Why can't central banks monetise something else?

Other than government bonds? That's a rhetorical question. They can.

David Andolfatto has gone over to the Dark Side, and all the lefty keynesians are celebrating their new convert to Big Government Deficits. (Tongue in cheek warning.)

Not so fast.

David imagines a world where the demand for (central bank money + government debt) is rising over time, and the government refuses to run big enough deficits to increase the supply of government debt at the same rate as the increasing demand, and he says that this must (sooner or later) inevitably mean the central bank is unable to prevent inflation falling below target.

David's key assumption is:

"[A1] The central bank cannot forever monetize [government] debt at a rate faster than it is being issued." [added by me]

He continues:

"Assumption [A1] is relatively weak because it does permit a central bank to grow the money-to-debt ratio temporarily. It just can't do so forever.

If [A1] holds, then the endgame is clear. Eventually the growth in the money-to-debt ratio must cease. At this point, inflation must decline back to the rate implied by the fiscal anchor. The cards are stacked against the central bank in this game. Sumimasen, Nippon Ginko."

(I had to Google the last bit, which I think means "Sorry, Bank of Japan". Which is strange, because Japan is the last country I would mention if I wanted an example of a government that had low inflation because the government deficits and debt were too small.)

OK, let's take an extreme case. Suppose the federal government runs a budget surplus, for year after year, pays off the national debt completely, and refuses to ever run a deficit in future. (That's not a very sensible fiscal policy, but let that pass.)

What can the central bank do, if it wants to increase the money supply to prevent inflation falling below target, and the government issues no bonds for the central bank to monetise (buy)?

Simple. It buys something else. Where is it written that central banks can only buy central government bonds? OK, OK; there may be laws restricting what central banks can buy, but laws are made to be broken changed, if circumstances warrant. At best David would have a legal restrictions theory of lowflation, where those legal restrictions would be silly legal restrictions in the circumstances where David's theory of lowflation would apply.

Central banks could buy: provincial/state government bonds; foreign government bonds; municipal bonds; commercial bonds; commercial stocks; real assets like land and houses; etc.. Central banks can (and do) lend money to commercial banks, which is like buying commercial bank bonds (isn't that basically what the ECB system does?).

If a central bank runs out of assets to buy, and can't find anyone who wants to borrow from the central bank (sell the central bank an IOU) then yes, we've got a problem. Then, and only then, would the central bank have to give money away (helicopter money) to prevent inflation falling below target.

Paradoxically, it is precisely when the central bank is expected to create too little money, and targets too low an inflation rate, that the real demand for central bank money Md/P will be highest, and the bank is in the greatest danger of running out of assets to buy, because it already owns all the assets in the economy.

Roger Farmer wants central banks to buy stocks, not government bonds. I'm not sure whether Roger is right, but if the central bank ran out of bonds to buy, I would say go for it.

Comments

[JKH]

In your extreme case, helicopter money is the central bank's revolt against a fiscal authority that is running surpluses. Helicopter money is a marginal deficit on a consolidated basis, although the valuation is muddied when interest rates are zero. Not so muddied if the CB has to increase rates at some point and pay interest on reserves. The deficit effect then may start to show up as a negative profit contribution to Treasury.

Tangential:

Greenspan went through a phase of freaking out over the Clinton surpluses because they removed risk free asset supply to the private sector. I don't recall whether he made the same point about supply to the central bank. Probably not because that would have required such an extreme level of cumulative surplus.

[Nick Rowe]

JKH: correct. But even in my semi-extreme case, where the stock of government bonds is zero, the central bank remits its seigniorage profits to the government, which must spend or gives away those profits, unless it wants the national debt to go negative.

I think Greenspan's point *was* that the Fed would run out of federal government bonds to buy, if Clinton kept running surpluses. Small-c conservative guy, who needed a bit more imagination!

[Market Fiscalist]

In David's world where money can be created only by buying govt debt, then if the demand to hold money+govt debt is growing faster than the quantity of govt debt, eventually the CB will run out of govt debt to buy and will be forced to either give money away or miss its inflation target.

In your world where money can be created by buying anything and the qty of govt debt is shrinking, then if the demand to hold money+govt debt is growing faster than the quantity of other things the CB can buy (minus the govt budget surplus) , then eventually the CB will run out of stuff to buy and will be forced to either give money away or miss its inflation target.

While it would presumably take much longer to reach the end game in your scenario the stories seem very similar.

(BTW: The business of buying stuff for newly created money seems like a good line to be in, why do we need a govt agency to do that ?)

[JKH]

Nick,

This is the testimony from Greenspan that I recall:

http://www.federalreserve.gov/Boarddocs/testimony/2001/20010125/default.htm

The interesting thing (and I recall this) is that he doesn't refer to the Fed's balance sheet at all. Which is weird, because he wouldn't be in the habit of referring by default to a consolidated view of Treasury and the Fed either.

E.g.

"But continuing to run surpluses beyond the point at which we reach zero or near-zero federal debt brings to center stage the critical longer-term fiscal policy issue of whether the federal government should accumulate large quantities of private (more technically nonfederal) assets. At zero debt, the continuing unified budget surpluses currently projected imply a major accumulation of private assets by the federal government. This development should factor materially into the policies you and the Administration choose to pursue."

[Peter]

Buying stuff seems like weird thing to do for a CB. Why not just deposit newly created money in a government account? And if the CB needs to reduce the amount of base money they could be given the right to issue government debt and sell it.

[Frank Restly]

JKH,

"But continuing to run surpluses beyond the point at which we reach zero or near-zero federal debt brings to center stage the critical longer-term fiscal policy issue of whether the federal government should accumulate large quantities of private (more technically nonfederal) assets. At zero debt, the continuing unified budget surpluses currently projected imply a major accumulation of private assets by the federal government."

Greenspan assumes that every tax dollar that the federal government takes in must be used to a. extinguish a debt, b. buy some good. Here Greenspan lack imagination. If the central bank can be a net creditor to the government then it can surely be a debtor to the government as well.

The federal government could loan the surplus back to the central bank.

[Nick Rowe]

Peter: that's no different in substance from what happens. Except the government gives the CB an interest-paying IOU for the money (but then the CB gives that interest straight back to the government, after subtracting its admin costs). Except it is taboo for the CB to lend directly to the government, in some countries, so the govt sells an IOU to a third party, who then sells it to the CB, which gets around the taboo.

[David Andolfatto]

Nick,

I replied to your comment at my blog, but I repeat here for the benefit of your readers. Thanks!

I appreciate what you are saying, Nick, but you did not read [A1] correctly. [A1] does in fact permit the central bank to monetize assets other than government securities. It merely states that in the long-run, the money-to-government debt ratio is bounded from above. An alternative specification for [A1] is to state that the central bank's balance sheet has an upper bound of some sort. IF such a bound exists, THEN my conclusions hold true.

The upper bound I have in mind is determined by political factors. If these real-world limitations were removed, then of course what you say is true. But of course, if you want to live in imaginary worlds, then why not imagine the Fed having the power to engage in direct helicopter drops? In reality, the Fed is not permitted to. And in reality, I think people know that there are bounds to how large a central bank balance sheet can grow. It is the knowledge of this bound that makes raising inflation in a liquidity trap very difficult.

[David Andolfatto]

"(I had to Google the last bit, which I think means "Sorry, Bank of Japan". Which is strange, because Japan is the last country I would mention if I wanted an example of a government that had low inflation because the government deficits and debt were too small.)"

Nick -- what is "too small?" We can observe the supply, and it looks "big." But we also need to know how big the demand is. We can't "see" demand directly. But we can infer it from the price of JGBs. The yield on these instruments is close to zero. This tells me that supply is NOT big relative to demand. So exactly how swapping zero-interest Yen for zero-interest JGBs is supposed to generate inflation, I have no idea. Unless you expect the BOJ to monetize everything in sight. Which I don't believe they will. Evidently, the market thinks the same way.

[David Andolfatto]

"Simple. It buys something else. Where is it written that central banks can only buy central government bonds? OK, OK; there may be laws restricting what central banks can buy, but laws are made to be broken changed, if circumstances warrant. At best David would have a legal restrictions theory of lowflation, where those legal restrictions would be silly legal restrictions in the circumstances where David's theory of lowflation would apply."

Yes, we could view it as a legal restrictions theory. The conflicts between central banks, treasuries, and legislative branches are, I believe, CENTRAL to understanding/interpreting monetary phenomena. These bodies often have conflicting objectives but are, nevertheless linked, via a consolidated budget constraint.

And would not go so far as to say legal restrictions are "silly." From a systems perspective, we may very well want to restrict a central bank in a particular way. In the U.S., the Fed is prevented from engaging in helicopter drops. Do you really want this unelected body to start distributing money willy-nilly? That's the job of Congress! :)

[SvN]

Silly closed-economy macroeconomists! Why not just have the central bank buy foreign currency (and avoid the need to change those pesky law-things)?

[Too Much Fed]

JKH, if I'm remembering correctly, you once told me that the gov't would not allow the central bank to go insolvent (or something close to that).

Nick seems to think it is no big deal if the central bank goes insolvent.

Which is it?

Also, can the fed set the fed funds rate if the monetary base is zero?

[Too Much Fed]

"Why can't central banks monetise something else?"

The gov't does not want the central bank losing "money"/going insolvent.

"OK, let's take an extreme case. Suppose the federal government runs a budget surplus, for year after year, pays off the national debt completely, and refuses to ever run a deficit in future. (That's not a very sensible fiscal policy, but let that pass.)"

I think that is a very sensible fiscal policy.

[Too Much Fed]

"Central banks can (and do) lend money to commercial banks, which is like buying commercial bank bonds (isn't that basically what the ECB system does?)."

I would say it is more like buying commercial bank demand deposits, not commercial bank bonds. Those demand deposits are supposed to be risk free.

JKH, doesn't the ECB work by "buying" commercial bank demand deposits and not "buying" gov't debt?

[Nick Rowe]

David: "[A1] merely states that in the long-run, the money-to-government debt ratio is bounded from above."

I don't get it. Suppose government debt is zero. If the central bank owns some commercial bonds (or gold, or land, or old masters, or whatever), equal in value to the money it issues, the money/government debt ratio is infinite, because the denominator is zero.

"An alternative specification for [A1] is to state that the central bank's balance sheet has an upper bound of some sort."

The only upper bound I can think of is when the central bank runs out of assets to buy. And if M/P is a decreasing function of expected inflation (for standard opportunity cost reasons, assuming CB money pays 0% nominal interest), that could only happen if the central bank set too low an inflation target.

In other words, if the central bank sets too low an inflation target, we end up in communism, where the government-owned central bank owns all the assets in the economy. (I always said that Milton Friedman's Optimum Quantity of Money was a commie plot.)

On the Japan thing: sure, we can't really define "small" or "large" without observing demand too. But it's still a bit strange to cite the case where the supply is largest to show the effects of too small a supply.

"These bodies often have conflicting objectives but are, nevertheless linked, via a consolidated budget constraint."

Suppose, by law, the Bank of Canada had to give all its seigniorage profits to the United Way, rather than to the Federal government. Would we develop a United Way theory of the price level?

[Majromax]

@SvN:

> Silly closed-economy macroeconomists! Why not just have the central bank buy foreign currency (and avoid the need to change those pesky law-things)?

That only works if there are enough governments out there to monetize debt in a "traditional" way. If the central bank of a surplus-running country uses foreign exchange to set monetary policy, then that means that other nations must either tighten (if their central banks set quantity of money and do not respond) or accommodate by taking an action that would otherwise be "easing."

[baconbacon]

@ Nick- not infinite, undefined (still doesn't mean there is an upper bound).

@ David A- tried to reply on your blog, didn't appear, but your position holds no water. From a legal standpoint what prevents the Fed from paying negative interest rates? If they can pay negative interest rates on a bond there is no theoretical limit on how much money they can offer for that bond. They could pay -1% on a $100 bond and only receive 99$ when it matures, or they could pay -101% on a $100 bond and owe the issuer $101 when it matures. With infinite dollar creating power (something they have near enough to in the digital age) the fed can set a price floor in terms of dollars for any asset they choose. If they fear that the government won't sped that money they can turn to other assets- which they have purchased before (gold, MBS) and buy from the public.

[Max]

If there's no zero bound, then there's no *lower* limit on the size of the central bank's balance sheet. Instead of inflating by increasing the quantity of base money, the CB can inflate by increasing the ratio of privately produced money to central bank money, without limit.

[Frank Restly]

Nick,

Why does the central bank need anything else to monetize? Even with the various legal arrangements, what prevents the central bank from setting the price it will pay for government bonds above what the bond is actually worth in terms of principle and interest payments?

[David Andolfatto]

Nick,

I don't get it. Suppose government debt is zero. If the central bank owns some commercial bonds (or gold, or land, or old masters, or whatever), equal in value to the money it issues, the money/government debt ratio is infinite, because the denominator is zero.

If M <= a*D and D=0, then my restriction implies M=0 (assuming M >=0). Maybe you think this is unreasonable. That's fine, we can agree on a more reasonable restriction. You seem to be saying, however, that there are no restrictions to how large a central bank's balance might grow. We can agree to disagree here.

"An alternative specification for [A1] is to state that the central bank's balance sheet has an upper bound of some sort."

The only upper bound I can think of is when the central bank runs out of assets to buy. And if M/P is a decreasing function of expected inflation (for standard opportunity cost reasons, assuming CB money pays 0% nominal interest), that could only happen if the central bank set too low an inflation target.

In other words, if the central bank sets too low an inflation target, we end up in communism, where the government-owned central bank owns all the assets in the economy. (I always said that Milton Friedman's Optimum Quantity of Money was a commie plot.)

Why do you even bother to impose such an upper bound? Why not just permit the central bank to perform helicopter drops? Then there is no upper bound.

On the Japan thing: sure, we can't really define "small" or "large" without observing demand too. But it's still a bit strange to cite the case where the supply is largest to show the effects of too small a supply.

"Strange" is different that saying it is "wrong." :)

"These bodies often have conflicting objectives but are, nevertheless linked, via a consolidated budget constraint."

Suppose, by law, the Bank of Canada had to give all its seigniorage profits to the United Way, rather than to the Federal government. Would we develop a United Way theory of the price level?

Nick, from the government budget constraint: G + RB = T - Z + B' + (M'-M)
Using seigniorage to finance the United Way is embedded in the transfer term Z.
I'm not sure I know what you're talking about here.

[Brian Romanchuk]

Marc Lavoie's recent post-Keynesian text has a section on "overdraft economies", I believe that there is a whole literature on the subject that it refers to. Central banks that are forced to only buy government bonds are largely limited to post-World War II "Anglo" governments. Meanwhile, Minsky's complaint about Monetarism is that it was narrowly focused on the mathematics of the monetary base, and ignored the role of the central bank in shaping the allocation of credit. When the Fed relied upon discounting, it knew what was going on within the banking system. The Fed in 2008 was entirely in the dark.

If the central bank starts purchasing private sector assets, it needs to have a lot of staff that can assess credit quality. Otherwise, the whole organization would be shut down by an enraged public during a downturn, and it would return to being under the control of the fiscal side of government (Treasury/MoF).

[CMA]

Money is already monetized. Just place it into circulation. No need to buy anything.

[Nick Rowe]

David: I didn't explain myself very clearly on the United Way thing. Let me try again.

The only link between (an independent) central bank's budget constraint and the rest of the government's budget constraint is that the seigniorage profits from the central bank are given to the government. Suppose instead that the central bank gave its seigniorage profits to the United Way, so the central bank's budget constraint is linked to the United Way's budget constraint. Would we say that the price level is determined by the United Way's revenue and expenditures? I don't think we would.

Brian: we can imagine a world (like in the New Keynesian model) where people can have both positive or negative balances in their chequing accounts at the central bank. And where the positive and negative balances exactly cancel out, so the central bank has no assets or liabilites except those negative and positive balances, and where the interest paid on positive balances equals the interest charged on negative balances, so the central bank earns zero profits (ignore admin costs).

But that's not close to the world we live in, and is very different from David's model.

[Brian Romanchuk]

Nick, I did not completely follow your response. The central bank always needs to have net financial assets if there is currency (notes and coins) outstanding (as they are a liability). Meanwhile, banks might need reserves under some banking system rules. This means that the monetary base is a positive number.

In "overdraft" economies, the central bank lends to private banks, instead of buying government bonds. This was the practice pretty much everywhere pre-WWII, and for the ECB (before they started QE).

Therefore, in such an operating environment, it would be straightforward for the monetary base to be positive and the central government could have no debt outstanding. I just wanted to point out there's been a fair amount of analysis about such monetary systems in the post-Keynesian literature. I have not looked into David's model, I was just responding to what you wrote.

[JKH]

Too much F.:

close on the ECB

See Romanchuck's comments above

[rsj]

But my question is when the Central bank takes control of all of these (formerly) private sector businesses by buying up their stock, does it:

1) forbid its employees from laying off workers, say, to prevent a macro-economic downturn
2) go completely hands off and let the managers do whatever they want, irrespective of the owners' wishes, including letting them set their own bonus pay to whatever they want?
3) do the employees of the businesses bought by the federal reserve become government employees?

And when the Central Bank purchases land and becomes a landlord, does it

1) Forego from raising rents as economic stimulus?
2) Kick out tenants who, say, discriminate or do other unsavory things?
3) Allow tenants to sue it as a landlord, even though people are generally not allowed to sue the government as they are allowed to sue private actors?

[rsj]

And of course, the most important question is once the Central Bank buys up all the private businesses, how does it go about setting price changes for the firms' output? You know, the central bank can really effectively set the price level this way.

[David Andolfatto]

David: I didn't explain myself very clearly on the United Way thing. Let me try again.

The only link between (an independent) central bank's budget constraint and the rest of the government's budget constraint is that the seigniorage profits from the central bank are given to the government. Suppose instead that the central bank gave its seigniorage profits to the United Way, so the central bank's budget constraint is linked to the United Way's budget constraint. Would we say that the price level is determined by the United Way's revenue and expenditures? I don't think we would.

Nick, let me again appeal to the government's consolidated budget constraint: G + RB = T - Z + B' + (M'-M), where T denotes tax revenue and Z denotes transfers. The other terms are self-explanatory, I think.

Now, suppose seigniorage is used to finance transfers to the United Way. In the specification above, we have Z = M'-M.

In this case, it would indeed be appropriate to say that transfers to the United Way determines inflation (at least, away from the ZLB).

In short, I still don't see your point.

Let's try to settle on the things we might agree on. First, the political economy of raising and lowering inflation (the effect it has on the debt-service cost for the government) implies an asymmetry in the ease with which inflation is increased or lowered. Yes or no? Second, we can agree that IF there is some limitation on the size of a central bank's balance sheet, whether or not this restriction is linked to government debt, THEN there are limits to how a central bank may raise inflation, especially in a liquidity trap. Third, if we gave the central bank complete power, then yes, of course, helicopter drops of money in sufficient quantity will increase the price level.

How much of the above can we agree on?

[Scott Sumner]

A central bank can create higher inflation by setting a higher inflation target.

They say they don't want to do that. In that case they can create inflation by buying as much stuff as it takes to create on target inflation.

They say they don't want to do that either. So precisely what's the problem?

If a fat man tells you he doesn't want to exercise and doesn't want to diet, the only sensible response is "enjoy being fat."

PS. Maybe if central banks in Japan, Sweden, the eurozone and soon perhaps the US weren't repeatedly RAISING interest rates at time when NGDP growth is far below trend, they might have an easier time hitting their inflation targets.

[David Andolfatto]

Scott,

You say that a central bank can create higher inflation by setting a higher inflation target.
Well, the inflation targets for a lot of central banks are presently higher than their respective inflation rates.
So, if what you say is true, then why is inflation persistently missing the target rate from below?

Surely your answer cannot be "set the inflation target even higher"?

You may say "the can buy more stuff at a faster rate." Sure, if they are permitted to. Suppose the Fed bought all the outstanding treasury debt and more, paying interest on it all, of course. Imagine the howls from Congress complaining how the Fed is paying foreign banks to hold "idle" reserves and how this takes away from Fed remittances to the Treasury.

It's all fine and good for you and Nick to simply assume helicopter drops in a political vacuum. But that's not how the world works, I'm afraid. These political constraints place limits on Fed behavior. And I think financial markets at least implicitly recognize these limits.

[Nick Rowe]

David: by symmetry, let me appeal to the United Way's + Bank of Canada's consolidated budget constraint: G + RB = T - Z + (B'-B) + (M'-M), where T denotes regular people's donations to the United Way, Z denotes the United Way's transfers of cash to the needy, G denotes the United Way's in kind transfers of goods to the needy, B'-B denotes United Way borrowing, rB the United Way's payment of interest, and M'-M denotes base money creation.

"First, the political economy of raising and lowering inflation (the effect it has on the debt-service cost for the government) implies an asymmetry in the ease with which inflation is increased or lowered. Yes or no?"

Yes, maybe. But you can get the same sort of asymmetry with any large borrower (like the banks), and the Mrs Thatcher vs the unions game has very similar properties (if the unions keep on raising nominal wages, will Mrs Thatcher be forced to turn away from trying to cut inflation?). Yes you are right that the endgame may matter in a game of chicken, but the Department of Finance may not be the only player on the other side of the game.

"Second, we can agree that IF there is some limitation on the size of a central bank's balance sheet, whether or not this restriction is linked to government debt, THEN there are limits to how a central bank may raise inflation, especially in a liquidity trap."

It sort of works the other way. In equilibrium, M/P is a *negative* function of inflation, so an upper limit on M/P puts a *lower* bound on inflation. But that equilibrium is only sustained by the *threat* of the central bank to increase M/P if inflation falls below target, and an upper limit on M/P may make that threat non-credible. (As is standard in game theory, what is or is not a subgame perfect Equilibrium depends on players' expectations about what would happen off the equilibrium path.)

[David Andolfatto]

Nick,

You have just relabeled the "government" as the "United Way." In this case, my answer is the same: yes, the United Way (government) ultimately limits the long-run inflation rate if my [A1] condition holds.

In response to your claim that the Dept. of Finance may not be the only player on the other side of the game, I agree. We can imagine all sorts of complicated games being played in reality. If I recall, in Wallace's "Interpreting the Reagan Deficits," he considered three players: the central bank, the treasury, and the legislative branch of government.

And yes, an upper limit on M/P places a lower bound on inflation. But I'm not sure why you would want to impose an upper limit on *real* balances. To me, the lower bound on inflation is the real (safe) rate of return on competing interest-bearing assets. That's why we've never seen any deflation spirals. In any case, IF there is an upper limit on M/P, then I agree with your subsequent reasoning.

Btw, Steve Williamson hates my post (and my little OLG paper supporting the claims made there in). He views the OLG model as "odd" and "special." Evidently, he thinks that the results are not general. Personally, I disagree. And anyway, Steve believes that the way to increase inflation is for the Fed to immediately raise its policy rate by 200 basis points. The asset market (Fisher equation) will evidently take care of the rest. Moreover, he tells me that he convinced you of this fact. Talk about going over to the Dark Side! ;)

[Jussi]

If the CB announce today that it will be buying all the asset in the closed economy. And lets assume for simplicity that all the private assets tomorrow will be confiscated and the socialized assets will produce the same amount of products. What would be the price level tomorrow?

I have hard time to imagine the price level would rise along the base money. If the assets are still producing the same amount of products going forward (they probably are not) and people has the same wealth/budget constraint even if in different form. Also I think asset values would not be greatly affected. E.g. would the last asset sold be more valuable than the first one, why?

[Andy Harless]

David:

"So, if what you say is true, then why is inflation persistently missing the target rate from below?

Surely your answer cannot be "set the inflation target even higher"?

Why not?

The old inflation target may not be consistent with equilibrium (i.e., the equilibrium real rate may be lower than the negative of the old inflation target). Some inflation rate will be high enough to be consistent with equilibrium.

[Nick Rowe]

David: "And anyway, Steve believes that the way to increase inflation is for the Fed to immediately raise its policy rate by 200 basis points. The asset market (Fisher equation) will evidently take care of the rest. Moreover, he tells me that he convinced you of this fact."

AAAAAAAARRRRRGGGGGGGHHHHHH!!!!!!!!!!

Nope. That reverses causality. If the Fed increases the expected inflation rate by 200 basis points, by (say) increasing the expected money growth rate by 200 basis points, the Fisher equation tells us that that will cause the Fed to raise the policy rate by (roughly) 200 basis points. See my collective speed limit game for an explanation of the distinction.

(Or were you teasing me? I always fall for it, hook line and sinker.)

[J.V. Dubois]

"It's all fine and good for you and Nick to simply assume helicopter drops in a political vacuum. But that's not how the world works, I'm afraid. These political constraints place limits on Fed behavior. And I think financial markets at least implicitly recognize these limits."

What a strange thing to say. If you boil it down you can say this about everything. One example: "Yes, it would be wonderful to have a little bit more economical freedom in North Korea, alas political constrains prevent korean policymakers to move in this way so economists should rather help them with new ideas to increase efficiency of slave labor"

[Nick Rowe]

David: "To me, the lower bound on inflation is the real (safe) rate of return on competing interest-bearing assets. That's why we've never seen any deflation spirals."

That, in my view, makes exactly the same "sign wars" mistake that I've been arguing about with Steve.

That is the lower bound on *equilibrium* inflation, *sans* deflationary spirals.

This I think is my best post on deflationary spirals. It explains how I see the difference between the equilibrium and out of equilibrium thought-experiments.

[Market Fiscalist]

Imagine a world where:

- The stock of wealth is fixed and generates a fixed steam of output
- real interest rates and velocity of money are fixed
- a change in the rate of increase of the money supply leads to immediate adjustments to nominal interest rates and the inflation rate

1. Assume an annual govt deficit funded by bond sales and with no asset swaps between money and bonds. This would
- be unsustainable as eventually the govt would have to pay more than the entire income stream in interest payments
- even if the govt tried to finance interest payments for the deficits by new money creation then the deficit would still be unsustainable since nominal interest rates would immediately adjust to changes in money supply.

2. Assume asset swaps by a CB between money and other forms of wealth but no govt deficit. This would be
- Be unsustainable since eventually the whole stock of wealth would be owned by the CB (remember the stock of wealth is fixed)

So both bond financed deficits , and growth in the money supply via asset swaps are unsustainable in the long term on there own.

3. However if the govt just funds spending by printing money then
- This is sustainable, You just get higher inflation and nominal interest rates and some resources get diverted to the the govt

4. It then turns out that bond financed deficits by the govt plus the CB buying all the bonds up is functionally exactly the same as 3 !

So on balance I think Dave A. is right and (based on very simple assumptions) you need net new money creation relative to wealth to generate both sustainable inflation and govt deficit spending. And it does not matter if this net new money creation goes to the govt or others.

(If the stock of wealth is increasing over time then I think both govt deficits funded by bonds , and CB creation of money by swaps for other forms of wealth will be sustainable to some degree, but only to the extent that they are not inflationary. Likewise if there are changes in velocity and/or lags in the adjustments process for interest rates and inflation results may chnage).

[Majromax]

@Fiscalist:

> be unsustainable as eventually the govt would have to pay more than the entire income stream in interest payments

This is unsurprising. Your hypothetical involves no real-terms growth, which means that any liability must not grow without bound, in real-terms. We don't need money to know that a government deficit is unsustainable.

> 2. Assume asset swaps by a CB between money and other forms of wealth but no govt deficit. This would be
- Be unsustainable since eventually the whole stock of wealth would be owned by the CB (remember the stock of wealth is fixed)

Not necessarily. Consider asset swaps via CB repurchase agreements, where the money supply is increased by using wealth as collateral for a loan. This creates a "private-sector" bond of well-defined value, but in essentially unlimited supply.

The mistake here is one of units: the Central Bank finances a flow of money (to cause inflation) via accumulating a finite stock.

You also have left out the problem of real-returns on wealth. If the central bank sells their trees' fruit on the market, then that reduces the money stock. If they give the fruit to the government, eventually the government's entire budget constraint will be supplied by seigniorage fruit and then we're still left with a surplus. If they simply leave the fruit to rot, this is unconscionable. If they give the fruit away, we're back to a helicopter drop.

[Alex Godofsky]

Nick:

I'm fairly convinced by the counterpoint that if the CB is buying private assets, that's "fiscal policy". Your CB is rebelling against the fiscal authority by usurping some of that authority. And, hey, the new policy might be a good idea, but people would have a right to say "hey, why are we spending this money on financial assets rather than bridges?"

However, I don't think buying other assets is the only way out. By paying interest on reserves the central bank can retain control of interest rates (although it is still bound-ish by the ZLB), and so it should still have full control over nominal variables as long as hitting its target doesn't require below-zero interest rates for all time.

Only in that last case, where a liquidity trap is expected to persist forever, does it need to do something different.

[Market Fiscalist]

MajroMax

"The mistake here is one of units: the Central Bank finances a flow of money (to cause inflation) via accumulating a finite stock."
I'm not following that.

Assume a fixed stock of orchards that produce fruit and the CB wants to generate inflation by buying assets for new money. It buys orchards. These orchards generate fruit that the CB can give away, but that will have no effect on inflation. If the CB wants inflation over time, it will have to keep buying stuff and eventually it will run out. It could buy fruit I suppose, but they will decay and it will have no assets to back the money.

"Consider asset swaps via CB repurchase agreements, where the money supply is increased by using wealth as collateral for a loan."
When the loan is repaid the money is flows back - so the net effect on inflation is neutral.

[David Andolfatto]

Nick,

I was teasing you about Steve Williamson, sorry :)

Deflationary spirals make no sense to me. As the price level declines to zero, the value of real money balances will approach infinity, enabling anyone in possession of a dollar to purchase the entire GDP, and more. So deflationary spirals are not rational equilibria. There may be a non-rational deflationary spiral that lasts for a finite period of time, but then it will end. On the other hand, rational hyperinflations pose no theoretical problem.

@ Andy Harless, you ask "why not" just adopt a higher inflation target? If the high inflation target is not working, what makes you think an even higher one will? I don't get it.

@ JV Dubois, who writes What a strange thing to say. If you boil it down you can say this about everything. One example: "Yes, it would be wonderful to have a little bit more economical freedom in North Korea, alas political constrains prevent korean policymakers to move in this way so economists should rather help them with new ideas to increase efficiency of slave labor"

It is not at all silly for me to push back at assertions that "the Fed should do X" where X is illegal. If you want the Fed to do X, then say that you want Congress to amend the FRA to permit X. It makes a difference, JV.

[baconbacon]

I must be missing something because this conversation is still going on.

A1 is clearly not true. The Fed has bought assets that are not US Treasuries before and carried them on their balance sheet without anyone being arressted or the Fed being forced to sell and promise never to do it again. Further there is no law that would require the Fed pay face value for an asset. Even if there was only $1 in Treasuries availible the Fed could buy it at -1,000,000,000,000% interest. The Fed is not in anyway constrained in the amount of money it can put in circulation by fiscal decision makers.

[Frank Restly]

David,

"Deflationary spirals make no sense to me. As the price level declines to zero, the value of real money balances will approach infinity, enabling anyone in possession of a dollar to purchase the entire GDP, and more."

That presumes a limit to real GDP. Science fiction like, imagine running a nuclear reactor in reverse - throw in a couple of megajoules of energy and out pops a toaster or a thousand toasters or a million toasters. It also misses how technological advancement is treated when calculating the price level. The price of a "computer" can stay the same, but because each iteration of computer does more we value that computer more than a computer from 20 years ago.

M. King Hubbert (who later coined the phrase "Peak Oil") had this to say in 1936:

"It cannot be emphasized too strongly that the [productivity, output and employment] trends we are describing are long-time trends and were thoroughly evident prior to 1929. These trends are in nowise the result of the present depression, nor are they the result of the World War. On the contrary, the present depression is a collapse resulting from these long-term trends."

Is there some theoretical or real limit to how fast productivity (and thus real GDP) can grow?
How should a central bank handle growing real GDP and deflation - or is such a situation out of the central bank's purview?

[Frank Restly]

David,

Real GDP rises by 10% annually
Prices fall by 8% annually

The value of real money balances does not approach infinity because the quantity of goods is growing faster than the price level is falling.

[Scott Sumner]

David, You said:

"Surely your answer cannot be "set the inflation target even higher"?"

That absolutely would be the answer if the problem was central banks could not hit their inflation target because of the zero bound problem. If that truly were the problem, then you set the inflation target high enough so that nominal interest rates never fell to the zero bound, as in say Australia, or India, or Brazil.

Do I favor a higher inflation target? No, because I think it's nonsense to claim that central banks can't hit their inflation targets right now. They can if they try, but they usually don't try. For instance, the Fed has announced it will probably raise rates later this year. That is NOT something a central bank does when it is trying but failing to boost inflation, it's what you do when you are worried that AD is running too hot. Many of the other central banks have already raised rates, despite low inflation.

Another option is level targeting, which in my view is far superior to growth rate targeting, especially at the zero bound.

You said:

"It's all fine and good for you and Nick to simply assume helicopter drops"

I've written about 100 posts saying helicopter drops are the most stupid idea ever contemplated, and not one in favor of them. How am I suddenly viewed as being in favor of them?

As for the unpopularity of paying foreign banks to hold reserves, I've always been 100% opposed to IOR. It should be zero or negative, but never positive.

You said:

"Steve Williamson hates my post (and my little OLG paper supporting the claims made there in). He views the OLG model as "odd" and "special." Evidently, he thinks that the results are not general. Personally, I disagree. And anyway, Steve believes that the way to increase inflation is for the Fed to immediately raise its policy rate by 200 basis points."

So can I assume that Steve thinks asset prices (stocks, commodities, real estate, etc) would rise on a sudden unexpected announcement of a 200 basis point increase in the Fed's interest rate target? Because that would not happen. If it were unexpected, it would be a big deflationary shock to the asset markets. Ditto for TIPS spreads.

Regarding deflationary spirals, it's politics that prevents them. Hyperinflation can occur out of desperation, but deflation hurts a government's finances, and hurts the public, so no government ever does the sort of policy that produces a deflationary spiral. But the Williamson policy you mentioned would produce a deflationary spiral, given enough time, if anyone was silly enough to do it. The ECB tried just a 1/2% increase in 2011, and fell into deflation. They had to quickly reverse course.

[Frank Restly]

Scott,

"...but deflation hurts a government's finances..."

??? Both a government's liabilities (bonds) and assets (tax revenue) are denominated in nominal dollars. Deflation only hurts the private sector because a fall in the value of real assets owned by someone in the private sector can result in bankruptcy if they are borrowed against. Governments do not have that problem - they don't borrow against real assets, only nominal tax revenue.

[David Andolfatto]

Scott,

I'm sorry for ascribing helicopter drops to you. I meant to ascribe whatever powers you assume the Fed to have outside its mandate as prescribed in the Federal Reserve Act 1913. In my view, one cannot just "will" the inflation rate higher by announcing a higher inflation target, especially at the ZLB. Fiscal support is needed. This is just the algebra of the consolidated government budget constraint, which has to hold in any sensible model (as it does in reality).

If you read the paper I link to in my post, everything I say in no way depends on the ZLB. (My theory could, of course, not be the correct one to use, but that is a different matter.)

I don't want to speak too much on "what Steve believes" as I'm still trying to figure it out. His statements appear to be claims about what must happen in the long-run if the Fed wants to have a higher interest rate. He admits that in the short-run, monetary non-neutralities (not sticky prices) would cause considerable pain.

Btw, why are these comments suddenly all italicized?

[Scott Sumner]

David, I do understand that if the central bank is limited to purchasing Treasury debt (and related assets like MBSs), then there may be a limit as to how much money can be created, as a share of GDP. But that's actually a much bigger problem at low rates than high inflation rates. When the inflation target is high enough to create positive interest rates, the base tends to be around 5% of GDP. Total eligible debt they can buy is far more than 100% of GDP. So while that issue might be important in theory, it's simply not a constraint for real world central banks like the Fed.

The bigger problem is when rates are near zero, then the base to GDP ratio may soar much higher, as we've seen in the US and Japan. In that case you could, in theory, run out of assets to buy. (Although still very unlikely in my view.) But at positive interest rates that's not a problem. Our national debt was relatively low during the Great Inflation, and the Fed had no trouble generating 11% NGDP growth rates during the 1970s, and equally high nominal interest rates.

It's interesting that you think the Fed might be unable to raise inflation if it wanted to. That's obviously not the Fed's view. Why do you think they are confident they could target inflation at 3% or 4% if they wanted to? Why do you think they plan to soon raise interest rates?

Steve is right about the long run equilibrium, but you get there by first lowering rates, letting NGDP growth rates rise, and then raising them.

I don't like the italics, makes me look like an angry crank. :)

[anon]

> It merely states that in the long-run, the money-to-government debt ratio is bounded from above. An alternative specification for [A1] is to state that the central bank's balance sheet has an upper bound of some sort. IF such a bound exists, THEN my conclusions hold true.

Do you really have a fiat-money system in the usual sense if M is constrained from above _and_ the constraint is binding? Most economists would agree that a monetary system with fixed M calls for different policies, either to shift the constraint and/or to affect V instead. (Such policies need not even be 'fiscal support' in the usual Keynesian sense; for instance, investment subsidies may be more efficient.) However, one could think of many cases where these policies would only matter out of equilibrium, provided that the NGDP target is sufficiently high. Admittedly, this means we _are_ in trouble if potential RGDP growth is low, real interest rates are low and we want to target a low inflation rate. But that's not the case for many countries (e.g. Australia); it's not an unescapable constraint,

[David Andolfatto]

Scott,

What makes you think that "the Fed" is "confident" it can target inflation at 3% or 4%?

*Some* FOMC members strongly believe in the Phillips curve. According to this religion, if the unemployment rate continues to fall, inflation must rise. (Never mind that the PC appears to slope in all different directions.)

Others appear "confident" that inflation will revert back to target because...well, because it always has in the past.

It was nice meeting you in St. Louis the other day. You owe me a lunch, remember. :)

[Market Fiscalist]

@David,

"In my view, one cannot just "will" the inflation rate higher by announcing a higher inflation target, especially at the ZLB. Fiscal support is needed. This is just the algebra of the consolidated government budget constraint, which has to hold in any sensible model (as it does in reality)."

You have persuaded me that in the long run an inflation target not supported by appropriate fiscal policy would be unsustainable.

However I'm not seeing how this affects short term monetary policy. In the short term it is assets swaps that create new money that drive inflation, and if govt borrowing doesn't match this then the money/govt debt ratio goes up but that has little or no immediate economic effect.

I do not think people right now are thinking "the fed can't hit its inflation target because fiscal policy is out of line with the target and its balance sheet would go too big", but rather "the fed can't hit its inflation target right now because of other higher priority goals it has that will prevent it doing what is needed to do so". The reason that the money/govt debt ratio is currently so high is probably because of unusually high demand to hold money. A higher inflation target would (logically) reduce this demand and might actually lead to a lower not higher ratio.

[David Andolfatto]

@Market Fiscalist

In the short-run, inflation is determined (in my model) by both the growth rate in the supply of nominal debt and the growth rate in the real demand for that debt (in a more general open economy model, this demand growth could be coming from foreign sources, generating trade deficits, which is what we are in fact witnessing in the U.S.).

So, if fiscal authority grows nominal debt at some (more or less) fixed rate, then disinflation could be the byproduct in an elevated growth in the real demand for government debt.

In a liquidity trap scenario, no amount of money-bond swaps is going to matter: these operations in no way affect how rapidly the total supply of nominal debt is growing. The central bank can "wish" whatever inflation target it wants. It's not going to get it if the money-to-debt ratio is bounded (for whatever reason at all).

That's my story, and I'm sticking to it! :)

[Philo]

@ David Andolfatto

"'Strange' is different [from] saying it is 'wrong'. :)" Granted; the point is not that your reference to Japan was (implicitly) a *false statement*, rather that it was *rhetorically inappropriate*.

[Philo]

@ Scott Sumner:

"I don't like the italics, makes me look like an angry crank. :)"

No, even in italics you come across as a mellow, genial crank! 

[Market Fiscalist]

@David,

If demand for debt is assumed to stay constant then in your model, in the short-run,inflation is determined purely the growth rate in the supply of nominal debt.

Are you saying that this is the case irrespective of how much of that debt is monetized ? So if the govt sells loads of bonds and spends the money raised it will be inflationary even if the CB monetized none of the newly created debt ?

Or do you mean that when the CB does monetize debt it is only inflationary if accompanied by a corresponding increase in total debt ?

(second one makes sense to me as a long term effect)

[David Andolfatto]

@ Market Fiscalist

See here: http://www.sfu.ca/~dandolfa/coordination_games.pdf

[LK Beland]

Does't the Switzerland National Bank already buy all kinds of assets, including assets on the stock market?

[Bert Schlitz]

What a bunch of bogus junk. Central banks are given access through assets allocation. They don't really "buy" anything. They can remove "dirty objects" like toxic MBS markets don't want to deal with or need to leave their balance sheets so they can become liquid, that is it and the policy rate. They can do the same thing with government debt if needed, but that is basically the government saying it because they backstop these 12 banks.

Saying there is a current "depression" is silly. There is no depression. With the passing of the Boomers demographically and the end result of the last innovation wave, the velocity of money is slowing down and growth is no longer needed or wanted frankly. The economy is already built up. A inflation "target" at 2% isn't a midrange goal, but the likely level when unemployments hits its crescendo and the next cyclical recession is nearing.

[rsj]

"Does't the Switzerland National Bank already buy all kinds of assets, including assets on the stock market?"

Many nations decide, for strategic reasons, to hold foreign bonds or other assets, and the agent for these purchases is the central bank, whereas the owner of the assets is the treasury. In this sense, the central bank acts as a broker for the Treasury in the same way that your own personal broker executes trades on your behalf for assets in your account, or in the way that your own personal bank might have a vault in which you can store some of the gold that you own.

But because the central bank holds these assets and executes the trade does not mean that the central bank *owns* them, all such assets are owned by the Treasury, not the bank. Actually *all* of the central banks assets are owned by the general government because the treasury owns the central bank outright, and so it is responsible for covering the bank's losses -- as swiss taxpayers are now finding out, or as British taxpayers found out when Soros "broke the Bank of England".

People forget that the central bank is an intermediary for the general government. The general government gives some leeway for the central bank to make independent purchases of government debt, or of other types of debt specified by statue, but the central bank is not an independent actor here, it is a broker or trustee, and all of its assets are owned by the general government, even if the central bank is given a prescribed form of independence vis-a-vis interest rate policy.

[Scott Sumner]

David, The Fed has produced an average of 2% inflation since 1990. That doesn't just happen by accident, and it was not done via fiscal policy. So they can do it. It's actually easier to get 3% or 4% inflation than 2%, because there is less of a zero bound problem. When Bernanke's been asked about a higher target, he doesn't say it's impossible, he says it's unwise. I don't recall any Fed official ever saying the target rate could not have been set at 3% or 4%. Volcker seemed able to target inflation at 4% from 1982 to 1990. Academic economists believe the Fed could raise its inflation target, they disagree about the wisdom of doing so. Many recommend this option (Blanchard, Rogoff, Krugman, etc.) I suppose its possible that a few people at the Fed believe it's impossible to target a higher trend rate of inflation, but have they written any papers claiming that view, and explaining why?

And again, the Fed would not be contemplating an increase in their target rate if they didn't think they had the tools to keep inflation at 2%.

I'm not a fan of Phillips Curve analysis, so I won't comment on those peculiar views. I do not believe inflation is caused by economic growth.

And yes, I do owe you a lunch. Get the Fed to set up a NGDP futures market and I'll buy you 100 lunches. :)

[Majromax]

@Scott Sumner:

> Academic economists believe the Fed could raise its inflation target, they disagree about the wisdom of doing so. Many recommend this option (Blanchard, Rogoff, Krugman, etc.) I suppose its possible that a few people at the Fed believe it's impossible to target a higher trend rate of inflation, but have they written any papers claiming that view, and explaining why?

I think this gets to an interesting question: what makes a central bank's target credible?

The efficacy of a higher target rate requires the market to act with the expectation that the target will be reached. David above seems to think that the Fed cannot, within its legal tools, reach a new, higher target rate over a reasonable period, in part because it is having difficulty reaching the 2%-ish target now.

This leads into an interesting thought experiment. If official central bank communication was limited to "we have taken actions to assist in reaching our inflation target" and the actual acts were unobservable, how could Scott Sumner or Nick Rowe convince everybody that they were in charge of the central bank rather than the Fed or Bank of Canada?

(More glibly: "We've secretly replaced the Bank of Canada with Folgers Crystals. Let's see if anybody notices the difference!")

[Too Much Fed]

JKH, sorry for my late reply.

Brian said: "In "overdraft" economies, the central bank lends to private banks, instead of buying government bonds."

Why doesn't that mean buy a demand deposit (or something extremely similar)?

Assume a run on a solvent commercial bank with an ECB like central bank. Demand deposits get converted to currency. The commercial bank does not have enough currency. The central bank "lends" to the commercial bank by buying the "reissued" demand deposits (a type of bond) and selling currency. This keeps the commercial bank from having to sell assets.

Anything wrong with my scenario?

Also, does the fed have two ways of operating? One is open market operations. The other is lending thru the discount window. Is lending thru the discount window like an ECB type system?

[Too Much Fed]

Nick said: "Brian: we can imagine a world (like in the New Keynesian model) where people can have both positive or negative balances in their chequing accounts at the central bank. And where the positive and negative balances exactly cancel out, so the central bank has no assets or liabilites except those negative and positive balances, and where the interest paid on positive balances equals the interest charged on negative balances, so the central bank earns zero profits (ignore admin costs)."

Brian said: "Nick, I did not completely follow your response. The central bank always needs to have net financial assets if there is currency (notes and coins) outstanding (as they are a liability). Meanwhile, banks might need reserves under some banking system rules. This means that the monetary base is a positive number."

Brian, could the assets be intangible?

Also, you need to replace positive bond balance that is a liability of some entity anywhere Nick says negative balances in their chequing accounts. I think that will help.

There is no such thing as a "negative balances in their chequing accounts". For example, assume you have $500 in your checking account. You write a check for $1,500. It goes thru because you have overdraft protection. Here is what happens. $500 gets transferred from your checking account. Your checking account balance does not go negative. You borrow $1,000 in demand deposits by issuing a bond to the bank. The bank gets the bond. You get $1,000 in demand deposits in your checking account. The $1,000 gets transferred. At no time did your checking account balance go negative.

[Too Much Fed]

For David Andolfatto, can you post at your site without any of the accounts in the drop down list? Thanks!

[David Andolfatto]

@Too Much Fed,

I'm not sure what you're asking. I think you are asking whether anyone can post a comment at my blog without signing in on an account from the drop down list (like Google, Twitter, etc.)? If so, I'm not sure...I can go check some settings. If this is not what you're asking, then send me an email: [email protected]

[Nick Rowe]

David: I'm on the farm in england, using the farm computer, so I can't copy and paste. But I basically agree with your May 5th reason for why defaltionary spirals cannot happen, IF the central bank prevents M collapsing to zero (which is what central banks actually did do, and more, because they increased M). But simply setting a nominal i, and letting M be demand-determined, is consistent with M collapsing to zero.

[Frances Woolley]

Nick, hope you managed to find some bluebells in the woods, and family and friends are well. Good luck licking everyone and everything into shape. The Gatineau mosquitos emerged approximately 1:47 p.m. last Saturday afternoon.

[JKH]

Too Much F.,

The ECB operates such an “overdraft” system.

The standard (pre-QE) ECB balance sheet consists mostly of lending to banks funded by currency issued and bank reserve balances. Thus, the non-government sector finances part of the banking system indirectly via currency and reserves and the rest directly through deposits and other forms. I believe this form of bank lending by the ECB is known as “refinancing operations”. Unlike deposits, these are secured loans, but the monetary effect is the same.

The standard (pre-QE) Fed balance sheet consists mostly of Treasuries funded by currency and reserves. So the non-government sector funds the government in part indirectly via currency and the rest with bonds and bills.

Your scenario is fine (roughly) for either system. This is last resort lending, which both the ECB and the Fed can do at their option. Lending through the discount window is such last resort lending. Whereas the ECB’s refinancing operations are standard ongoing procedure.

[khodge]

I'm sure that there is some way to create inflation, but I have been expecting, for at least 20 years, deflation to start at the beginning of this century due to the obvious demographics: Baby-boomers retiring, dropping out of the work-force, and withdrawing their savings. Upon reflection, I should have also included the death of the preceding generation in that analysis.

Is the government able to create enough money to counter the demographics? I rarely come across any post that includes demographic analysis alongside NGDP targeting analysis.

[Too Much Fed]

David Andolfatto said: "I think you are asking whether anyone can post a comment at my blog without signing in on an account from the drop down list (like Google, Twitter, etc.)? If so, I'm not sure...I can go check some settings."

That is what I am asking. Let me know what you find out.

[Too Much Fed]

JKH said: "The standard (pre-QE) ECB balance sheet consists mostly of lending to banks funded by currency issued and bank reserve balances."

So the assets of the ECB (pre-QE) are bonds from the commercial banking system?

"Unlike deposits, these are secured loans, but the monetary effect is the same."

I'm thinking a demand deposit is a bond/loan that is secured by the assets of the commercial bank?

Also, is the price fixed for these "secured loans" (the central bank and commercial banks buy and sell from each other at a fixed exchange rate that just happens to be 1 to 1)?

"Whereas the ECB’s refinancing operations are standard ongoing procedure."

Pre-QE, the ECB did no open market operations, just "discount window lending". Right?

Lastly, assume an ECB central bank system, all the commercial banks are solvent, every entity knows that, and each of them experiences a bank run because demand for currency increases unrelated to solvency concerns. Would the ECB ever deny convertibility to currency?

[Too Much Fed]

test

[Too Much Fed]

Are there comments in spam?

[Too Much Fed]

For David Andolfatto, put ;blogger settings comments anonymous; into your favorite search engine. It should begin with About comments.

[Frank Restly]

TMF,

What are you looking for in particular?