – via the administered rate channel and the market arbitrage forces that discourage the fed funds rate from trading outside of that range.

The underlying feature there is that the central bank determines a set of banks that are required to clear settlement balances on its balance sheet - and the central bank is the monopoly provider of those settlement balances. So it can control the interest rate in some fashion.

"In this situation, in theory, the central bank could have nothing on its balance sheet in aggregate at the end of the day – other than its aggregate loans to banks and the corresponding excess settlement balance position (i.e. excess reserve position).

And in pure theory, it might include situations where the market clears itself, with no central bank lending and no excess settlement balances at the end of the day. In other words, a balance sheet with “nothing” on it at the end of the day.

But the trading range for the fed funds rate will still be determined – via the administered rate channel and the market arbitrage forces that discourage the fed funds rate from trading outside of that range."

Let's say that happened. The fed can set the fed funds rate with a zero balance sheet. Let's assume demand deposits are medium of exchange, the commercial bank(s) are all solvent, every entity believes the commercial bank(s) are all solvent, and that the fed operates like the ECB (like the discount window and no open market operations). There are $7 trillion of demand deposits with a velocity of 2. NGDP is $14 trillion. There is $0 of currency and $0 of central bank reserves.

Next, entities change and start borrowing a lot so that the number of demand deposits increase. This causes price inflation to go above the fed's target of 2% per year. The entities then decide to move to *all* currency hoping prices will not go up as much in terms of currency. Will the fed ever not accommodate this increased demand for currency (break 1 to 1 convertibility) so that prices in terms of demand deposits and currency will be different?

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