It's BAAACK! Japan's Slump and the Return of the Liquidity Trap
Total Page:16
File Type:pdf, Size:1020Kb
Load more
Recommended publications
-
Forecasting the Money Multiplier: Implications for Money Stock Control and Economic Activity
Forecasting the Money Multiplier: Implications for Money Stock Control and Economic Activity R. W. HAFER, SCOTT E. HUN and CLEMENS J. M. KOOL ONE approach to controlling money stock growth based on the technique of Kalman filtering.3 Although is to adjust the level of the monetary base conditional the Box-Jenkins type of model has been used in pre- on projections ofthe money multiplier. That is, given a vious studies toforecast the Ml multiplier, this study is desired level for next period’s money stock and a pre- the first to employ the Kalsnan filtering approach to diction of what the level of the money multiplier next tlae problen_i. period will be, the level of the adjusted baseneeded to The second purpose of this study is to rise the multi- achieve the desired money stock is determined re- plier forecasts in a simulation experiment that imple- sidually. For such a control procedure to function ments the money control procedure cited above. properly, the monetary authorities must be able to Given monthly money multiplier forecasts from each predict movements in the multiplier with some of the forecasting methods, along with predetermined, accuracy. a hypothetical Ml growth targets, monthly and quarter- This article focuses, first, oma the problem of predict- ly Ml growth rates are simulated for the 1980—82 ing moveanents in the multiplier. Two n_iodels’ capa- period. bilities in forecasting ti_ic Ml money multiplier from Finally, the importance of reduced volatility of the January 1980 to Decen_iber 1982 are compared. One quarterly Ml growtla is examined in another simula- procedure is based on the time series models of Box 2 tion experiment. -
Money Creation in the Modern Economy
14 Quarterly Bulletin 2014 Q1 Money creation in the modern economy By Michael McLeay, Amar Radia and Ryland Thomas of the Bank’s Monetary Analysis Directorate.(1) This article explains how the majority of money in the modern economy is created by commercial banks making loans. Money creation in practice differs from some popular misconceptions — banks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposits. The amount of money created in the economy ultimately depends on the monetary policy of the central bank. In normal times, this is carried out by setting interest rates. The central bank can also affect the amount of money directly through purchasing assets or ‘quantitative easing’. Overview In the modern economy, most money takes the form of bank low and stable inflation. In normal times, the Bank of deposits. But how those bank deposits are created is often England implements monetary policy by setting the interest misunderstood: the principal way is through commercial rate on central bank reserves. This then influences a range of banks making loans. Whenever a bank makes a loan, it interest rates in the economy, including those on bank loans. simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money. In exceptional circumstances, when interest rates are at their effective lower bound, money creation and spending in the The reality of how money is created today differs from the economy may still be too low to be consistent with the description found in some economics textbooks: central bank’s monetary policy objectives. -
Harvard Kennedy School Mossavar-Rahmani Center for Business and Government Study Group, February 28, 2019
1 Harvard Kennedy School Mossavar-Rahmani Center for Business and Government Study Group, February 28, 2019 MMT (Modern Monetary Theory): What Is It and Can It Help? Paul Sheard, M-RCBG Senior Fellow, Harvard Kennedy School ([email protected]) What Is It? MMT is an approach to understanding/analyzing monetary and fiscal operations, and their economic and economic policy implications, that focuses on the fact that governments create money when they run a budget deficit (so they do not have to borrow in order to spend and cannot “run out” of money) and that pays close attention to the balance sheet mechanics of monetary and fiscal operations. Can It Help? Yes, because at a time in which the developed world appears to be “running out” of conventional monetary and fiscal policy ammunition, MMT casts a more optimistic and less constraining light on the ability of governments to stimulate aggregate demand and prevent deflation. Adopting an MMT lens, rather than being blinkered by the current conceptual and institutional orthodoxy, provides a much easier segue into the coordination of monetary and fiscal policy responses that will be needed in the next major economic downturn. Some context and background: - The current macroeconomic policy framework is based on a clear distinction between monetary and fiscal policy and assigns the primary role for “macroeconomic stabilization” (full employment and price stability and latterly usually financial stability) to an independent, technocratic central bank, which uses a “flexible inflation-targeting” framework. - Ten years after the Global Financial Crisis and Great Recession, major central banks are far from having been able to re-stock their monetary policy “ammunition,” government debt levels are high, and there is much hand- wringing about central banks being “the only game in town” and concern about how, from this starting point, central banks and fiscal authorities will be able to cope with another serious downturn. -
Assessing the Stability and Predictability of the Money Multiplier in the EAC
Working paper Assessing the Stability and Predictability of the Money Multiplier in the EAC The Case of Tanzania Christopher Adam Pantaleo Kessy May 2011 When citing this paper, please use the title and the following reference number: S-40021-TZA-1 Assessing the stability and predictability of the money multiplier in the EAC: The Case of Tanzania This paper was commissioned by the Economic Affairs sub-committee of the East African Community Monetary Affairs Committee. The paper offers a template for Partner State central banks to employ in developing common operational and analytical approaches to understanding the evolution and behaviour of the money multiplier in the context of reserve money-based monetary programmes. The paper is the outcome of research collaboration between staff of the Bank of Tanzania and the International Growth Centre. The views expressed in this paper are solely those of the authors and do not necessarily reflect the official views of the Bank of Tanzania or its management. We are grateful to members of the Sub-Committee for useful comments. All errors are those of the authors. Contents Introduction 3 Defining the money multiplier X Tanzania: evidence and interpretation X Forecast performance X Summary and conclusion X References X Appendix I: Data X Appendix II X 2 Assessing the stability and predictability of the money multiplier in the EAC: The Case of Tanzania Introduction This paper discusses the stability and predictability of the money multiplier in the context of a reserve money anchor for inflation. The methods are illustrated throughout using data from Tanzania, but the discussion is relevant for the whole of the East African Community. -
How to Escape a Liquidity Trap with Interest Rate Rules Fernando Duarte Federal Reserve Bank of New York Staff Reports, No
How to Escape a N O . 776 Liquidity Trap with M A Y 2 0 1 6 Interest Rate Rules REVISED JANUARY 2019 Fernando Duarte How to Escape a Liquidity Trap with Interest Rate Rules Fernando Duarte Federal Reserve Bank of New York Staff Reports, no. 776 May 2016; revised January 2019 JEL classification: E43, E52, E58 Abstract I study how central banks should communicate monetary policy in liquidity trap scenarios in which the zero lower bound on nominal interest rates is binding. Using a standard New Keynesian model, I argue that the key to preventing self-fulfilling deflationary spirals and anchoring expectations is to promise to keep nominal interest rates pegged at zero for a length of time that depends on the state of the economy. I derive necessary and sufficient conditions for this type of state contingent forward guidance to implement the welfare-maximizing equilibrium as a globally determinate (that is, unique) equilibrium. Even though the zero lower bound prevents the Taylor principle from holding, determinacy can be obtained if the central bank sufficiently extends the duration of the zero interest rate peg in response to deflationary or contractionary changes in expectations or outcomes. Fiscal policy is passive, so it plays no role for determinacy. The interest rate rules I consider are easy to communicate, require little institutional change and do not entail any unnecessary social welfare losses. Key words: zero lower bound (ZLB), liquidity trap, new Keynesian model, indeterminacy, monetary policy, Taylor rule, Taylor principle, interest rate rule, forward guidance _________________ Duarte: Federal Reserve Bank of New York (email: [email protected]) The author thanks Sushant Acharya, Tobias Adrian, Christine Breiner, Marco Del Negro, Gauti Eggertsson, Marc Giannoni, Pierre-Olivier Gourinchas, Alfonso Irarrazabal, Chris Sims, Rui Yu, and, particularly, Anna Zabai for comments and discussions. -
Endogenous Money: Implications for the Money Supply Process, Interest Rates, and Macroeconomics
RESEARCH INSTITUTE POLITICAL ECONOMY Endogenous Money: Implications for the Money Supply Process, Interest Rates, and Macroeconomics Thomas Palley August 2008 Gordon Hall 418 North Pleasant Street Amherst, MA 01002 Phone: 413.545.6355 Fax: 413.577.0261 [email protected] www.peri.umass.edu WORKINGPAPER SERIES Number 178 Endogenous Money: Implications for the Money Supply Process, Interest Rates, and Macroeconomics Abstract Endogenous money represents a mainstay of Post Keynesian (PK) macroeconomics. Analytically, it provides a critical linkage between the financial and real sectors, with the link running predominantly from credit to money to economic activity. The important feature is credit is placed at the beginning of this sequence, which contrasts with conventional representations that place money first. The origins of PK endogenous money lie in opposition to monetarism. Whereas neo-Keynesian economics challenged monetarism by focusing on the optimality of money supply versus interest rate targets, PK theory challenged monetarism’s description of the money supply process. PK theory is itself divided between “horizontalist” and “structuralist” approaches to the money supply. Horizontalists believe the behavior of financial institutions is unconstrained by the availability of liquidity (reserves) provided by the central bank and the supply-price of finance to banks is fixed at a price set by the central bank. Structuralists believe liquidity pressures matter and the supply price of finance to banks can increase endogenously. Horizontalists can be further sub-divided into “strong” and “weak” positions. The strong position holds the bank loan supply schedule is horizontal and interest rates are unaffected by lending. The weak position holds that interest rates may rise with lending if borrower quality deteriorates. -
A Neoclassical Theory of Liquidity Traps
A Neoclassical Theory of Liquidity Traps Sebastian Di Tella∗ Stanford University August 2017 Abstract I propose a flexible-price model of liquidity traps. Money provides a safe store of value that prevents interest rates from falling during downturns and depresses in- vestment. This is an equilibrium outcome — prices are flexible, markets clear, and inflation is on target — but it’s not efficient. Investment is too high during booms and too low during liquidity traps. The optimal allocation can be implemented with a tax or subsidy on capital and the Friedman rule. 1 Introduction Liquidity traps occur when the role of money as a safe store of value prevents interest rates from falling during downturns and depresses investment. They can be very persistent, and are consistent with stable inflation and large increases in money supply. Liquidity traps are associated with some of the deepest and most persistent slumps in history. Japan has arguably been experiencing one for almost 20 years, and the US and Europe since the 2008 financial crisis. This paper puts forward a flexible-price model of liquidity traps and studies the optimal policy response. The baseline model is a simple AK growth model with log utility over consumption and money and incomplete idiosyncratic risk sharing. Markets are otherwise complete, prices are flexible, and the central bank follows an inflation-targeting policy. During downturns idiosyncratic risk goes up and makes risky capital less attractive. Without money, the real interest rate would fall and investment would remain at the first best level. ∗ I’d like to thank Manuel Amador, Pablo Kurlat, Chris Tonetti, Chad Jones, Adrien Auclert, Arvind Krishnamurthy, Narayana Kocherlakota, Bob Hall, and John Taylor. -
Macro-Economics of Balance-Sheet Problems and the Liquidity Trap
Contents Summary ........................................................................................................................................................................ 4 1 Introduction ..................................................................................................................................................... 7 2 The IS/MP–AD/AS model ........................................................................................................................ 9 2.1 The IS/MP model ............................................................................................................................................ 9 2.2 Aggregate demand: the AD-curve ........................................................................................................ 13 2.3 Aggregate supply: the AS-curve ............................................................................................................ 16 2.4 The AD/AS model ........................................................................................................................................ 17 3 Economic recovery after a demand shock with balance-sheet problems and at the zero lower bound .................................................................................................................................................. 18 3.1 A demand shock under normal conditions without balance-sheet problems ................... 18 3.2 A demand shock under normal conditions, with balance-sheet problems ......................... 19 3.3 -
The Friedman-Eichengreen Theory of the Great Depression
THE FRIEDMAN-EICHENGREEN THEORY OF THE GREAT DEPRESSION Paul Krugman March 28, 2009 This note is an attempt, for teaching purposes, to clarify my own thoughts about Barry Eichengreen’s interpretation of the international spread of the Great Depression. As I interpret it, Eichengreen’s story of what happened to the relationship between gold and monetary base at the international level closely resembles Friedman and Schwartz’s story about what happened to the relationship between monetary base and broader monetary aggregates at the domestic level. So one can write down an integrated Friedman-Eichengreen theory of the Depression. One can also ask whether this theory looks right. I’ve expressed some doubts about the Friedman explanation of the US Depression; by extension, one has to worry about how well the international extension of that explanation works. So here goes. I imagine a world of two countries, Home and Foreign, each producing a distinct good. Effective demand for each country’s good, which determines real output, is a function of its own output (via consumer demand), foreign output, the real exchange rate, and the interest rate: y = A(y, y*, EP*/P, i) y* = A*(y*,y, EP*/P, i*) I assume interest arbitrage: i = i* In each country there is a demand for money: M/P = L(y,i) M*/P* = L*(y*,i*) Now, assume prices fixed in the short run (Eichengreen and Sachs, more realistically for the 30s, had upward-sloping AS curves, but it doesn’t matter for current purposes). In each country the money supply is determined via a multiplier by the monetary base: M = μB, M* = μ*B* And now for the gold-exchange standard thing: each country pegs its currency to gold at rates R, R* currency units per ounce, so that E= R/R*. -
JAPAN's TRAP Paul Krugman May 1998 Japan's Economic Malaise Is First and Foremost a Problem for Japan Itself. but It Also Poses
JAPAN'S TRAP Paul Krugman May 1998 Japan's economic malaise is first and foremost a problem for Japan itself. But it also poses problems for others: for troubled Asian economies desperately in need of a locomotive, for Western advocates of free trade whose job is made more difficult by Japanese trade surpluses. Last and surely least - but not negligibly - Japan poses a problem for economists, because this sort of thing isn't supposed to happen. Like most macroeconomists who sometimes step outside the ivory tower, I believe that actual business cycles aren't always real business cycles, that some (most) recessions happen because of a shortfall in aggregate demand. I and most others have tended to assume that such shortfalls can be cured simply by printing more money. Yet Japan now has near-zero short-term interest rates, and the Bank of Japan has lately been expanding its balance sheet at the rate of about 50% per annum - and the economy is still slumping. What's going on? There have, of course, been many attempts to explain how Japan has found itself in this depressed and depressing situation, and the government of Japan has been given a lot of free advice on what to do about it. (A useful summary of the discussion may be found in a set of notes by Nouriel Roubini . An essay by John Makin seems to be heading for the same conclusion as this paper, but sheers off at the last minute). The great majority of these explanations and recommendations, however, are based on loose analysis at best, purely implicit theorizing at worst. -
Horizontalists, Verticalists, and Structuralists: the Theory of Endogenous Money Reassessed
A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Palley, Thomas I. Working Paper Horizontalists, verticalists, and structuralists: The theory of endogenous money reassessed IMK Working Paper, No. 121 Provided in Cooperation with: Macroeconomic Policy Institute (IMK) at the Hans Boeckler Foundation Suggested Citation: Palley, Thomas I. (2013) : Horizontalists, verticalists, and structuralists: The theory of endogenous money reassessed, IMK Working Paper, No. 121, Hans-Böckler-Stiftung, Institut für Makroökonomie und Konjunkturforschung (IMK), Düsseldorf, http://nbn-resolving.de/urn:nbn:de:101:1-201403119904 This Version is available at: http://hdl.handle.net/10419/105987 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. www.econstor.eu June 2013 121 Institut für Makroökonomie und Konjunkturforschung Macroeconomic Policy Institute Working Paper Thomas I. -
Federal Reserve Structure, Economic Ideas, and Monetary and Financial Policy
NBER WORKING PAPER SERIES FEDERAL RESERVE STRUCTURE, ECONOMIC IDEAS, AND MONETARY AND FINANCIAL POLICY Michael D. Bordo Edward S. Prescott Working Paper 26098 http://www.nber.org/papers/w26098 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 July 2019 We would like to thank Al Broaddus, Doug Evanoff, Owen Humpage, Tom Humphrey, Loretta Mester, Ed Prescott, Ellis Tallman, and David Wheelock for helpful comments. The views expressed in this essay are those of the authors and not necessarily those of the Federal Reserve Bank of Cleveland, the Federal Reserve System, or the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications. © 2019 by Michael D. Bordo and Edward S. Prescott. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source. Federal Reserve Structure, Economic Ideas, and Monetary and Financial Policy Michael D. Bordo and Edward S. Prescott NBER Working Paper No. 26098 July 2019 JEL No. B0,E58,G28,H1 ABSTRACT The decentralized structure of the Federal Reserve System is evaluated as a mechanism for generating and processing new ideas on monetary and financial policy. The role of the Reserve Banks starting in the 1960s is emphasized. The introduction of monetarism in the 1960s, rational expectations in the 1970s, credibility in the 1980s, transparency, and other monetary policy ideas by Reserve Banks into the Federal Reserve System is documented.