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A Study in Monetary Macroeconomics

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A Study in Monetary Macroeconomics A Study in Monetary Macroeconomics A Study in Monetary Macroeconomics STEFAN HOMBURG 1 3 Great Clarendon Street, Oxford, OX2 6D P, United Kingdom Oxford University Press is a department of the University of Oxford. It furthers the University’s objective of excellence in research, scholarship, and education by publishing worldwide. Oxford is a registered trade mark of Oxford University Press in the UK and in certain other countries © Stefan Homburg 2017 The moral rights of the author have been asserted First Edition published in 2017 Impression: 1 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, without the prior permission in writing of Oxford University Press, or as expressly permitted by law, by licence or under terms agreed with the appropriate reprographics rights organization. Enquiries concerning reproduction outside the scope of the above should be sent to the Rights Department, Oxford University Press, at the address above You must not circulate this work in any other form and you must impose this same condition on any acquirer Published in the United States of America by Oxford University Press 198 Madison Avenue, New York, NY 10016, United States of America British Library Cataloguing in Publication Data Data available Library of Congress Control Number: 2017931042 ISBN 978–0–19–880753–7 Printed and bound by CPI Group (UK) Ltd, Croydon, CR0 4YY Links to third party websites are provided by Oxford in good faith and for information only. Oxford disclaims any responsibility for the materials contained in any third party website referenced in this work. Contents List of Figures and Tables ......................................................................... ix Key Symbols ............................................................................................. xi Chapter 1 Introduction ........................................................................... 1 Chapter 2 Framework .............................................................................. 7 2.1 General Structure ................................................................................. 7 2.2 Expectations ......................................................................................... 9 2.3 Central Bank ...................................................................................... 11 2.4 Producers ........................................................................................... 13 2.5 Consumers ......................................................................................... 14 2.6 Temporary Equilibrium ...................................................................... 16 2.7 Setup for Simulations ......................................................................... 17 Chapter 3 Traditional Topics ................................................................. 21 3.1 Basic Lessons ...................................................................................... 21 3.1.1 Quantity Theory of Money .............................................................. 21 3.1.2 Fisher Effect ..................................................................................... 24 3.1.3 Erratic Expectations ......................................................................... 26 3.1.4 Superneutrality ................................................................................. 29 3.1.5 Forced Saving and Distributive Justice .............................................. 31 3.1.6 Welfare ............................................................................................. 33 3.2 Arguable Lessons ................................................................................ 35 3.2.1 Endogenous Money and Interest Pegs .............................................. 35 3.2.2 Tobin Effect...................................................................................... 39 3.2.3 Money Irrelevance ............................................................................ 40 3.2.4 Interest on Money ............................................................................ 41 3.2.5 Digression on RE ............................................................................. 44 3.3 Fiscal Policy ........................................................................................ 46 3.3.1 Superneutrality Revisited .................................................................. 47 3.3.2 Ricardian Equivalence ...................................................................... 49 3.3.3 Leviathan ......................................................................................... 54 3.3.4 Debt Monetization ........................................................................... 57 3.4 Wage Rigidities .................................................................................. 60 3.4.1 Employment Trap ............................................................................ 61 3.4.2 Phillips Curve................................................................................... 64 3.4.3 Policy Implications ........................................................................... 67 vi Contents 3.5 Price Rigidities ................................................................................... 70 3.5.1 Liquidity Effect ................................................................................ 73 3.5.2 Deterministic Business Cycles .......................................................... 75 3.5.3 The Limit Economy ......................................................................... 77 Chapter 4 Constrained Credit ............................................................... 79 4.1 Liquidity Traps ................................................................................... 79 4.2 Borrowing Constraint ........................................................................ 83 4.3 Policy Implications ............................................................................. 87 4.4 Evaluation .......................................................................................... 93 4.5 Conclusion ......................................................................................... 97 Chapter 5 Net Worth ............................................................................. 99 5.1 Entrepreneurs ..................................................................................... 99 5.2 Corporations .................................................................................... 101 5.3 Stock Manias .................................................................................... 102 5.4 Limited Leverage .............................................................................. 104 5.5 Fisherian Debt-deflations ................................................................. 110 Chapter 6 Real Estate .......................................................................... 113 6.1 Empirical Overview .......................................................................... 113 6.2 Modeling Real Estate........................................................................ 116 6.3 Dynamic Inefficiency ....................................................................... 119 6.4 Quasi-Ricardian Equivalence ............................................................ 122 6.5 Housing Manias ............................................................................... 124 6.6 A Housing Cycle .............................................................................. 127 Chapter 7 Commercial Banks ............................................................. 131 7.1 Institutional Background .................................................................. 132 7.2 Traditional Banking Model .............................................................. 134 7.3 Funds Rate Determination ............................................................... 135 7.4 Excess Reserves ................................................................................. 141 7.5 Interest on Reserves .......................................................................... 145 7.6 Currency and the Money Base .......................................................... 147 7.7 Conclusion ....................................................................................... 150 Chapter 8 Methods .............................................................................. 153 8.1 Expectations ..................................................................................... 153 8.2 Intertemporal Choice ....................................................................... 155 8.3 Modeling Money .............................................................................. 157 8.4 Labor Supply .................................................................................... 161 8.5 Price Determination ......................................................................... 163 Contents vii Appendices ............................................................................................. 167 A Producer Behavior ............................................................................. 167 B Consumer Behavior ........................................................................... 168 C Walras’ Law........................................................................................ 171 D Existence ............................................................................................ 172 E Superneutrality .................................................................................
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