Worthwhile Canadian Initiative

Accounting for central bank profits

Just a simple "teaching" post.

There are two different ways of thinking about central bank profits (of doing the accounting). A simple numerical example will illustrate the difference.

Assume 2% inflation, and 1% real GDP growth, so Nominal GDP grows at 3%. Assume the stock of currency is 5% of annual NGDP. Assume the nominal interest rate on bonds is 4%, but currency pays 0% interest. Assume central banks have zero operating costs.

Method 1: Every year the central bank prints currency worth 0.15% of NGDP (that's 5% x 3%) so its profits are 0.15% of NGDP, and it gives those profits to the government which owns the central bank.

Method 2: When the central bank prints currency it buys bonds, so owns bonds worth 5% of NGDP, and earns interest on those bonds equal to 0.2% of NGDP (that's 5% x 4%), and it gives those profits to the government which owns the central bank.

Helicopter Money is small beer, and normal

Let's do a back-of-the-envelope calculation. Assume a 5% currency/Nominal GDP ratio. Assume the government/central bank wants to use helicopter money to permanently raise the level of NGDP by 5% above what it would otherwise be. So the stock of currency will be permanently higher by 0.25% of NGDP. And assume currency pays 0% interest, so is not a liability of the government/central bank in any meaningful sense.

So helicopter money finances a deficit of 0.25% of NGDP for one year. It's small beer.

Now suppose the central bank makes NGDP grow at 5% every year (say 2% inflation plus 3% real GDP growth). So helicopter money finances a deficit of 0.25% of NGDP every year. It's small beer, but a continuous flow of small beer. It's normal. This is roughly what happens every year on average in Canada, for example. (But since central bank profits are treated as government revenue in the national accounts, we don't call it a 0.25% "deficit".)

Just a quickie, to get by brain working again, while I gather my strength to disentangle this mare's nest.

Health Spending Numbers: An Update on the Long-Term

It is of course useful from time to time to take a look at the longer-term picture when it comes to health spending especially given that there is a slowdown in health expenditure growth. Figure 1 plots per capita total health expenditure in US PPP dollars from 1960 to 2014 for Canada (to 2014)  and the OECD (to 2013) using data from the OECD Health Statistics 2015.

The challenge: Find an example where ethnicity or culture matters in regulatory policy

Today I was asked by a government policy analyst: "I'm trying to think of an example of a situation when ethnicity or culture matters in regulatory policy. Can you help me out?"

Here's my best attempt. I challenge others to try to come up with a better example.

The regulation: In Canada, Vitamin D must be added to milk.

"Addition of Vitamin A, Vitamin C and Vitamin D to fluid milk is a legal requirement under Health Canada's Food and Drugs Act (see Appendix 1, Table 1). Vitamin D is added to all forms of milk while Vitamin A is added only to skim and partly (partially) skimmed milks. Evaporated and powdered milks which are sold at retail in Canada have similar requirements for vitamin addition. In addition, Vitamin C is required to be added to evaporated milks. Section B.08.027 of the Food and Drug Regulations (FDR) exempts certain dairy products which are used in or sold for the manufacture of other food from the vitamin addition requirements which are specified in the above prescribed food standards" Source: www.inspection.gc.ca

Why does ethnicity and culture matter?

Ethnicity and culture matter, first, because they influence the amount of Vitamin D supplementation a person will need to maintain good health. The people who are most at risk of Vitamin D deficiency are those who are do not absorb sufficient vitamin D through exposure to sunlight. People relatively more skin pigment have a heightened risk for Vitamin D deficiency, because they require up to six times the amount of sun exposure to absorb the same level of Vitamin D as a person with relatively less skin pigment (reference).  Since a person's level of skin pigmentation is largely genetically determined, ethnicity influences the risk of Vitamin D deficiency. Culture is a factor, also, because it will affect the extent to which people are willing to expose their skin in public - and thus the amount of vitamin D they will absorb from sunlight.

Gender-Based Analysis: A Guide for Economists

GBA+ [Gender-Based Analysis plus] is an analytical tool used to assess the potential impacts of policies, programs, services, and other initiatives on diverse groups of women and men, taking into account gender and other identity factors. The "plus" in the name highlights that GBA+ goes beyond gender, and includes the examination of a range of other intersecting identity factors (such as age, education, language, geography, culture and income). [Status of Women Canada]

Over 20 years ago, the Government of Canada committed to implementing Gender-Based Analysis, or GBA, in policies, programs, and legislation. Status of Women Canada was tasked with creating and championing the framework for GBA, although all federal departments and agencies had a shared responsibility for implementation.

I believe understanding how policies may effect men and women differently is a worthwhile goal. I believe achieving gender equity is a worthwhile goal. But I have serious reservations about an overly strong reliance on the current GBA framework - GBA+ - to achieve that goal. The GBA+ framework developed by Status of Women Canada is not readily integrated with prevailing methods of policy analysis. Doing GBA+ properly often requires data that is often either unavailable, or else hard to obtain in a timely fashion. The lofty ambitions embedded in the current GBA+ analysis framework can make doing GBA+ seem overwhelming or impractical. Moreover, the very concept of Gender-Based Analysis locates gender considerations in the analysis phase of policy making. However effective integration of gender in policy formation requires a holistic approach, with gender being considered at every stage and level of the policy process, from data collection to setting of overall government priorities.

Democratic Helicopter Money and the non-observance of two counterfactual conditionals

I give my kids $100 and tell them to spend it not save it.

1. How can I tell whether my kids have really spent $100 more than they otherwise would have spent? Maybe they would have spent $100 anyway.

2. How can my kids tell whether I have really given them $100 more than I otherwise would have given them? Maybe I would have given them that $100 (plus interest) anyway, in my will, and I am simply giving it to them earlier rather than later. Maybe it's not a permanent increase in the amount of money I give them. Maybe they aren't any wealthier than they would have been otherwise.

Simon Wren-Lewis's proposal for "Democratic Helicopter Money" , in which the central bank prints an extra $1 billion, gives it to the government, and tells the government to spend it not save it, faces exactly the same two problems.

The government owns the central bank, which is like the government being the sole beneficiary in the central bank's will. Any profits the central bank earns from printing money must eventually get given to the government anyway. If the extra $1 billion is a permanent increase in base money, relative to what the time-path of base money would otherwise have been, then the government is $1 billion wealthier, whether it gets that $1 billion now or later (plus interest), and it must get it eventually. And if it's not a permanent increase in base money, relative to what the time-path of base money would otherwise have been, the government is not $1 billion wealthier, so an extra $1 billion fiscal deficit will be bond-financed, not money-financed, sooner or later.

Money is fungible. Helicopter Money is permanent, or it's not Helicopter Money. True Helicopter Money is equivalent to an increase in the Price Level Path (or NGDP Level Path) target.

(There's definitely a Principal-Agent Problem, and maybe a Rotten Kid Theorem, in here somewhere.)

[I've said all this before, but maybe I've said it clearer and simpler this time. Does the kid analogy work?]

Update: Simon responds.

Adding more periods to the Diamond Dybvig Model; fear of illiquidity not insolvency

David Andolfatto has a very good post on "Monetary Policy Implications of Blockchain Technology". In passing (it's not a central point of his post), David says:

"However, it's worth pointing out that the leading economic theory of bank sector fragility, the Diamond and Dybvig model, does not rely on the existence of opacity in the financial market. In that model, the portfolios of banks are perfectly transparent. A bank run may nevertheless be triggered by the expectation of a mass redemption event, which subsequently becomes a self-fulfilling prophecy. It is also interesting to note that (in the same model) bank-runs can be eliminated if banks adopt a credible policy of suspending redemptions once they run out of cash (this commits the bank not to firesale assets to meet short-term debt obligations)."

I think that David is right about suspending redemptions. But I think that David would be wrong if we made a small change to the Diamond Dybvig model. We simply add an extra time period, or periods. It's a friendly amendment to the model.