The Case for Unencumbering Interest Rate Policy at the Zero Bound
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Excess Reserves and the New Challenges for Monetary Policy
Economic Brief March 2010, EB10 -03 In recent months, the level of total reserves held by depository Excess reserves and institutions (DIs) in the United States has been consistently above $1 the New challenges trillion. Of this, required reserves have been less than 7 percent. In the for Monetary Policy five years prior to September 2008, total reserves fluctuated between $38 billion and $56 billion, and required reserves fluctuated between 80 percent and 99 percent of total reserves. Hence, the recent level By huberto M. Ennis and alexander L. Wolman of reserves represents a dramatic change from previous experience. There has been much debate about the implications of high levels of Interest on reserves allows the reserves for the economy and how monetary policy is conducted. In this Economic Brief , we bring attention to the consequences of these Federal Reserve to pursue an appropriate large reserve balances for the Federal Reserve’s ability to adjust its monetary policy even with a high level of policy stance in a timely manner. excess reserves. However, a banking system Several factors help to explain why today the level of reserves is so high flush with excess reserves can raise the risk of by historical standards. In September and October 2008, riskless market monetary policy getting behind the curve. interest rates fell at all maturities. Since these lower interest rates also represented a lower opportunity cost of holding reserves, DIs moved to holding higher levels of reserves. In addition, the weakened condition of many DIs and the financial system as a whole caused an increase in demand for the most liquid assets, such as reserves.The Fed accommo - dated this by increasing the supply in an effort to maintain its interest rate target.While demand-related factors played a role in the initial buildup of reserves (approximately $140 billion), the lion’s share of the increase resulted from an unprecedented expansion of the Fed’s balance sheet and the ability to pay interest on reserves (IOR). -
Large Excess Reserves and the Relationship Between Money and Prices by Huberto M
Economic Brief February 2019, EB19-02 Large Excess Reserves and the Relationship between Money and Prices By Huberto M. Ennis and Tim Sablik As a consequence of the Federal Reserve’s response to the financial crisis of 2007–08 and the Great Recession, the supply of reserves in the U.S. banking system increased dramatically. Historically, over long horizons, money and prices have been closely tied together, but over the past decade, prices have risen only modestly while base money (reserves plus currency) has grown sub- stantially. A macroeconomic model helps explain this behavior and suggests some potential limits to the Fed’s ability to increase the size of its balance sheet indefinitely while remaining consistent with its inflation-targeting policy. Macroeconomic models have long predicted a of reserves in the banking system in response tight long-run relationship between the supply to the financial crisis of 2007–08 and the Great of money in the economy and the overall price Recession. At the same time, prices grew at only level. Money in this context refers to the quantity 1.8 percent per year on average. This Economic of currency plus bank reserves, or what is some- Brief provides one explanation for this behavior times called the monetary base. As the monetary and examines whether there might be limits to base increases, prices also should increase on a the decoupling of money from prices. one-to-one basis. A Period of “Unconventional” Policy This theory also has been confirmed empirically. In response to the financial crisis of 2007–08, According to Robert Lucas of the University of the Fed employed a number of extraordinary Chicago, who received the Nobel Prize in Eco- measures to stabilize the financial system and nomics in 1995 in part for his work in this area, help the economy weather the Great Recession. -
Netw Rks Reading Essentials and Study Guide
NAME ________________________________________ DATE _______________ CLASS _________ Reading Essentials and Study Guide netw rks Chapter 16: Monetary Policy Lesson 2 Monetary Policy ESSENTIAL QUESTION How does the government promote the economic goals of price stability, full employment, and economic growth? Reading HELPDESK Academic Vocabulary explicit openly and clearly expressed Content Vocabulary fractional reserve system system requiring financial institutions to set aside a fraction of their deposits in the form of reserves legal reserves currency and deposits used to meet the reserve requirements reserve requirement formula used to compute the amount of a depository institution’s required reserves member bank reserve (MBR) reserves kept by member banks at the Fed to satisfy reserve requirements excess reserves financial institution’s cash, currency, and reserves not needed for reserve requirements; potential source of new loans monetary policy actions by the Federal Reserve System to expand or contract the money supply to affect the cost and availability of credit interest rate the price of credit to a borrower easy money policy monetary policy resulting in lower interest rates and greater access to credit; associated with an expansion of the money supply tight money policy monetary policy resulting in higher interest rates and restricted access to credit; associated with a contraction of the money supply open market operations monetary policy in the form of U.S. Treasury bills, or notes, or bond sales and purchases by the Fed discount -
Measuring the Natural Rate of Interest: International Trends and Determinants
FEDERAL RESERVE BANK OF SAN FRANCISCO WORKING PAPER SERIES Measuring the Natural Rate of Interest: International Trends and Determinants Kathryn Holston and Thomas Laubach Board of Governors of the Federal Reserve System John C. Williams Federal Reserve Bank of San Francisco December 2016 Working Paper 2016-11 http://www.frbsf.org/economic-research/publications/working-papers/wp2016-11.pdf Suggested citation: Holston, Kathryn, Thomas Laubach, John C. Williams. 2016. “Measuring the Natural Rate of Interest: International Trends and Determinants.” Federal Reserve Bank of San Francisco Working Paper 2016-11. http://www.frbsf.org/economic-research/publications/working- papers/wp2016-11.pdf The views in this paper are solely the responsibility of the authors and should not be interpreted as reflecting the views of the Federal Reserve Bank of San Francisco or the Board of Governors of the Federal Reserve System. Measuring the Natural Rate of Interest: International Trends and Determinants∗ Kathryn Holston Thomas Laubach John C. Williams December 15, 2016 Abstract U.S. estimates of the natural rate of interest { the real short-term interest rate that would prevail absent transitory disturbances { have declined dramatically since the start of the global financial crisis. For example, estimates using the Laubach-Williams (2003) model indicate the natural rate in the United States fell to close to zero during the crisis and has remained there into 2016. Explanations for this decline include shifts in demographics, a slowdown in trend productivity growth, and global factors affecting real interest rates. This paper applies the Laubach-Williams methodology to the United States and three other advanced economies { Canada, the Euro Area, and the United Kingdom. -
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. -
Overcoming the Zero Bound with Negative Interest Rate Policy
OVERCOMING THE ZERO BOUND WITH NEGATIVE INTEREST RATE POLICY Marvin Goodfriend Carnegie Mellon University, Tepper School “Removing the Zero Lower Bound on Interest Rates” An Imperial College Business School, Brevan Howard Centre for Financial Analysis, CEPR, and Swiss National Bank Event London, 18 May 2015 1 Overcoming the Zero Bound with Negative Interest Rate Policy • Urgency of the problem • Evolution of monetary policy • Why the zero bound constraint matters • Mechanics of negative nominal interest rate policy • Elevated inflation target not the answer • Conclusion 2 Urgency of the Problem • Irving Fisher’s (1930, 1986) The Theory of Interest pointed out that if a commodity could be stored costlessly over time, then the rate of interest in units of that commodity could never fall below zero • A central bank that pays zero interest on reserves puts a lower bound on the nominal interbank rate of interest • The power of open market operations to lower short-term real interest rates to fight deflation or recession then is limited when nominal rates are already low on average—as is the case when inflation and the inflation premium are stabilized at a 2% inflation target 3 Urgency of the Problem (2) • Quantitative monetary policy appears to have been effective in averting deflation and stimulating demand with near zero interest rates in the US and the UK • But Japan did not exit the zero bound or deflation for two decades even with the help of quantitative policy • The US, the UK, and the Euro area have not yet exited near zero interest -
Chapter 11 - Fiscal Policy
MACROECONOMICS EXAM REVIEW CHAPTERS 11 THROUGH 16 AND 18 Key Terms and Concepts to Know CHAPTER 11 - FISCAL POLICY I. Theory of Fiscal Policy Fiscal Policy is the use of government purchases, transfer payments, taxes, and borrowing to affect macroeconomic variables such as real GDP, employment, the price level, and economic growth. A. Fiscal Policy Tools • Automatic stabilizers: Federal budget revenue and spending programs that automatically adjust with the ups and downs of the economy to stabilize disposable income. • Discretionary fiscal policy: Deliberate manipulation of government purchases, transfer payments, and taxes to promote macroeconomic goals like full employment, price stability, and economic growth. • Changes in Government Purchases: At any given price level, an increase in government purchases or transfer payments increases real GDP demanded. For a given price level, assuming only consumption varies with income: o Change in real GDP = change in government spending × 1 / (1 −MPC) other things constant. o Simple Spending Multiplier = 1 / (1 − MPC) • Changes in Net Taxes: A decrease (increase) in net taxes increases (decreases) disposable income at each level of real GDP, so consumption increases (decreases). The change in real GDP demanded is equal to the resulting shift of the aggregate expenditure line times the simple spending multiplier. o Change in real GDP = (−MPC × change in NT) × 1 / (1−MPC) or simplified, o Change in real GDP = change in NT × −MPC/(1−MPC) o Simple tax multiplier = −MPC / (1−MPC) B. Discretionary Fiscal Policy to Close a Recessionary Gap Expansionary fiscal policy, such as an increase in government purchases, a decrease in net taxes, or a combination of the two: • Could sufficiently increase aggregate demand to return the economy to its potential output. -
Investment Insights
CHIEF INVESTMENT OFFICE Investment Insights AUGUST 2017 Matthew Diczok A Focus on the Fed Head of Fixed Income Strategy An Overview of the Federal Reserve System and a Look at Potential Personnel Changes SUMMARY After years of accommodative policy, the Federal Reserve (Fed) is on its path to policy normalization. The Fed forecasts another rate hike in late 2017, and three hikes in each of the next two years. The Fed also plans to taper reinvestments of Treasurys and mortgage-backed securities, gradually reducing its balance sheet. The market thinks differently. Emboldened by inflation persistently below target, it expects the Fed to move significantly more slowly, with only one to three rate hikes between now and early 2019. One way or another, this discrepancy will be reconciled, with important implications for asset prices and yields. Against this backdrop, changes in personnel at the Fed are very important, and have been underappreciated by markets. The Fed has three open board seats, and the Chair and Vice Chair are both up for reappointment in 2018. If the administration appoints a Fed Chair and Vice Chair who are not currently governors, then there will be five new, permanent voting members who determine rate moves—almost half of the 12-member committee. This would be unprecedented in the modern era. Similar to its potential influence on the Supreme Court, this administration has the ability to set the tone of monetary policy for many years into the future. Most rumored candidates share philosophical leanings at odds with the current board; they are generally hawkish relative to current policy, favor rules-based decision-making over discretionary, and are unconvinced that successive rounds of quantitative easing were beneficial. -
How the World Achieved Partial Consensus on Monetary Policy1
How the World Achieved Partial Consensus on Monetary Policy1 James Bullard President and CEO, Federal Reserve Bank of St. Louis Shadow Open Market Committee Meeting Current Monetary Policy: The Influence of Marvin Goodfriend New York, N.Y. March 6, 2020 In 2007, Marvin Goodfriend published a paper titled “How the World Achieved Consensus on Monetary Policy” in the Journal of Economic Perspectives. It is an excellent summary of the sequence of economic ideas influencing and eventually dominating actual monetary policy from Lucas (1972) up to the eve of the global financial crisis. Goodfriend’s explanations and summaries are so lucid, and his examples and thinking so familiar to me that in rereading the article I had the sensation that my life was flashing before my eyes. In the article, Goodfriend builds up the key idea in central banking of the last 50 years—namely, successful monetary policy requires a credible commitment on the part of the central bank to careful, systematic future policy choices. At the end of the article, he allows for some unfinished business and some open issues, among them the question of why credible central banks may end up with inflation that is too low when compared to an intended target. In retrospect, the “World Consensus” article appears a bit triumphal and somewhat premature. The events since its publication seem to suggest that the consensus that appeared to exist at that moment has its own problems. As we meet here today, many central banks have consistently missed their stated inflation targets to the low side for many years. -
Terms and Conditions Deposit Products
114 DOMINION ROAD AUCKLAND TERMS AND CONDITIONS DEPOSIT PRODUCTS Definitions and Interpretation In these Terms and Conditions, unless the context requires otherwise: “Account Information” means information in respect of your account(s) (such as your bank statements, account password(s) (if any) or any other information related to your accounts); “Automatic Payment” means an electronic payment instruction from you to us which instructs us to transfer a set amount of money at set intervals from your account(s) to another party, and “Automatic Payment Authority” means our approved form for such instructions; “Direct Credit” means an electronic payment instruction initiated by you which instructs us to transfer money from your account(s) to the account of a third party; “Direct Debit” means an electronic payment instruction initiated by a third party company or business which instructs us to transfer money from your account(s) to the account of the third party; “CDD Requirements” means the “Customer Due Diligence” identification requirements outlined in these Terms and Conditions; “Money Laundering” means the offence of Money Laundering as that term is defined in the Anti- Money Laundering and Countering Financing of Terrorism Act 2009, summarily described here as if you receive stolen or fraudulently or illegally obtained funds into your bank account and then transfer such funds, knowing or believing that the funds have not been transferred into your account by their true owner, or being reckless as to whether this is the case, and “Money -
Endogenous Money and the Natural Rate of Interest: the Reemergence of Liquidity Preference and Animal Spirits in the Post-Keynesian Theory of Capital Markets
Working Paper No. 817 Endogenous Money and the Natural Rate of Interest: The Reemergence of Liquidity Preference and Animal Spirits in the Post-Keynesian Theory of Capital Markets by Philip Pilkington Kingston University September 2014 The Levy Economics Institute Working Paper Collection presents research in progress by Levy Institute scholars and conference participants. The purpose of the series is to disseminate ideas to and elicit comments from academics and professionals. Levy Economics Institute of Bard College, founded in 1986, is a nonprofit, nonpartisan, independently funded research organization devoted to public service. Through scholarship and economic research it generates viable, effective public policy responses to important economic problems that profoundly affect the quality of life in the United States and abroad. Levy Economics Institute P.O. Box 5000 Annandale-on-Hudson, NY 12504-5000 http://www.levyinstitute.org Copyright © Levy Economics Institute 2014 All rights reserved ISSN 1547-366X Abstract Since the beginning of the fall of monetarism in the mid-1980s, mainstream macroeconomics has incorporated many of the principles of post-Keynesian endogenous money theory. This paper argues that the most important critical component of post-Keynesian monetary theory today is its rejection of the “natural rate of interest.” By examining the hidden assumptions of the loanable funds doctrine as it was modified in light of the idea of a natural rate of interest— specifically, its implicit reliance on an “efficient markets hypothesis” view of capital markets— this paper seeks to show that the mainstream view of capital markets is completely at odds with the world of fundamental uncertainty addressed by post-Keynesian economists, a world in which Keynesian liquidity preference and animal spirits rule the roost. -
Perspectives on Monetary and Credit Policy
Perspectives on Monetary and Credit Policy November 20, 2012 Jeffrey M. Lacker President Federal Reserve Bank of Richmond Shadow Open Market Committee Symposium New York, N.Y. The Federal Open Market Committee in January formally announced a numerical objective for inflation, a step which has long been argued to be essential to anchoring longer-term expectations about the conduct of monetary policy.1 So it might seem a bit surprising, as this year draws to a close, to find a member of the Committee speaking at an event whose title is “The Fed’s Monetary Policy Adrift.” But on further reflection, I don’t think it should be surprising at all. Both the FOMC’s articulation of an inflation target and the sense that policy is adrift are related, I believe, to the extraordinary circumstances and resulting policy actions of the last few years. In my remarks this morning, I will discuss two dimensions of Federal Reserve policy that came in the wake of the financial crisis and Great Recession: first, the effort to provide stimulus and policy guidance at the zero bound; and second, the expansion of the scope of Fed policy beyond monetary policy to a broader engagement in credit policy. Before I begin, however, I need to recite a disclaimer that should be quite familiar to members of the Shadow Open Market Committee — my remarks reflect my own views and not necessarily those of any 2 other members of the FOMC. Maintaining Credibility Let me begin by noting that when the FOMC announced an explicit numerical objective for inflation this year, we had experienced an extended period of relative monetary stability.