Can’t we all just get along?

Here is Paul Krugman, right after I did a really nice post praising him:

Brad DeLong manfully takes on the efforts of various commentators to define away the paradox of thrift and redefine our current problems as somehow wholly monetary. As I see it, this is all a desperate attempt to cut and stretch things into a quasi-monetarist framework, for no good reason.

.   .   .

So what’s wrong with my “one model to rule them all”? Well, it doesn’t easily translate into anything that looks like monetarism — for a good reason: when short-term interest rates are near zero, the distinction between the monetary base, which the central bank controls, and the much broader class of safe short term assets, which it doesn’t, more or less vanishes. That’s not a bug, it’s a feature; it says that when you’re in a liquidity trap, thinking in terms of the supply and demand for money is just not a helpful way to approach the issues.

Let’s start with some propositions that all us new Keynesians and quasi-monetarists can agree on:

1.  If interest rates are 5% and the Fed announces a doubling of the money supply, and also announces that all the new money will be pulled out of circulation a month later, almost nothing will happen to prices and output.

2.  If interest rates are 0% and the Fed announces a doubling of the money supply, and also announces that all the new money will be pulled out of circulation a month later, almost nothing will happen to prices and output.

3.  If interest rates are 5% and they announce a permanent doubling of the monetary base, prices will rise sharply.

4.  If interest rates are 0% and the Fed announces a permanent doubling of the money supply prices will rise sharply.

Monetary policy is never very effective if the injections are temporary, and (almost) always very effective if permanent.  (Unless the liquidity trap is expected to last forever.)  So the problem during a liquidity trap isn’t really that cash and T-bills are perfect substitutes, it’s more complicated.

So what’s the real issue here?  Unfortunately, just like in the game “wack-a-mole,” a new objection pops up as soon as you answer the previous one.  A little history might be helpful.  For decades the new Keynesians have been driving the economy using a flawed interest rate instrument.  They got away with it until rates hit zero.  Now they are looking for answers.  The quasi-monetarists are suggesting that the Fed increase the supply of base money (QE) and/or reduce the demand for base money (lower IOR and higher inflation targets.)  The more progressive new Keynesians like Krugman support these ideas, but get bent out of shape when quasi-monetarists try to define our AD shortfall problem as essentially monetary, rather than simply an implication of the paradox of thrift.  [BTW, I prefer autistic to Procrustean.]

So what are the issues that separate us?

1.  The quasi-monetarists have higher expectations for monetary policy.  We all agree the Fed could do a lot more.  We all want them to do a lot more, but only the quasi-monetarists actually assume that the Fed is still driving the car, still determining NGDP growth.

2.  Communication.  The new Keynesians drove the economy off the cliff, yanked off the steering wheel, handed it to the quasi-monetarists, and said “OK, you drive smarty-pants.”  But at the zero bound driving the economy requires a whole new form of communication.  We can’t use interest rates and the markets aren’t used to anything else.  Remember, only permanent money supply increases are effective.  But since base demand is so unstable at low rates, we can’t really target the base credibly; it would leave prices too unstable.  [That's why we're quasi-monetarists, not monetarists--we don't assume stable money demand.]  So we have to combine changes in the money supply with changes in the inflation target.  We need to tell the public we’ll inject enough money to push prices X% higher over the next few years.  The new Keynesian will respond “Aha, but that’s not monetarism, that’s new Keynesianism.  The inflation target is doing all the work, not the money supply increase.”  Yes and no.  It is mostly the target, but not completely.  That’s because the Keynesian liquidity trap model is slightly unrealistic in several ways:

a.  The Fed can limit reserve demand by cutting rates on bank reserves to zero, or negative.  In that case it’s all about cash held by the public.  And the reasons people hold cash are different from the reasons they hold securities.  Most cash is held for tax evasion and petty transactions–neither of which can be easily done with T-bills.  So they aren’t quite perfect substitutes.  Still, rates on T-bills could go negative enough to make them near perfect substitutes.

b.  Cash is even less of a perfect substitute for other types of securities, which the Fed could also purchase.

c.   Most importantly, QE is also a form of communication.  If you are trying to convince markets that you are adopting a more expansionary monetary policy, it is easier to do if you both announce a higher inflation target, AND ALSO DO SOMETHING.  Roosevelt understood this, which is why he adopted a gold buying program in late 1933.  The amounts of gold purchased were far too small to have any macro effect, but nonetheless the program did move market prices.  Why? Because it was a signal that FDR was soon going to do something which would be effective—permanently devalue the dollar.  He bought gold at higher and higher prices, which was a signal to the markets about the likely future price of gold.  QE would be Bernanke’s gold-buying program, only slightly effective on its own, but very powerful when combined with a higher inflation target.  Even if the inflation target isn’t explicit, but merely hinted at.

It’s slightly annoying the way people like Krugman and DeLong imply their opponents don’t understand the paradox of thrift.  Yes, if people try to save more, and rates fall, the real demand for base money will rise.  And if the Fed doesn’t offset that then AD will fall.  We do understand that.  But we continue to insist the problem is fundamentally monetary because we see the Fed as being able to offset any shifts in public or private saving.  And how can Krugman disagree with that on theoretical grounds?  Hasn’t he just been hammering the Fed for not doing enough to boost AD?  It’s a bit late to claim the Fed can’t do anything when rates are zero.  Now he’s certainly entitled to claim that he doesn’t think the Fed would completely offset an attempt by the public to save more, or a program of austerity by the government, but that’s an empirical judgment.  It has nothing to do with new Keynesian theoretical models that supposed “prove” there is a paradox of thrift at the zero bound.

The paradox of thrift models are only pulled out at the zero bound, because that’s when monetary policy is (allegedly) ineffective.  So you have the bizarre spectacle of Krugman castigating the Fed every Monday, Wednesday, and Friday for not doing enough, and then on Tuesday and Thursday criticizing economists who don’t believe in the paradox of thrift—a model that only makes sense if the Fed can’t do anything!

As for Mr. DeLong, his reply to Nick Rowe’s comment is fine as far as it goes, but it doesn’t go anywhere near deeply enough into the problem.  No one is asking the Fed to merely do a few desultory OMOs, and then imply they’ll soon be reversed.   And at times he still seems to be struggling to free himself from the influence of 1930s Keynesianism, as when he claims the problem can’t be monetary, because interest rates on government bonds aren’t very high:

Thus we would expect a downturn caused by a shortage of liquid cash money to be accompanied by very high interest rates on, say, government bonds–which share the safety characteristics of money and serve also as savings vehicles to carry purchasing power forward into the future, but which are not liquid cash media of exchange.

I wish we could stop all this skirmishing on side issues, and focus on what really separates us–whether it is most useful to think of monetary policy driving inflation and NGDP growth, even at the zero bound.  Or whether (as Krugman and DeLong seem to believe) it is more useful to think of monetary policy as passive and ineffective at the zero bound, and do macro analysis on that assumption.  They’re entitled to that belief, but then I don’t see why the Fed should listen to their complaints that money’s too tight.

One final comment.  Keynesians argue that only permanent monetary injections matter at the zero bound, and thus that it is pointless to increase the current money supply.  But that’s true equally true of interest rates in normal times.  If you raise rates 1% and announce they’ll be cut again a month later, almost nothing will happen.  Woodford showed it’s all about the expected future path of policy.  So this argument that current changes in the money supply are not important is always approximately true, and equally true of interest rates.  Plan on quitting smoking?  Heh, light up another cigarette!  After all, it’s the long run path of your cigarette consumption that really matters.  My response would be that there is no better time to start QE than right now.  Remember, the longest journey begins with a single step.

OK, let’s all get together now and go after the real enemy—the hawks at the Fed.

BTW, Krugman says his model’s best because he predicted interest rates and inflation weren’t going to rise.  Well I predicted interest rates and inflation weren’t going to rise, AND I was screaming at the Fed to ease money in late 2008.  How does that call for action look now?  Sometimes one needs a relentlessly single-minded focus, and if people consider that Procrustean, so be it.

HT:  David Beckworth, TravisA


Tags:

 
 
 

88 Responses to “Can’t we all just get along?”

  1. Gravatar of Liberal Roman Liberal Roman
    30. September 2010 at 16:29

    I wonder if Krugman will respond. This seems like the first time in awhile that he has taken on the true monetarists. And your response is why I have become a believer in monetary policy. (Although, still a bit skeptical).

  2. Gravatar of Ram Ram
    30. September 2010 at 21:07

    Not that this settles anything, but whose side is Woodford on, yours or Krugman’s? It’s hard to tell. When Woodford is writing about fiscal policy, he seems to think that it has an important role to play, though that can only be because monetary policy is ineffective. But it’s not clear why he would think monetary policy would be effective right now, given everything else he’s written.

    If I recall, there was a paper he wrote a while back according to which if the Fed is guided by a backward-looking Taylor rule, and if the markets believe as much, then it becomes ineffective at the zero lower bound. And of course it’s not hard to show that in normal times Fed behavior seems to fit a Taylor rule of one kind or another quite well. Maybe that’s the claim–ideally the Fed could do everything as you suggest, but it isn’t operating under the ideal regime, and under the one it’s actually operating under, it’s (mostly) out of gas. That’s the only way I can make sense of Woodford’s diverse writings on these areas.

    Of course, Woodford is just one economist, but I think he has (rightfully) become a kind of spokesperson in the specialist literature for the New Keynesian paradigm, so it’s of more general interest to figure out what exactly he thinks the relationship between monetary and fiscal policy is right now.

  3. Gravatar of Passing By Passing By
    1. October 2010 at 02:53

    “The new Keynesians drove the economy off the cliff”.

    So Bush, Greenspan, Bernanke, Geithner and/or Paulson are “new Keynesians”? Or maybe you had somebody else in mind? Would you care to be more specific?

  4. Gravatar of Scott Sumner Scott Sumner
    1. October 2010 at 04:35

    Liberal Roman, Thanks, although I am certainly not a “true monetarist.” Krugman’s term ‘quasi-monetarist’ is much more appropriate, as I don’t favor using the money supply as either an indicator or instrument of monetary policy.

    Ram, I’d guess he’s on Krugman’s side.

    Passing By, Ben Bernanke is clearly a new Keynesian, as is the policy establishment in the US. Bush has Keynesian instincts (he sold his tax cut idea with Keynesian arguments, even as his advisors insisted it was a supply-side cut) but I don’t think he has any clearly thought out views on monetary economics.

    Bernanke and most of the economists at the Fed are clearly new Keynesians, and that’s what matters. New Keynesians favor having the central bank run monetary policy by adjusting short term interest rates. I’d say that’s a fairly widespread view in policy circles. They also favor inflation targeting and/or a Taylor Rule.

  5. Gravatar of Lewis Lewis
    1. October 2010 at 05:00

    Quasi-monetarists? You need a better name, Scottbro

  6. Gravatar of 123 – TheMoneyDemand Blog 123 - TheMoneyDemand Blog
    1. October 2010 at 05:01

    Here are three different stimulus options:
    1. Permanent OMOs
    2. Credit easing / market-making of last resort
    3. Temporary tax cuts

    They all can raise AD, but they have different implications for volatility of AD, and for AS. These differences matter even if zero lower bound does not apply, and they matter even if NGDP path targeting is in place. Procrustean option 1 should always remain in the driver’s seat, but it is very important to know when option 2 and option 3 should also be used.

  7. Gravatar of Indy Indy
    1. October 2010 at 05:34

    The more I think about it, the only thing the Fed really needs to do is say “level inflation targeting” (and mean in) and all is accomplished.

    The last few things I’ve read about the Fed Hawks seems to be an over-anxious concern about the Fed’s “credibility” to produce the results it says it is trying to achieve with the tools it decides to use.

    But with “Level”, there is no “Action, Reaction, Comparison of Consequences with Goals” credibility cycle. It doesn’t matter whether the Fed undershoots or overshoot – everyone knows it will be corrected in the next cycle.

    “Level 2% (compounded) inflation from 2005, to be achieved as soon as possible, but make no mistake, to be achieve *eventually*” is perhaps the only thing the Fed needs to say and do.

    I wonder what would happen the very minute of that announcement in the market?

  8. Gravatar of Justin Justin
    1. October 2010 at 06:00

    “BTW, Krugman says his model’s best because he predicted interest rates and inflation weren’t going to rise. Well I predicted interest rates and inflation weren’t going to rise, AND I was screaming at the Fed to ease money in late 2008. How does that call for action look now? Sometimes one needs a relentlessly single-minded focus, and if people consider that Procrustean, so be it.”

    Scott,

    In terms of making the right calls in terms of recession, interest rates, price inflation, investment decision making etc, Mish seemed pretty on the ball as well.

    http://globaleconomicanalysis.blogspot.com/2008/08/future-is-frugality.html

    http://globaleconomicanalysis.blogspot.com/2009/01/is-big-inflation-coming.html

    Moreover, Mish was making the recession call in no uncertain terms back when Krugman was still hedging:

    http://globaleconomicanalysis.blogspot.com/2008/01/recession-is-reality.html

    http://krugman.blogs.nytimes.com/2008/01/01/did-we-dodge-a-bullet/

    Krugman is really offbase if he thinks a series of correct calls proves a particular model is correct. You, Krugman and Mish all came to generally correct conclusions about the macroeconomic situation despite different approaches (particuarly between you/Krugman and Mish).

    As an aside, Mish also has some Post Keynesian views, particularly on the topics of credit creation and the money multiplier. In support, he links to a very lengthy post by economist Steve Keen. If you ever get bored, I’d love to see your take on Keen’s post. Sorry for all the links, by the way.

    http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/

  9. Gravatar of StatsGuy StatsGuy
    1. October 2010 at 07:24

    You know the funny thing – the pop-Austrians (of which ZeroHedge is probably the champion) refer to the Fed as the high priests of Keynesianism, and insist that QE is a Keynesian policy.

    To the outside, this great debate between monetarists and Keynesians seems odd.

  10. Gravatar of David Pearson David Pearson
    1. October 2010 at 07:44

    Scott,

    You wrote:
    “3. If interest rates are 5% and the Fed announces a permanent doubling of the monetary base prices will rise sharply.”

    Is this true?

    Under a FF rate targeting regime, the Fed stands ready to supply any amount of reserves through OMO as necessary to keep the rate from rising above target. This means that the supply of reserves is perfectly elastic. If so, then why would doubling Excess Reserves (“the monetary base”) beforehand matter? Banks can double non-borrowed reserves, as a system, any time they face enough credit demand to do so.

    So imagine the Fed doubles the base tomorrow, and it all goes into Excess Reserves. You would agree this is not inflationary. “But,” you might respond, “the injection is permanent, and that means the ER’s will eventually be used to support lending.” Again, that situation is no different than the system eventually calling on a doubling of required reserves at the point that it faces credit demand. In each case, the inflationary impact is a function not of the Fed’s supply of excess reserves, but of the system’s demand for required reserves at any FF rate.

  11. Gravatar of Nick Rowe Nick Rowe
    1. October 2010 at 07:45

    Scott. Yep. My response to Paul Krugman is here: http://worthwhile.typepad.com/worthwhile_canadian_initi/2010/10/the-paradox-of-thrift-vs-the-paradox-of-hoarding.html

  12. Gravatar of On the Paradox of Thrift | The Everyday Economist On the Paradox of Thrift | The Everyday Economist
    1. October 2010 at 08:37

    [...] policy, but expectations about central bank policy. For a discussion about expectations, see this post by Scott [...]

  13. Gravatar of StatsGuy StatsGuy
    1. October 2010 at 08:48

    Nick:

    Isn’t your post essentially saying the problem is the savings/investment gap?

  14. Gravatar of JimP JimP
    1. October 2010 at 10:20

    According to this its a done deal – the Fed will act at the next meeting:

    http://www.bloomberg.com/news/2010-10-01/dudley-says-more-fed-action-is-warranted-unless-economic-outlook-changes.html

    And according to this, Obama is facing the same ghosts and monsters as Roosevelt did in his first off year election (1934).

    http://www.newdeal20.org/2010/10/01/how-obama-can-fight-back-fdr-the-populist-backlash-and-the-1934-election-22348/

    And here we have the voice of the present day American Liberty League – the ever charming Phil Gramm.

    http://online.wsj.com/article/SB10001424052748704116004575522351201224286.html

  15. Gravatar of Benjamin Cole Benjamin Cole
    1. October 2010 at 11:05

    Excellent post–but Scott, you fail in rhetoric.

    The enemy is not the “hawks at the Fed.”

    The enemy is “the Japan Wing of the Fed.” The “overly timid Fed.” The “growth doves at the Fed.” The “dithering at the Fed.”

    Those “more in love with zero inflation than real economic growth.”

    Castigate the “timidity of effete central bakers, who pettifog about inflation as the economy sinks into a deflationary recession.”

    On the other hand, the monetary bulls want to fire the economy up, reflate property values to save the banks without taxpayer money, and put Mr. and Mrs. America back to work.”

    BTW, at this point, running a national lottery, and paying $10 of printed money for every $1 played, makes great sense.

  16. Gravatar of Edwin A Edwin A
    1. October 2010 at 13:31

    “growth doves at the Fed.”

    That actually means the opposite of what you think it means. =)

  17. Gravatar of Mark A. Sadowski Mark A. Sadowski
    1. October 2010 at 13:59

    I came across this by Brad DeLong recently and initially thought “cool, maybe there’s something here I can use in class.” Sigh, alas not:

    http://delong.typepad.com/sdj/2010/09/six-lectures-on-depression-economics.html

    It turns out that DeLong’s cure for this depression is neither Monetarist nor Keynesian but Minskian!?! I’m beginning to think the traditional interest rate transmission mechanism has numbed his otherwise magnificent brain.

    IMO Mishkin’s chapter on the MTM is still the best tool for teaching students the power of money.

    As for Krugman, I wish he would stop equivocating and just make up his mind what he truly believes. (Did issuing more scrip cure the Capital Hill Baby Sitting Coop recession or not?)

  18. Gravatar of Benjamin Cole Benjamin Cole
    1. October 2010 at 14:02

    Edwin–

    This has come up before. I contend my use is okay. After all, a “military hawk” is for more military. So, a growth hawk is for more growth, and a growth dove is weak on growth.

    However, I concede this label may cause confusion.

    So, I invented “monetary bulls,” to describe the pro-QE crowd. I really wish these labels would catch on, and I ask everyone repeat them, or similar ones.

    The Japan Wing of the Fed must be portrayed as weak and indecisive, inbred, cloistered, dithering, and cravenly saluting icons from a past eras. For starters.

    “The Japan Wing of the Fed thinks the psychic income they receive from zero inflation is equal in value to the lost real income of all Americans it took to get there.”

  19. Gravatar of happyjuggler0 happyjuggler0
    1. October 2010 at 14:15

    Instead of “quasi-monetarists”, how about “New Classical Monetarists” in that it is a refined view of Pre-Keynesians.

    By the way, regarding the term “quasi”, I believe it was Bill O’Reilly who was talking to Krugman and called him a quasi-socialist. Krugman got apoplectic and replied that he wasn’t a socialist. O’Reilly responded, “I said quasi”, to which Krugman replied something like, “Well that’s just wonderful. You can use the term quasi and can call anyone anything. You’re a quasi-murderer”.

  20. Gravatar of Nick Rowe Nick Rowe
    1. October 2010 at 14:25

    StatsGuy: “Nick:

    Isn’t your post essentially saying the problem is the savings/investment gap?”

    I thought I was saying just the opposite. That it’s the money demand money supply gap.

  21. Gravatar of Edwin A Edwin A
    1. October 2010 at 14:58

    Benjamin,

    The thing is that “inflation dove” ( http://tinyurl.com/26dp8fs ) and and even “fiscal dove” ( http://tinyurl.com/25x9j3r ) already have well established meanings in the unofficial econ jargon dictionary. “Dove” means that you want more, not less. Putting “dove” after “growth” makes it sound like the fed wants more growth. But I’ll concede that “monetary bulls” sounds cooler.

    Happyjuggler0,

    Hah, that’s a wonderful reply by Krugman.

  22. Gravatar of scott sumner scott sumner
    1. October 2010 at 15:31

    Lewis, The name “monetarists” would fit perfectly, except that it’s already taken. :(

    123, I’m tempted to say option 2 and 3 should be used when the government runs out of green ink and paper. But seriously, those options have huge costs, which monetary policy does not have. I don’t think fiscal stimulus can target NGDP more accurately than monetary stimulus. I will concede that certain actions that stablize expectations, and hence velocity, might make it easier to use M to stabilize PY.

    Indy, NY Fed Prez Dudley just gave a speech where he moves toward price level targeting. And I agree, the more I think about it, the more important the nominal target seems.

    Justin, You said;

    “As an aside, Mish also has some Post Keynesian views, particularly on the topics of credit creation and the money multiplier. In support, he links to a very lengthy post by economist Steve Keen. If you ever get bored, I’d love to see your take on Keen’s post.”

    I’d have to be pretty bored, as there’s nothing I hate more than Post-Keynesian economics. It’s 180 degrees removed from my views. But thanks for the links, I’ll try to force myself to take a look.

    Statsguy, Yes, that’s why I ask “Why can’t we just all get along?”

    David, If they doubled the base, they’d have to abandon interest rate targeting. In that case prices would rise due to the excess cash balance mechanism.

    Thanks Nick, I’ll take a look as soon as I finish these comments.

    JimP, Yes, it does now seem almost inevitable–unless the economy really picks up sharply before early November.

    Benjamin, I wish I had you right here to supply the colorful metaphors. Writing is not my forte.

    Mark, I haven’t read that DeLong post, but agree on Mishkin and Krugman.

    happyjuggler0. I’ve given it a lot of thought, and just can’t come up with anything. Again, monetarist would be perfect, but its already taken. Steve Williamson calls his views ‘new monetarism,’ but it’s not the same as my view. We could call it the BRS system after certain popular monetary bloggers, and maybe add W if Woolsey starts up again.

    The other problem is that everyone has their own nuances. I probably put a bit more weight on targeting expectations than some of the other monetarists. Nick Rowe emphasizes money as a medium of exchange.

  23. Gravatar of Benjamin Cole Benjamin Cole
    1. October 2010 at 15:43

    BTW, I think the title of this post is an ode to Rodney King, the wayward motorist pounded by LAPD batons, lo those many moons ago, an event videotaped, and then broadcast on TV. The results ultimately were citywide riots, including huge, towering pillars of smoke on all sides of your truly. I lived in a warehouse at that time.

    At one point I walked on the roof of the warehouse complex to gauge events; when I returned, I was informed by an fellow tenant that he had trained an automatic weapon on me, thinking I might be a looter.

    I suspect Sumner’s post title it is the only time Rodney King and quantitative easing have been connected.

  24. Gravatar of Mark A. Sadowski Mark A. Sadowski
    1. October 2010 at 15:50

    “The other problem is that everyone has their own nuances.”

    I’m growing increasingly tired of being nuanced (maybe it’s early senescence). Will more money solve the problem or not? I’m a Monetarist. Are you?

  25. Gravatar of David Pearson David Pearson
    1. October 2010 at 15:59

    Scott,

    The banking system can “double reserves” any time it wants to under any FF target. It merely has to make loans, create deposits, and, in aggregate, call on the Fed to conduct OMO to keep the FF rate from rising above target. As long as the policy rate remains constant, the banking system faces a perfectly elastic reserve supply curve.

    Given the above, I don’t see how a Fed-induced doubling of Excess Reserves on system’s balance sheet can make a difference. The banking system is never reserve supply constrained in the first place (at any given FF rate). If they are never supply constrained, then why would it matter whether they have double the Excess Reserves parked at the Fed, or whether Excess Reserves are zero? Either way, they will have the reserves they need to make whatever loans are demanded by the economy.

  26. Gravatar of Mark A. Sadowski Mark A. Sadowski
    1. October 2010 at 16:15

    Let me restate this nuance problem in another way:

    “I drink Dr. Sumner and I’m proud
    I use to feel alone in a crowd
    but now you look around these days
    and it seems theres a Dr. Sumner CRAZE

    I’m a Sumner he’s a Sumner she’s a Sumner we’re a Sumner
    wouldn’t you like to be a Sumner too?
    I’m a Sumner he’s a Sumner she’s a Sumner
    if you drink Dr. Sumner you’re a Sumner too!

    Us Sumners are an interesting breed
    an original taste is what we need
    ask any Sumner and they’ll say “only Dr. Sumner tastes that way”

    I’m a Sumner he’s a Sumner she’s a Sumner we’re a Sumner wouldn’t you like to be a Sumner too?
    I’m a Sumner he’s a Sumner she’s a Sumner we’re a Sumner wouldn’t you like to be a Sumner too?

    Be a Sumner, drink Dr. Sumner! Come on!!!”

  27. Gravatar of Fed Up Fed Up
    1. October 2010 at 17:23

    I’m going to need some definitions. Can you define:

    money supply

    money

    monetary base

    base money

    and monetary policy for me?

    This is not as simplistic as it sounds.

  28. Gravatar of Fed Up Fed Up
    1. October 2010 at 17:27

    “We need to tell the public we’ll inject enough money to push prices X% higher over the next few years.”

    Why should you push most people’s budget further into negative real earnings growth territory?

  29. Gravatar of Fed Up Fed Up
    1. October 2010 at 17:30

    “Most cash is held for tax evasion and petty transactions–neither of which can be easily done with T-bills.”

    By cash, I am going to assume you mean currency. I can think of other reasons currency is held depending on the scenario.

  30. Gravatar of TravisA TravisA
    1. October 2010 at 17:37

    Scott, you were much gentler in your post than I would have been. The title should be: DeLong and Krugman are big fat idiots ;-)

    Do DeLong and Krugman really believe that it’s impossible for the Fed to create inflation at the zero bound without any fiscal policy? If so, I wish that they’d come out and say it — and then be laughed at. It’s really frustrating that their left of center politics influence their monetary prescriptions. Their message becomes a mishmash and really doesn’t help in the goal of influencing the Fed.

  31. Gravatar of Mark A. Sadowski Mark A. Sadowski
    1. October 2010 at 17:41

    Fed up,
    All god questions.
    Dr. Sumner’s answers are for what you are asking but allow me to fill in in the meanwhile.

    Money (money supply) is usually measured in terms of monetary aggregates: M0, M1, M2, MZM.

    The Monetary base (or base money) is M0.

    Go to http://research.stlouisfed.org/fred2/

    to see the latest quantities.

  32. Gravatar of Fed Up Fed Up
    1. October 2010 at 17:42

    “OK, let’s all get together now and go after the real enemy—the hawks at the Fed.”

    I don’t think that is the real problem. It seems to me there needs to be one overnight rate for the real economy and another much higher overnight rate for asset price speculation. If so, I believe that means there is an imbalanced economy probably due to wealth/income inequality and a lot of that excess saving(s) is due to a wealth/income inequality affect.

  33. Gravatar of Mark A. Sadowski Mark A. Sadowski
    1. October 2010 at 17:44

    When I said
    “All god questions”
    I didn’t mean to commit sacralidge.
    I’m Catholic. Oops!

  34. Gravatar of Fed Up Fed Up
    1. October 2010 at 17:49

    Mark A. Sadowski, thanks for the answers. I still have some questions.

    You said: “The Monetary base (or base money) is M0.”

    So monetary base and base money are the same, right?

    Is M0 currency or currency plus central bank reserves?

    Is currency plus all debt based on that currency the broadest measure of the “money supply”?

  35. Gravatar of Mark A. Sadowski Mark A. Sadowski
    1. October 2010 at 17:59

    “Mark A. Sadowski, thanks for the answers. I still have some questions.

    You said: “The Monetary base (or base money) is M0.”

    So monetary base and base money are the same, right?”

    The first is a formal term. The latter is not.

    “Is M0 currency or currency plus central bank reserves?”

    M0 is currency held by anyone. In other words, it is held by the public, the central banks’ reserves, or by foreign accounts.

    “Is currency plus all debt based on that currency the broadest measure of the “money supply”?”

    I’m not sure what you mean by “currency plus all debt based on that currency”.

  36. Gravatar of Mark A. Sadowski Mark A. Sadowski
    1. October 2010 at 18:30

    I’m not sure but I think this passage is relevant:

    “I don’t think that is the real problem. It seems to me there needs to be one overnight rate for the real economy and another much higher overnight rate for asset price speculation. If so, I believe that means there is an imbalanced economy probably due to wealth/income inequality and a lot of that excess saving(s) is due to a wealth/income inequality affect.”

    I’ll think on this tomorrow.

  37. Gravatar of David Tomlin David Tomlin
    1. October 2010 at 19:36

    @JimP

    Do you have a specific criticism of the Gramm article you linked? I think it’s mostly on target, except that I’m less optimistic about the short-run benefits from electing a Republican Congress.

    It’s interesting that Gramm doesn’t mention TARP, or bailouts generally. That looks to be a major establishment/insurgent fault line.

  38. Gravatar of JimP JimP
    1. October 2010 at 19:49

    On market projections v those of the Fed.

    http://www.economist.com/blogs/freeexchange/2010/09/perils_prediction

  39. Gravatar of JimP JimP
    1. October 2010 at 19:59

    My objection to Gramm is that, for him, the only Roosevelt that exists is the late Roosevelt. The Roosevelt I admire is the easy money guy, a man who never forgot to fight for poor people and to take on the banksters of his day. Gramm grovels to the banks.

  40. Gravatar of 123 – TheMoneyDemand Blog 123 - TheMoneyDemand Blog
    2. October 2010 at 04:18

    Scott, you said:
    “But seriously, those options have huge costs, which monetary policy does not have.”

    I believe that credit easing is

  41. Gravatar of 123 – TheMoneyDemand Blog 123 - TheMoneyDemand Blog
    2. October 2010 at 04:26

    Oops, hit ENTER accidentally

    Scott, you said:
    “But seriously, those options have huge costs, which monetary policy does not have.”

    I believe that credit easing is monetary policy. And credit easing that is based on broad diversified basket of private sector securites is no more costly or risky than regular OMOs (provided that durations match). I feel much more comfortable when Bank of England holds BP bonds than when ECB holds Greek government securities.

    Temporary tax cuts have low costs and they can really strengthen private sector balance sheets when they unexpectedly become too weak. The main costs with this option are related to public choice problems.

  42. Gravatar of JimP JimP
    2. October 2010 at 06:51

    Here is a critique of Gramm – better than I can do.

    http://www.salon.com/technology/how_the_world_works/2010/10/01/phil_gramm_rewrites_the_history_of_the_great_depression

  43. Gravatar of scott sumner scott sumner
    2. October 2010 at 08:06

    Benjamin, Yes, it was a nod to Rodney King.

    Mark, The problem is that monetarists believe that M2 is the proper indicator of monetary policy, and that policy should have M2 grow at a steady rate. (Or perhaps a more updated aggregate, such as a divisia index) But I don’t favor targeting any M, I favor targeting NGDP expectations.

    David Pearson, Yes, if the Fed targets interest rates then the money supply is endogenous. But that’s not what I was assuming—I assumed they targeted M, and more specifically doubled M. As far as I know every single monetary model predicts that will increase the price level. (Well perhaps not Post-Keynesian, but any serious model.)

    Mark, If your teaching gig doesn’t pan out, you can always write ad jungles.

    Fed up, I define money as the monetary base=cash held by the public plus bank reserves.

    I don’t favor inflation targeting, the Fed does. The point is that if we are going to target inflation, we need a bit more now, as its the only way the Fed can raise national income.

    TravisA, As far as what Krugman believes about monetary policy effectiveness, it depends on the day of the week.

    Fed Up, Inequality has nothing to do with the current recession.

    123, OK, those are better options than more spending, I’ll grant you that. I suppose buying other assets wouldn’t hurt, although some will argue that it might tend to politicize the Fed over time, as they picked and chose between various private sector assets. I’m less concerned about this than some conservatives.

    Jim, Actually you can do much better than Salon. They don’t distinguish between FDR’s monetary stimulus that helped, and the other stuff that hurt. They also give Obama an easy time, whereas you correctly point out Obama’s been way too passive about monetary policy.

  44. Gravatar of 123 – TheMoneyDemand Blog 123 - TheMoneyDemand Blog
    2. October 2010 at 13:07

    Scott, you said,
    “As for Mr. DeLong, his reply to Nick Rowe’s comment is fine as far as it goes, but it doesn’t go anywhere near deeply enough into the problem. No one is asking the Fed to merely do a few desultory OMOs, and then imply they’ll soon be reversed. And at times he still seems to be struggling to free himself from the influence of 1930s Keynesianism, as when he claims the problem can’t be monetary, because interest rates on government bonds aren’t very high”

    I have a post where I argue that the shock was caused by the shortage of money, not by the shortage of safe assets. In fact, relative price of safe assets that did not serve as media of exchange fell:

    http://themoneydemand.blogspot.com/2010/10/brad-delong-and-flight-to-safety.html

  45. Gravatar of Lew Lew
    2. October 2010 at 15:04

    I’m with you on this one. It sure seems like Krugman and you are splitting hairs. You both believe that quantitative easing and more stimulus would be helpful. That’s a lot closer to agreement than all the wackos calling for fast and furious deficit reduction. Also, I don’t get what you mean by “The new Keynesians drove the economy off the cliff”. How exactly did they do that? Based on my readings it sure seems more like the problem was that the fed under Greenspan did nothing to stop the unbelievable leveraging of the financial industry. I have an undergraduate degree in economics but admit I don’t really understand most of the stuff you guys write (meaning Krugman, Delong, yourself, etc.)

  46. Gravatar of David Tomlin David Tomlin
    2. October 2010 at 17:00

    @JimP

    Thanks for the link.

    Could you point me to an article that explains how the Gramm-Leach-Bliley Act is supposed to have contributed to the crisis? I’ve been on the lookout for something like that for a long time.

    The merits of GLBA aside, the Salon article attributes its passage to Gramm and ‘the Republicans’. In fact the legislation had overwhelming Democratic support in both houses, and was signed by President Clinton. Had there not been a single Republican in Congress, legislation equivalent to GLBA would probably have been enacted.

    Paul Krugman once did a similar hit piece on Gramm, with an extra bit of sleaze. He suggested that GLBA contributed to the crisis by quoting someone else, without giving his own opinion. Months later, Krugman wrote a post in which he admitted that he himself did not think GLBA contributed significantly to the crisis.

  47. Gravatar of scott sumner scott sumner
    3. October 2010 at 11:13

    123, Very interesting post. But I have a question: What did the Treasury do after March 2009 to boost the liquidity of TIPS?

    Lew, In my view the key mistake was in 2008, when the Fed left interest rates at 2% as the economy was getting steadily worse. The Fed was effectively tightening monetary policy, but it wasn’t obvious in the new Keynesian model.

    David, Those are all excellent points.

  48. Gravatar of 123 – TheMoneyDemand Blog 123 - TheMoneyDemand Blog
    3. October 2010 at 12:02

    Scott, I don’t know what Treasury did to boost the liquidity of TIPS. I know that March 2009 QE announcement boosted the liquidity of TIPS via two routes. There was a direct effect of expected TIPS purchases by the Fed, and there was an indirect effect related to expected purchases of other assets.

  49. Gravatar of JTapp JTapp
    3. October 2010 at 18:37

    I don’t know what to think about the semantics. Over at econlib.org, the entry about Monetarism says:
    “In 2005, most academic specialists in monetary economics would probably describe their orientation as new keynesian…It is only in its emphasis on monetary aggregates that monetarism is not being widely espoused and practiced today.”
    Mankiw’s entry about New Keynesians says that the main argument between New Keynesians and New Classicals is about nominal wage stickiness.

    In Todd Buckholz’s “New Ideas from Dead Economists” he says that New Keynesians and New Monetarists are basically the same thing, all are now part of the “Neoclassical Synthesis.”

    I get the differences between “freshwater” RBC and New Keynesian “saltwater” economists– mostly because it appears to be differences in their econometric models.

    But I live in an area where people ask: “Are you Keynesian, monetarist, Austrian…?” and if you say “Well, it’s more complicated than that” then you end up in hotter water.

    Help, please?

  50. Gravatar of Fed Up Fed Up
    3. October 2010 at 22:58

    Does the monetary base (base money) equal currency held by the public plus currency in bank vaults plus central bank reserves?

  51. Gravatar of Fed Up Fed Up
    3. October 2010 at 23:00

    scott sumner said: “Fed Up, Inequality has nothing to do with the current recession.”

    I hope I have enough time because I believe that will be a long and ongoing discussion about why that is not quite right.

  52. Gravatar of Fed Up Fed Up
    3. October 2010 at 23:03

    Mark A. Sadowski said: “I’m not sure what you mean by “currency plus all debt based on that currency”.”

    I think there is about 1 trillion in currency and about 52 trillion or 58 trillion in total currency denominated debt.

    That is what I mean. Is that the money supply that matters because it is the one used to purchase goods/services and financial assets?

  53. Gravatar of Fed Up Fed Up
    3. October 2010 at 23:04

    Can I get defintions for money supply and monetary policy?

  54. Gravatar of scott sumner scott sumner
    4. October 2010 at 06:27

    123, I’m wondering whether the TIPS were ever as illiquid as people assume. The market is huge–$100s of billions, and the bid-asked spread is really small. What am I missing?

    JTapp, I’m afraid there is no solution. You are right, new Keynesianism is essentially new monetarism. DeLong made the same point.

    Fed Up, I define money as the base, which is cash held by the public plus reserves. Reserves have two components, vault cash and bank deposits at the Fed.

    Monetary policy is actions taken by the Fed that are impact either the supply or demand for base money. The supply is influenced by OMOs and discount loans. The demand is influenced by Reserve Requirements and IOR. Various nominal targets like inflation, NGDP, or foreign exchange rates can influence both the supply and demand for base money.

  55. Gravatar of Fed Up Fed Up
    4. October 2010 at 09:16

    scott sumner said: “Fed Up, I define money as the base, which is cash held by the public plus reserves. Reserves have two components, vault cash and bank deposits at the Fed.”

    Why aren’t the demand deposits created from debt considered money (like when people get a mortgage)?

    I get the currency held by the public and vault currency. What exactly are bank deposits at the fed? Are central bank reserves bank deposits at the fed? What else could that be?

  56. Gravatar of 123 – TheMoneyDemand Blog 123 - TheMoneyDemand Blog
    4. October 2010 at 09:50

    Scott, before Lehman, TIPS were as liquid as cash for marginal holder who was using TIPS as media of exchange in repo market. After Lehman, marginal holder of TIPS was not holding it for monetary purposes, and for marginal holder bid-ask spread and depth of bid-ask quotes suddenly became very important. This demonetization of TIPS has driven down the price of TIPS. I am unwilling to attribute this whole enormous TIPS pricing anomaly to violations of EMH.

  57. Gravatar of scott sumner scott sumner
    5. October 2010 at 06:18

    Fed up, I am not sure what you mean by central bank reserves. Some consider DDs money, I don’t.

    123, I am confused by your response. How large was the bid/asked spread in late 2008? The data is published every day in the paper, but I don’t know where the historical data is. Every time I’ve looked at TIPS bid asked spreads, they’ve been tiny.

  58. Gravatar of 123 – TheMoneyDemand Blog 123 - TheMoneyDemand Blog
    5. October 2010 at 08:22

    The authors of this study use trading volume data and Treasury-Refcorp spread to estimate liquidity premium of TIPS:

    http://www.bilkent.edu.tr/~refet/gsw_tips_revised.pdf

    They say:
    “The liquidity premium was high in the early years of the TIPS
    program, but fell fairly steadily between 1999 and 2005. During the recent period of
    financial market turmoil, the liquidity premium rose considerably, and it soared in
    September 2008, reaching about the same level as in 1999 when the TIPS market was
    small and still relatively new.”

    I think this reduction in liquidity of TIPS was partially caused by a decline in use of TIPS as repo collateral. When TIPS are used as repo collateral, they are as good as money.

  59. Gravatar of Fed Up Fed Up
    5. October 2010 at 10:38

    scott sumner said: “Fed up, I am not sure what you mean by central bank reserves. Some consider DDs money, I don’t.”

    Central bank reserves are medium of exchange that the fed uses. I consider them to be overnight gov’t debt in disguise. What did the fed use to purchase mortgage backed securities?

    Why aren’t demand deposits money? Can’t I use them as a medium of exchange and/or a store of value?

  60. Gravatar of 団結のとき by Scott Sumner (9/30/2010) – 道草 団結のとき by Scott Sumner (9/30/2010) – 道草
    5. October 2010 at 12:40

    [...] 団結のとき by Scott Sumner (9/30/2010) // 一連のリレーの最後、スコット・サムナーのCan’t we all just get along?の翻訳です。引用部分はそれぞれの邦訳をそのまま利用させてもらってます。なので、訳語が統一されていない箇所があります。「quasi-moentarist」は「疑似マネタリスト」だったり、僕は「なんちゃってマネタリスト」と訳していたり、「paradox of thrift」は「節約のパラドクス」だったり「倹約のパラドクス」だったり。 [...]

  61. Gravatar of ssumner ssumner
    7. October 2010 at 05:59

    123, Unless I know the bid asked spread, how can I know the liquidity. If it “soars from one basis point to ten, that’s a big increase but still not that important.

    Fed up, I consider the base to be money, and DDs as credit. Not everyone agrees with me. It’s a matter of cenvenience, not scientific fact.

  62. Gravatar of 123 – TheMoneyDemand Blog 123 - TheMoneyDemand Blog
    8. October 2010 at 03:12

    Scott,
    bid-ask spread tells you little about liquidity risk. Even high volumes may mask high liquidity risk. The flash crash in May was caused by sell order execution algorithm that was limited to no more than 9% of volume, and was operating in S&P 500 futures market that has extremely low bid-ask spreads.

  63. Gravatar of ssumner ssumner
    8. October 2010 at 14:59

    123, So if the bid asked spread was small, why was the flash crash a “problem?” I would have loved to buy stocks at the bottom of the flash crash.

  64. Gravatar of 123 123
    9. October 2010 at 04:02

    The flash crash was a problem for some individual stocks. For some, all bids disappeared, for some, all ask orders disappeared. But the cause of the problem was located in S&P futures market, where $4 billion in futures contracts were sold by a fund manager that mistakenly thought it was selling into a liquid market, as bid-ask spreads were low and volumes were high.

    The same mistake should not be made when analyzing the 2008 TIPS crash – bid-ask spreads are not everything.

  65. Gravatar of ssumner ssumner
    10. October 2010 at 04:44

    123, I’m still having trouble understanding the precise “problem” with the flash crash. These are voluntary transactions–who gets hurt?

    Are you saying the bid-ask spreads are not accurate? That one cannot buy a TIPS and then turn around and sell it for almost the same price?

  66. Gravatar of Fed Up Fed Up
    10. October 2010 at 17:08

    ssumner said: “Fed up, I consider the base to be money, and DDs as credit.”

    Strictly speaking, I believe that central bank reserves (excess reserves part of monetary base) would actually be considered credit too.

    It seems to me there is:

    1) currency (not credit and medium of exchange)

    2) central bank reserves (credit and medium of exchange inside the banking system only)

    3) all other demand deposits (credit and medium of exchange)

    Any corrections needed there?

  67. Gravatar of ssumner ssumner
    11. October 2010 at 05:54

    Fed up, That’s fine, but I prefer to focus on the base.

  68. Gravatar of Fed Up Fed Up
    11. October 2010 at 09:04

    ssumner said: “Fed up, That’s fine, but I prefer to focus on the base.”

    OK, but in MV=PY shouldn’t the M be the medium of exchange, which would be currency + demand deposits, because that is what is accepted by producers, stores, and others?

  69. Gravatar of ssumner ssumner
    12. October 2010 at 05:07

    Fed up, No, any medium of account will work, including the base. V is just NGDP/MB

  70. Gravatar of 123 123
    12. October 2010 at 12:36

    Scott, you said:
    “I’m still having trouble understanding the precise “problem” with the flash crash. These are voluntary transactions–who gets hurt?”

    I mostly agree with the recent blog posts by Rajiv Sethi, who says the real problem is that some “crazy” transactions were cancelled by the regulators.

    Yet there is a problem in the sense of the optimal market structure. Perhaps a different market structure could do a better job of matching equity buyers and sellers.

    You said:
    “Are you saying the bid-ask spreads are not accurate? That one cannot buy a TIPS and then turn around and sell it for almost the same price?”
    Liquidity risk is the risk that large uninformed trade order will move the price, bid-ask spread gives you very little information about that.

  71. Gravatar of Fed Up Fed Up
    12. October 2010 at 16:51

    “Fed up, No, any medium of account will work, including the base. V is just NGDP/MB”

    But can you purchase a good/service or financial asset with an excess central bank reserve?

  72. Gravatar of ssumner ssumner
    15. October 2010 at 15:14

    123, Sethi is obviously right. Cancelling the orders is just adding even more moral hazard to the system. Will someone please save capitalism from the capitalists!

    I’ve forgotten why we were discussing TIPS, I’d want to know how much the market price falls with large sales.

    Fed up, Yes, reserves are essentially cash.

  73. Gravatar of Fed Up Fed Up
    15. October 2010 at 16:29

    “Fed up, Yes, reserves are essentially cash.”

    IMO, only currency and demand deposits are true medium of exchange because I thought central bank reserves couldn’t leave the banking system, but I will try to keep that in mind when I write posts.

  74. Gravatar of ssumner ssumner
    17. October 2010 at 05:51

    Fed up, Again, there are no such thing as central bank reserves. Commerical banks have reserves, not central banks.

  75. Gravatar of 123 123
    18. October 2010 at 03:56

    Scott, you said:
    “I’ve forgotten why we were discussing TIPS, I’d want to know how much the market price falls with large sales.”

    We started discussing TIPS because I blogged about TIPS as evidence of monetary nature of shock in September-October 2008 (my post was liked to by Rowe and Beckworth). If the nature of the shock was Minskian as Delong says, then the relative price of all safe assets should have increased. Yet the price of illiquid TIPS has crashed.

    Scientists think that relative trading volume tells us a lot about how much the market price falls with large sales. Relative trading volume was one of the indicators used by the authors of the study we discussed above (the study found that there was a huge increase of TIPS liquidity risk premia in September-October 2008).

  76. Gravatar of ssumner ssumner
    19. October 2010 at 05:18

    123, I like that argument, please send it to me this weekend when I’ll have more time. Am I correct in assuming that both of the following interpretations suggest money was too tight in late 2008?

    1. TIPS fell sharply because the Fed raised real rates and lowered inflation expectations.

    2. TIPS fell sharply because the Fed failed to provide enough liquidity to the markets, and relatively illiquid (but riskfree) assets fell sharply in value.

    Or is there a third hypothesis that would exonerate the Fed?

  77. Gravatar of Fed Up Fed Up
    20. October 2010 at 22:14

    “Fed up, Again, there are no such thing as central bank reserves. Commerical banks have reserves, not central banks.”

    Maybe it is more accurate to call them central bank medium of exchange that is credit/debt?

    Here is how someone once said it:

    “Central bank excess reserves” [medium of exchange] “are in a sense a form of (short term) government debt, on a consolidated basis. Their primary purpose is as a liability in support of central bank assets directly. It’s not really a disguise. It’s more that people for the most part don’t understand this. It’s a bit of a stretch to compare them with Fannie and Freddie, but some of the central bank assets now are mortgage related – i.e. MBS – so you’re not far off.

    I believe the 1 month Treasury bill is normally the shortest original term. There may have been special occasions where they issued shorter term bills than that.

    The monetary base is going up in the form of reserves instead of currency, because the Fed has intended that the base increase (to support its own assets) and can do this most effectively through excess reserves. It can’t force currency issuance at will, because currency demand is determined by the public. The public has increased its currency holdings by only about $ 100 billion over the entire period of the crisis, compared to the Fed increasing excess reserves by $ 1.1 trillion.”

  78. Gravatar of Scott Sumner Scott Sumner
    21. October 2010 at 05:48

    Fed Up, MBSs are not “reserves” for the Fed, they are assets.

    Your comment about forcing the public to accept more currency is wrong. The Fed controls the monetary base, not reserves or cash separately. So they are no more able to force reserves on the banking system than they can force cash on the public. Both are demand determined. But if they put negative rates on reserves, then they can effectively force the public to hold more cash–of course that would create hyperinflation unless they reduced the base.

  79. Gravatar of 123 123
    23. October 2010 at 04:35

    Scott, you said:
    ” I like that argument, please send it to me this weekend when I’ll have more time. Am I correct in assuming that both of the following interpretations suggest money was too tight in late 2008?

    1. TIPS fell sharply because the Fed raised real rates and lowered inflation expectations.

    2. TIPS fell sharply because the Fed failed to provide enough liquidity to the markets, and relatively illiquid (but riskfree) assets fell sharply in value.

    Or is there a third hypothesis that would exonerate the Fed?”

    My argument is here:
    http://themoneydemand.blogspot.com/2010/10/brad-delong-and-flight-to-safety.html

    Both of the reasons you gave why TIPS fell are true – it is visible in the data. Real rates could change because of some real shock, so #1 might not persuade everybody. #2 is the clear indictment of the Fed.

  80. Gravatar of ssumner ssumner
    23. October 2010 at 06:25

    123, Thanks, I’ll try to do a post on that.

  81. Gravatar of Richard W Richard W
    23. October 2010 at 07:16

    The TIPS bid-ask spread might not be exhibiting an obvious sign of liquidity stress. However, that can be a misleading indicator of its true liquidity. If the market was liquid why would the sale of Lehman TIPS securities have an execution effect on yields? That indicates the market is shallow and is responding to transactions rather than changes in economic fundamentals.

  82. Gravatar of Scott Sumner Scott Sumner
    24. October 2010 at 07:09

    Richard, Good point.

  83. Gravatar of Laser Toner UK Laser Toner UK
    25. October 2010 at 03:42

    Fed up, Again, there are no such thing as central bank reserves. Commerical banks have reserves, not central banks.

  84. Gravatar of Fed Up Fed Up
    27. October 2010 at 22:47

    “Fed Up, MBSs are not “reserves” for the Fed, they are assets.”

    “Fed up, Again, there are no such thing as central bank reserves. Commerical banks have reserves, not central banks.”

    I hope I have picked up enough from the accounting people.

    You didn’t get the whole conversation, but the first point is yes the MBS’s are the assets AND the central bank medium of exchange (the reserves) is/are the liabilities.

    The next point is I was trying to compare Fannie and Freddie failing to the central bank failing. In both cases, would/did the federal gov’t bail them out with gov’t debt? If they would/did, IMO it is gov’t debt in disguise.

  85. Gravatar of Fed Up Fed Up
    27. October 2010 at 23:01

    “Your comment about forcing the public to accept more currency is wrong. The Fed controls the monetary base, not reserves or cash separately. So they are no more able to force reserves on the banking system than they can force cash on the public. Both are demand determined.”

    “It can’t force currency issuance at will, because currency demand is determined by the public.”

    Actually someone else’s comment. I’m reading that as both comments agree about currency. As far as forcing reserves on the banking system, does that mean the fed needs to overpay for the assets?

  86. Gravatar of the secret the secret
    2. November 2010 at 02:23

    “The other problem is that everyone has their own nuances.”

    I’m growing increasingly tired of being nuanced (maybe it’s early senescence). Will more money solve the problem or not? I’m a Monetarist. Are you?

  87. Gravatar of ssumner ssumner
    4. November 2010 at 17:23

    Fed up, No they don’t overpay, they pay market prices.

    Secret, I’m a post-monetarist

  88. Gravatar of “Ben Volcker” and the monetary transmission mechanism « The Market Monetarist “Ben Volcker” and the monetary transmission mechanism « The Market Monetarist
    30. October 2011 at 10:51

    [...] finally from Scott Sumner on the differences between New Keynesian and Market Monetarist [...]

Leave a Reply