Think of money demand shocks as negative money supply shocks

Over at Econlog, I have a new post discussing Ricardo Reis’s proposal for a market-based price level target, which relies on shifts in money demand.  (In contrast, my NGDP futures targeting paper contemplates using markets to adjust the money supply until NGDP expectations are on target.)

When thinking about these two approaches, it might be useful to compare a money demand shock with a money supply shock.  We all know from EC101 that a shift in supply has the opposite impact (on value) from a shift in demand.  Money is no different.  Those who are used to taking a quantity theoretic approach to money might consider the following three examples:

1. Suppose there is a huge spike in the demand for US currency in foreign countries.  That will increase the demand for US base money and, other things equal, will reduce the US price level.  But you can also think of this sort of demand shock as reducing the supply of currency within the US.  With less currency circulating in the US, the price level falls for standard “quantity theory” reasons.

2. Now let’s consider an economy whose currency is of no interest to outsiders—say Canada.  If Canada imposes draconian taxes then the Canadian public might hoard currency as a way of hiding income from the government.  That would result in a huge spike in Canadian currency demand.  But you can also view that as a money supply shock.  The supply of currency actively being used as a medium exchange, aka Canadian “transactions balances”, would decline as hoarding balances increase. The quantity theory of money applies better to transactions balances than to all money balances.

3. With the advent of interest on reserves (IOR), and enormously bloated levels of excess reserves, the Fed has shifted somewhat away from a supply of money approach and towards a demand for money approach.  On the other hand, the original monetarist model treated “high-powered money” as being equivalent to the monetary base.  With IOR, the entire monetary base is no longer high-powered money.  Instead, the currency stock is the new high powered money.  So a change in IOR that impacts the demand for base money can also be thought of as impacting the supply of high-powered money.   Thus if the Fed suddenly cut IOR to zero, banks would try to get rid of some of their excess reserves, which would flow out into circulation, boosting the supply of currency, and hence the price level.

[Some people who understand accounting but not macroeconomics will tell you that banks as a whole cannot get rid of reserves—that reserves withdrawn from one bank will be deposited into another.  Don’t believe them.  A monopoly bank could easily get rid of unwanted ERs by buying assets, then making bank deposits unattractive enough so that all the base money doesn’t get redeposited into the banking system.  The entire banking system is no different.  People who treat macro as a branch of accounting will only confuse you—stay away from them.]

There’s nothing new in this post, even more than a quarter millennium ago David Hume knew that an increase in money demand is equivalent to a decrease in the money supply:

“If the coin be locked up in chests, it is the same thing with regard to prices, as if it were annihilated.” David Hume — Of Money

PS.  The thought experiments in this paper were merely to illustrate basic concepts. In the real world, the Fed would accommodate a shift in currency demand from overseas hoarding, or domestic tax evaders.  Hence there would be no significant macroeconomic impact.

 


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40 Responses to “Think of money demand shocks as negative money supply shocks”

  1. Gravatar of Jerry Brown Jerry Brown
    17. March 2017 at 20:30

    Lets say the banking system as a whole can get rid of excess reserves by making bank deposits less attractive to their customers after purchasing assets with the excess reserves. What makes you think that the people whose savings vehicles were so purchased are going to head out and spend all that money rather than continue to save it in some other fashion? Their original intent was to save, why wouldn’t that largely remain? Why wouldn’t the velocity of money change far more than the price level in other words? Why assume a behavior change in desired savings? I mean it is not like banks are going to go out and purchase junk cars from people’s back yards and everyone decides to have a party suddenly.

  2. Gravatar of Lorenzo from Oz Lorenzo from Oz
    17. March 2017 at 21:42

    What, you mean bank deposits are a service governed by supply and demand? Wow.

    🙂

  3. Gravatar of Anonymous Anonymous
    17. March 2017 at 22:17

    Without a competitive market in currency, we really cannot tell whether tomorrow’s decline in outstanding bank credit (money) and thus decline in the money supply, is a correction to today’s over-expansion, or today’s under-expansion.

    The system is ultimately predicated on obedience to the state, not on open and competitive bidding among free market providers which reveals actual individual preferences and thus market signals of over- or under-expansion of a good.

    With goods like cars for example, we can tell when there is over-expansion by the existence of losses resulting from competitive market forces between cars and other goods. Here it would mean cars are over-produced and other goods are under-produced. This is how producers in a competitive market produce each good in the right amount that satisfies individual preferences.

    Can’t do that with state run currencies.

    Attempts to do it, are always ultimately dependent on obedience not consent, and thus not intellectual or scientific.

  4. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    18. March 2017 at 05:10

    You’d think a guy who worked for years next to Milton Friedman at Hoover would have learned that interest rates are not the price of money. But, when your reputation hinges on an interest rate rule named after you…

    http://web.stanford.edu/~johntayl/2017_pdfs/Testimony-Taylor-Mar16-2017-MPT.pdf

    Even when he stumbles onto the truth;

    ‘…reserve balances should be reduced to the size where the interest rate is market determined rather than administered by the Fed’s setting the rate on excess reserves. In other words, my target level for the size of the balance sheet would be a level of reserves where the interest rate is determined by the supply and demand for reserves. Reserves are way above that level now so the federal funds
    rate is effectively determined by the interest on excess reserves.’

    he doesn’t realize what he’s saying is that monetary policy can’t be conducted with a focus on interest rates; the bible according to Friedman.

  5. Gravatar of Ray Lopez Ray Lopez
    18. March 2017 at 07:37

    I promised to be nice to the mentally-ill Sumner in my last post, am I a person of my word? I will try…but it’s so hard, so hard.

    Sumner’s analogy is like “imagine a gunshot wound as being lead poisoning”. But still, a good analogy I suppose. (BTW, the Fed makes money on IOR when interest rates are low, see: https://andolfatto.blogspot.com/2017/02/a-public-finance-case-for-keeping-feds.html )

    But the real question is this: so what? Imagine a country where one-third of the money is stolen (happened, Moldova) or a huge supply of money is suddenly outlawed and withdrawn (happened, India), or where a bunch of guys suddenly burn up all their wealth (happened, twice, once in the Pacific Northwest with the ‘potlatch’ and once in Polynesia with a huge ‘rai’ stone that sank in the sea). What would happen to real GDP? NOTHING. Absolutely nothing. In fact in India, Moldova and Polynesia GDP went up. Think about that.

    Can you imagine a world where money is neutral, short term and long? It’s not hard, if you let the scales fall from your eyes. Wake up.

    PS–re-reading my post above, I sound like a sort-of poor man’s Paul Krugman. Schooling Scott Sumner. LOL, that’s happened too!

  6. Gravatar of ssumner ssumner
    18. March 2017 at 08:14

    Jerry, I am not talking about saving, I am talking about money demand—they are unrelated topics.

    Prices are determined by money supply and demand, saving has nothing to do with it.

    Could velocity change? Sure, anything is possible, but what does that have to do with this post?

    Lorenzo. For many people that’s a major insight. 🙂

    Ray, As I keep telling you, the theft of money doesn’t change the money supply–it just means someone else owns it.

  7. Gravatar of flow5 flow5
    18. March 2017 at 09:27

    Scott Sumner doesn’t know a credit from a debit (and can’t explain his shortcomings). From the standpoint of the economy, commercial banks do not loan out existing deposits, saved or otherwise. Thus when rates rise, more savings become idled, as the proportion of time to transaction deposits rises.

    There was a dramatic contraction in “credit” velocity (due to the impoundment of savings within the CB system, or more specifically, “savings” velocity, the transfer of title of non-bank assets within the commercial banking system), following the rate hike on 12/15/16 (thereby swallowing up R-gDp).

    Same for the hike on 12/17/15 (which swallowed up N-gDp). There should be another dramatic contraction in DD Vt following Yellen’s latest rate hike (again swallowing up R-gDp).

    Sumner is quick with theory, but can’t apply his garbage.

  8. Gravatar of flow5 flow5
    18. March 2017 at 09:40

    “Since the value of base money is the inverse of the price level”

    LOL. Where’s the evidence?

  9. Gravatar of flow5 flow5
    18. March 2017 at 09:43

    “bank reserves earn interest, and the interest rate is indexed to the price level”
    ———-

    LOL. Use the last 8 years as an example.

  10. Gravatar of flow5 flow5
    18. March 2017 at 09:48

    Targeting N-gDp caps real output and maximizes inflation. It is a perverse idea. R-gDp = the rate-of-change in short-term money flows (for the last 100 + years). Inflation = the rate-of-change in long-term money flows (for the last 100 + years).

    Monetary policy objectives should be formulated in terms of desired rates-of-change, roc’s, in monetary flows, M*Vt, relative to roc’s in R-gDp. Roc’s in N-gDp (though “raw materials, intermediate goods and labor costs, which comprise the bulk of business spending are not treated in N-gDp”), can serve as a proxy figure for roc’s in all transactions, P*T, in Professor Irving Fisher’s truistic: “equation of exchange”. Roc’s in R-gDp have to be used, of course, as a policy standard.

  11. Gravatar of Jerry Brown Jerry Brown
    18. March 2017 at 09:52

    Scott, I am just trying to understand the process in which the banking system could get rid of excess reserves that they no longer desired by purchasing financial assets from the public and by making bank deposits so unattractive that the proceeds of the purchase would not end up in banks. I assume that financial assets held by the non-bank public are classified as savings. Purchases of these assets by banks under your scenario would have to end up as being by actual vault cash (a type of bank reserves) and your statement that this would increase the price level assumes that the savings desires of the public is highly influenced by the form of the asset that they hold rather than the form being dependent on the desire to save, which I think is more reasonable.

    I don’t see how some desire by the private banks to lower their overall reserves through asset purchases translates into a change in the demand for money by the private non-bank sector absent a change in the savings desires of that sector. And therefore I don’t understand why this would affect the price level outside of demands for the purchase of safes and safety deposit boxes.

  12. Gravatar of flow5 flow5
    18. March 2017 at 09:56

    Tell me what’s the projected “Wicksellian Natural Rate of Interest” associated with high employment and stable inflation? We’ve had at least 100 years to figure that out (but as yet, no cigar).

    If you can’t forecast, you don’t understand money and central banking period.

  13. Gravatar of flow5 flow5
    18. March 2017 at 10:04

    An increasingly disproportionate volume of N-gDp (which Sumner advocates targeting), is related to the growth of inflation.

    There will obviously come a time under the remuneration of IBDDs, that all we get, is more inflation and subzero real economic output. I.e., we will not only have negative real-rates of interest but negative real growth rates as well.

  14. Gravatar of Jerry Brown Jerry Brown
    18. March 2017 at 10:06

    Flow5- “Targeting N-gDp caps real output and maximizes inflation”

    That is pure nonsense. Targeting a nominal rate of income growth does not limit real income growth unless it was far too low and in no way is a policy of maximizing inflation unless policymakers picked a nominal growth target somewhere in the stratosphere.

  15. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    18. March 2017 at 12:18

    ‘Scott, I am just trying to understand the process in which the banking system could get rid of excess reserves that they no longer desired by purchasing financial assets from the public….’

    It’s called making loans. It’s what banks do.

  16. Gravatar of Jerry Brown Jerry Brown
    18. March 2017 at 13:51

    Patrick Sullivan, I guess when a bank creates a loan with a customer that could be termed as purchasing the customer’s signature on the loan agreement and could be considered as the purchase of a brand new financial asset by the bank. At a 10% required reserve ratio, eliminating 2 trillion in excess reserves only requires the banking system to create 20 trillion in new loans using this method to reduce excess reserves to zero. Finding the credit worthy customers willing to borrow that is sure to be difficult, but if it was possible, I would agree that would have a major impact on the price level. In any case, it is not what I understood Sumner to mean by purchasing assets. But perhaps I misunderstood, that does happen frequently I am afraid.

  17. Gravatar of Major-Freedom Major-Freedom
    18. March 2017 at 14:34

    Out of fairness, I must finally admit Scott Sumner was right about something, in this case BREXIT:

    http://i.imgur.com/86K2AKY.jpg

  18. Gravatar of Benjamin Cole Benjamin Cole
    18. March 2017 at 17:21

    With IOR, the entire monetary base is no longer high-powered money. Instead, the currency stock is the new high powered money.–

    But also

    “In the real world, the Fed would accommodate a shift in currency demand from overseas hoarding, or domestic tax evaders.” –Scott Sumner.

    Not sure what to make of this.

    BTW, U.S. paper cash in circulation is at $4,700 per US resident.

    Sure, your neighbors, family of four, have $18,400 in their cupboards. Aunt Ninnie keeps very little cash, offset by Uncle Joe with his $10,000 wad he carries around.

    How would the Fed offset changes in paper currency use or demand? What if a lot of currency use is not measured (we can hope).

    A shadow economy in which people are prospering, beyond the reach of the Fed?

    Through reverse repos?

    What means the $30 trillion in offshore Cayman Islands bank accounts? Our current President, and Mitt Romney, evidently use offshore accounts heavily. I guess this this is common now. The Treasury Secy said he used offshore bank accounts so heavily as he wanted to help do-goody non-profits.

    A fin question: What fraction of the three most recent Presidential cabinets had illegal household help or offshore bank accounts?

    I get the sense macroeconomists are groping the dark, feigning confidence.

  19. Gravatar of dtoh dtoh
    18. March 2017 at 17:53

    Scott,
    For at least 3 and 1/2 years, I’ve been commenting that you need to exclude ER when looking at the effects of monetary policy. In other words MB is completely irrelevant. The only thing that counts is MB minus ER (or MB minus all reserves if you prefer). I’m glad to see that you’ve come round to that point of view.

    Now that you have finally absorbed that point, I will reiterate a more generalized point that I have also been repeatedly making.

    When analyzing monetary policy, stop making a distinction between the Fed and the commercial financial sector.

    The only thing that matters is marginal changes in the exchange of assets for money between the non-financial sector and the financial sector. And by financial sector, I mean the commercial financial sector AND the Fed together viewed as a single entity.

    As I have noted before an exchange of assets for money between Chase and the Fed has no more effect on the economy than if same transaction were to take place between the St. Louis Federal Reserve Bank and the New York Federal Reserve Bank.

    Once you stop making the unnecessary distinction between the commercial financial sector and the Fed, analysis of monetary policy becomes trivial.

  20. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    18. March 2017 at 18:59

    ‘I guess when a bank creates a loan with a customer that could be termed as purchasing the customer’s signature on the loan agreement and could be considered as the purchase of a brand new financial asset by the bank.’

    Which might be why banks carry those loans as assets on their balance sheets.

  21. Gravatar of Ray Lopez Ray Lopez
    18. March 2017 at 19:13

    Sumner: “Ray, As I keep telling you, the theft of money doesn’t change the money supply–it just means someone else owns it.” – like dtoh implies, you need to blog on this a bit more for us stupid readers. Some points you should make:

    1) if the Fed holds assets on its balance sheet as opposed to the private sector, does it matter? Answer (I think, if I read you correctly, ITIIRYC): No, ‘somebody else owns it so it don’t matter’

    2) if money is taxed from a population (India) or stolen (Moldova), does it matter? Answer (ITIIRYC): No, ‘somebody else owns it so it don’t matter’

    3) if money is destroyed (potlatch) does it matter? Answer (ITIIRYC): No, with a caveat *.

    4) if money is created out of thin air, Friedman helicopter drop style, does it matter? Answer (ITIIRYC): Yes, with a caveat *.

    What is the caveat *? Due to money non-neutrality short term, and money illusion, as well as sticky prices/wages (all interrelated), a non-optimum supply of money can cause real GDP effects, either a drop in GDP if too little money with respect to the optimum, or, it can cause GDP to rise if the money supply is not optimum.

    But IMO you need to do a column on this, for the IQ 80-120 crowd that reads this blog. Some of us are not as bright as you.

  22. Gravatar of Benjamin Cole Benjamin Cole
    18. March 2017 at 19:17

    The Fed is too tight:

    http://ngdp-advisers.com/2017/03/18/can-developed-economy-permanently-atrophy/

  23. Gravatar of flow5 flow5
    18. March 2017 at 23:08

    @ Jerry Brown:

    That is pure nonsense? No Jerry, that is math.

  24. Gravatar of George George
    19. March 2017 at 03:25

    @Flow5

    Your strategy won’t work here. Unlike you Scott is not thin-skinned and does not lose his composure that fast. You won’t be able to provoke him into reaction.

    @Scott Sumner

    You could respond to Flow in a separate blog post. I know discussions with him are hard but perhaps it would be beneficial. Plus I would definitely enjoy reading it!

  25. Gravatar of Negation of Ideology Negation of Ideology
    19. March 2017 at 06:41

    Benjamin –

    “BTW, U.S. paper cash in circulation is at $4,700 per US resident.

    Sure, your neighbors, family of four, have $18,400 in their cupboards. Aunt Ninnie keeps very little cash, offset by Uncle Joe with his $10,000 wad he carries around.”

    I assume that includes money kept by stores in cash registers. Also casinos. So the median US resident would likely have far less cash on hand than the mean. I also vaguely recall reading that something like 2/3 of cash is held overseas. If you divide that $4700 by 3 you get $1566 per resident, and probably a much lower median. I’d guess a few hundred dollars.

    In any case, the Fed can offset any change in monetary demand because it has control over the supply of base money.

  26. Gravatar of Negation of Ideology Negation of Ideology
    19. March 2017 at 06:53

    Ray Lopez –

    The answer to all your questions is the same. It “matters” to the individual who gains or loses money, but not to the economy as a whole.

    If money is destroyed (rare, but it happens), then the Central Bank has issue an equal amount of new money to offset it. A loss to the owner of the destroyed money, but an equal gain to the Central Bank/Treasury.

    If money is stolen it is a loss to the owner, and an equal gain to the thief. There could be a change in velocity – we don’t know whether the original owner or the thief will spend the money faster. But that doesn’t matter because the Central Bank can offset velocity changes.

    I suspect the only thing the Central Bank can’t offset is counterfeiting on a massive scale. I’ll repeat what I said above to Benjamin (by the way, I highly recommend his book):

    In any case, the Fed can offset any change in monetary demand because it has control over the supply of base money.

  27. Gravatar of Private Pyle Private Pyle
    19. March 2017 at 07:36

    Hi prof. Sumner ,

    what is your opinion on positivemoney.org? are they right in their analysis of our current monetary system?

  28. Gravatar of Ray Lopez Ray Lopez
    19. March 2017 at 12:37

    @Negation of Ideology – thanks, and I did not know Ben Cole has a good book, amazing, I did see something that looked like a self-published work directed towards novices a while ago and dismissed it. The velocity for rich being different from the poor is something I’ve seen as well (the same being said for spending money on war defense hardware as opposed to social services welfare, Republicans vs Democrats in the USA). As for money supply due to counterfeiting, it’s the same answer as what you said to me: it doesn’t matter. Think of new gold from the New World in 15th C Spain: in a sense, it’s like ‘counterfeit fiat money’ in that it’s a massive influx of ‘new money’. Your last point is debatable, that the Fed “can offset any change in monetary demand”. The Fed IMO pushes on a string–the last few years have proved this, and the last few decades in Japan. This is separate and aside from my belief in money neutrality; we’re talking nominal GDP here. That’s why Sumner’s NGDPLT and Ricard Reis’ proposal are problematic: they probably won’t work. If people don’t want to spend, they won’t, massive hyperinflation aside.

  29. Gravatar of Don Geddis Don Geddis
    19. March 2017 at 13:13

    @Ray Lopez: “if the Fed holds assets on its balance sheet as opposed to the private sector, does it matter?

    “Assets” are not part of the monetary base, so of course your question (whether “yes”, or “no”) is irrelevant for monetary policy and NGDP.

    As for money supply due to counterfeiting, it’s the same answer as what you said to me: it doesn’t matter. Think of new gold from the New World in 15th C Spain: in a sense, it’s like ‘counterfeit fiat money’ in that it’s a massive influx of ‘new money’.

    Do tell. So now your theory is that New World gold influx “didn’t matter” for the value of the unit of account (and the overall economy) at the time? LOL. Would love to watch you try to explain this “lesson” from history.

  30. Gravatar of morgan warstler morgan warstler
    19. March 2017 at 21:08

    Scott, you inadvertently tripped over the one issue I have with NGDPLT…

    “1. Instead of dollars being redeemable into 1/35 oz. of gold, they are redeemable into a fixed basket of goods and services.

    2. The redemption applies to bank reserves, and guarantees that one dollar in reserves can be redeemed a year from today for enough dollars to buy one plus the real interest rate worth of goods and services.”

    The fixed basket of goods and services HAS TO BE X% DIGITAL AND EVERY YEAR BE MORE SO AT A FASTER RATE THAN 2%,

    AND INFACT IF INFLATION EVER INCREASES WE CAN EXPECT DIGITAL DEFLATION TO KILL IT (PEOPLE SWITCHING TO ENDLESS FREE NEAR FREE STUFF) MORE SO THAN HIGHER WAGES.

    WE GET HIGHER WAGES AS NEW FREE SH*T – BUT IT’S IMPOSSIBLE FOR YOUR BRAIN TO GROK IT.

  31. Gravatar of morgan warstler morgan warstler
    19. March 2017 at 21:23

    Ray, As I keep telling you, the theft of money doesn’t change the money supply–it just means someone else owns it.

    The problem Scott is ALWAYS and I kills you to think this…

    DOERS > BANKERS > Thieves

    Bankers live in fear of doers feeling stolen from…

    Your (bankers) job Scot is to keep us (doers) happy and that means we tell you (bankers) what to do and you (bankers) go out and hunt for systems that reward lazy (thieves) and you kill them like mice (thieves) and bring them to our (doers) door and leave them there as proof you are worth keeping at pets (bankers).

    REREAD OVER AND OVER.

  32. Gravatar of ssumner ssumner
    20. March 2017 at 05:36

    Jerry, You said:

    “Purchases of these assets by banks under your scenario would have to end up as being by actual vault cash”

    Why? I don’t follow your argument. Why not just cash held by the public?

    dtoh, You said:

    “For at least 3 and 1/2 years, I’ve been commenting that you need to exclude ER when looking at the effects of monetary policy. In other words MB is completely irrelevant. The only thing that counts is MB minus ER (or MB minus all reserves if you prefer). I’m glad to see that you’ve come round to that point of view.”

    No, you are still misunderstanding my view, as I explained to you a few days ago.

    The currency stock is not a good indicator of the stance of monetary policy.

    And I’ve been saying the same thing for many years—far more than 3 1/2.

    Ray, Theives are part of the public, I thought you knew that. Most people do.

    George, I only respond to actual human beings, not robots.

    Pyle, It looks like they are mixing up monetary and fiscal policy (helicopter drop). If so, I’m not a fan.

    Morgan, You said:

    “REREAD OVER AND OVER.”

    Once is more than enough.

  33. Gravatar of Jerry Brown Jerry Brown
    20. March 2017 at 06:22

    Yes Scott, I meant the cash would have to end up coming from vault cash and would then end up being held by the public. If the private banks as a whole began making purchases from the rest of the private sector and refusing deposits then they are in effect using their vault cash reserves to make those purchases and it seems to me that the non-bank public would end up holding that in the form of cash.

  34. Gravatar of morgan warstler morgan warstler
    20. March 2017 at 06:36

    Scott,

    When we say Central Bank can always generate more inflation – I agree with you!

    And I agree with you in the sense that theoretically they can indeed print until inflation moves.

    You yourself admit often the political limitations. I’m just naming these:

    “DOERS > BANKERS > Thieves”

    I’m not wrong when I say bankers live in fear of inflation bc it gives DOERS (value creators) sense bankers have forgotten who they work for… you just have to pry down into their deepest moral suppositions to find it… but you see it clearly expressed by like Rick Perry basically telling Ben not to visit Texas.

    It’s there it & doesn’t harm you to admit it.

    BECAUSE… the reason NGDPLT works and can solve for the DOERS > BANKERS > Thieves rule is of course the loss of discretion of LT.

    When the Fed becomes a computer (loss of discretion) DOERS ARE THEIR MOST CONFIDENT THE BANKERS GET THE RULE!

    IMO we’d get a bigger bump in long term expectations, higher animal spirits, than even Trump > Obama.

    Wouldn’t you admit that Dems and Millennials are all learning anew that Obama did indeed leave juice in orange – holding back Economy with taxes and regulations – and they are internalizing this – so that it becomes MORE LIKELY that if they get power again, they will not make the same mistakes, not in the immediate.

    We should expect to see a Bill Clinton like fear of harming the free market Economy after Reagan’s lesson when the next Dem takes office… even if they run on Bernie stuff, when they see market slow down even a little bit, the sense of GET THE JUICE! will remain – it takes a while to forget how Economy runs.

    You don’t agree?

    And if you agree there… wouldn’t it stand to reason that as a Fed begins to give up discretion, this will be a self-reinforcing loop – as DOERS are made happy, happier, happiest?

  35. Gravatar of dtoh dtoh
    20. March 2017 at 06:39

    Scott,
    I didn’t say MB minus ER was a good indicator, but it at least gives you some information, e.g. (MB – ER) going up is more accommodative than when (MB – ER) is declining. MB alone, on the other hand, gives you zero information.

    That said, I think we would both agree that NGDP is a sufficient indicator of the stance of monetary policy.

    One question I do have though is that you say, “My second reason for opposing IOR is that it moves us even further away from a quantity theoretic approach to monetary policy.” Does this mean you have another money aggregate in mind that you think gives a better indication of the stance of monetary policy than the currency stock. If not, why the desire for a quantity theoretic approach if there is no correlation between quantity and outcome.

  36. Gravatar of dtoh dtoh
    20. March 2017 at 06:48

    Scott,

    And BTW, when we had this discussion a couple of years ago, you said, “You can talk about the base and NGDP, in which case adding MB-ER adds nothing to the model.”

    Versus now, when you say, “On the other hand, the original monetarist model treated “high-powered money” as being equivalent to the monetary base. With IOR, the entire monetary base is no longer high-powered money. Instead, the currency stock is the new high powered money.”

    My point then as now is – stop talking about the base. It’s a meaningless number.

  37. Gravatar of Ray Lopez Ray Lopez
    20. March 2017 at 12:09

    @Sumner- “Ray, Theives [sic] are part of the public, I thought you knew that. Most people do.” – Morgan is right, you sir are a thief, you produce nothing of value. By contrast I have in my professional capacity increased the economic pie, as perhaps has Morgan (yes, promoting an innovative business is a form of increasing the economic pie) not just redistributed it (like most lawyers, politicians and middlemen). And I don’t even mention the businesses I am creating now, including chicken farming and now investing in light manufacturing in the Philippines.

    You, sir, are a form of entertainment. Nothing more. You’re not a doer, a maker, you’re just a taker. And you owe us a column on Moldova, please get on it.

    @Don Geddis – it’s irrelevant what you think is monetary theory. My answers speak for themselves, and you should read the recent reply in the blog Alt-M by Larry White to another blogger for the context, as I referenced in the link above. Education Don is your Achilles’ Heel. Heel. Reminds me of you.

  38. Gravatar of Michael Makdad Michael Makdad
    20. March 2017 at 23:40

    Lorenzo,

    bank deposits are governed by supply and demand AND ALSO by institutional constraints.

    For example, in a major country that has a loan-to-deposit ratio of only 50% for the entire banking system and a negative interest rate on marginal excess reserves, most banks do not want incremental deposits… yet cultural norms in this society (i.e., potential regulatory actions if banks were to break the norms) in effect prevent banks from charging higher fees or making their branches/ATMs less convenient. in theory, the society as a whole could make different choices, but the banking sector cannot do so on its own.

  39. Gravatar of ssumner ssumner
    21. March 2017 at 17:10

    dtoh, If the MB gives you zero information, doesn’t that imply QE has no effect?

    I don’t recall the context of our earlier discussion, but I think what I meant is that you can talk about tools (MB) or outcomes (NGDP) but don’t talk about things that are neither tools nor useful outcomes (MB-ER)

  40. Gravatar of dtoh dtoh
    21. March 2017 at 17:33

    Scott,

    Something is only a tool if it produces a useful outcome. I would posit that MB is not a tool if the money never gets outside of the banking system. As I have said many times, the Fed trading Treasuries for deposits with Chase is no different than the NY Fed doing the same trade with the St. Louis Fed.

    MB is only a tool when it is held by the non-financial sector, and by definition that is MB minus reserves.

    …And BTW – I think I said “MB alone” gives you no information. 🙂

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