tag:blogger.com,1999:blog-2499715909956774229.post5331829593839056025..comments2024-03-22T22:37:02.639-07:00Comments on Stephen Williamson: New Monetarist Economics: Kocherlakota in LondonStephen Williamsonhttp://www.blogger.com/profile/01434465858419028592noreply@blogger.comBlogger9125tag:blogger.com,1999:blog-2499715909956774229.post-29204463813699929152010-10-01T18:35:08.325-07:002010-10-01T18:35:08.325-07:00I may have misunderstood your question. If we thin...I may have misunderstood your question. If we think about injecting reserves, if the Fed does it under current circumstances by purchasing Treasury bills, we would expect no consequences. The Fed is just swapping interest-bearing reserves for interest-bearing T-bills. What's the difference? However, the Fed seems to think that swapping reserves for long-maturity Treasuries matters. That's what Narayana is getting at here. You can see how, if you shorten the maturity of the outstanding debt of the consolidated government that this might make a difference. As Narayana argues, though, it's not so obvious.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-10754846341308701662010-10-01T15:52:42.237-07:002010-10-01T15:52:42.237-07:00Stephen,
The mechanism you describe is clear. My...Stephen,<br /><br />The mechanism you describe is clear. My observation, however, is that it requires credit demand (in the form of a car loan) to convert reserves into currency. What I think we have been discussing is whether the Fed can create inflation by providing reserves to the banking system IN ADVANCE of credit demand. So in your example, without a borrower seeking an auto loan, the reserves would not become (partially) currency. <br /><br />I wonder whether this is not an important point. Many economists seem to argue the supply of reserves at any given (constant) FF rate can create inflation; but since supply is always perfectly elastic, I don't see how that is true. I've heard some argue that the Fed's credible promise to create inflation makes reserve supply inflationary. I see the logic, but I don't think its necessarily so--it presupposes "credibility" in the absence of an exogenous mechanism for producing inflation.<br /><br />The tried-and-true means of a central bank producing inflation -- of making sure reserves are spent -- are monetizing deficits and buying foreign assets (currency devaluation). The Fed, IMO, risks talking up the inflationary consequence of QE without a means of delivering. Of course, this may all be moot since, regardless of the Fed's intentions, any QE would be indirectly monetizing a large fiscal deficit.Anon1noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-91598606726557895342010-10-01T15:03:02.497-07:002010-10-01T15:03:02.497-07:00anon1:
Banks have the ability to make withdrawals...anon1:<br /><br />Banks have the ability to make withdrawals from their reserve accounts in currency. I assume the way this gets done is that every bank has regular contact with the Fed and is constantly returning worn-out currency to the local Federal Reserve bank or branch, and is also receiving truckloads of cash. The Fed nets out these flows, and if the net flow is going to the bank, that is counted as a debit on the bank's reserve account with the Fed. Thus, withdrawals from the bank's reserve account are driven by withdrawals in currency from the bank's deposit accounts. Now, suppose that other assets suddenly look more attractive to the bank than the reserves it is holding. How does this translate into less reserves and more currency, particularly under the current circumstances where the interest rate on reserves is fixed by the Fed, and that rate is governing all short-term interest rates? Suppose the bank lends $20,000 to a consumer in the form of a car loan by depositing $20,000 in the consumer's account, which the consumer then transfers to the auto dealer, who has an account in another bank. When the transaction clears, the consumer's bank has $20,000 less in reserves, the auto dealer's bank has $20,000 more in reserves, and the auto dealer has $20,000 in her account with her bank. Now, the auto dealer takes the $20,000 and allocates this among a portfolio of assets. Indeed, currency is one of those assets, but the auto dealer may leave some of the funds in her bank. In any event, this process does not end until the banks are content with the reserves and all the other assets they are holding, and consumers and firms are content with the currency and other assets they are holding, given market prices and interest rates. I'm saying the process ends when the price level rises sufficiently, and what you are going to see in equilibrium is less nominal reserves and more nominal currency.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-34182286549352060892010-10-01T12:34:10.123-07:002010-10-01T12:34:10.123-07:00If I understand you correctly, you write that the ...If I understand you correctly, you write that the ability to convert reserves to currency is what makes them potentially inflationary. Presumably this is because currency in circulation would increase. The question is, by what mechanism? They could discourage deposits (by charging more fees for them?), in which case the system in aggregate would lose deposits and gain currency. In this case, why wouldn't it result in more currency hoarding by actors? Also, if the system loses deposits, wouldn't it also have to pull back on lending (which is an offset in the case of actors unwillingness to hold more currency)?<br /><br />I can see, though, how the currency-conversion ability makes existing Excess Reserves different from the system's unlimited ability to call on reserves in the future. Thanks for making that clear.Anon1noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-92002784385817962852010-10-01T12:34:06.577-07:002010-10-01T12:34:06.577-07:00May I just say what a relief it is to have a blogg...May I just say what a relief it is to have a blogging economist who keeps us informed with up-to-date macro. A blessed relief from the turgid regurgitations of ancient parables like the quantity theory, money multipliers and paradoxes of thrift found at the likes of deLong and Sumner. Don't these guys get it that macro has moved on since the 1950s ? Reading them is like trying to do organic chem before the discovery of the electron.<br /><br />anon2 from TxAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-45886854995135141992010-10-01T06:43:47.649-07:002010-10-01T06:43:47.649-07:00Kocherlakota does say this:
"The Fed’s price...Kocherlakota does say this:<br /><br />"The Fed’s price stability mandate is generally interpreted as maintaining an inflation rate of 2 percent"<br /><br />That does more than what was in the last FOMC statement, which is vague about what the implicit inflation target is. From my point of view, an explicit inflation target is the way to go, with Fed given discretion as to how to achieve it. As I outline here, if you think of QE as giving you commitment, it could commit you in the wrong way.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-6990270264841717922010-10-01T00:25:10.875-07:002010-10-01T00:25:10.875-07:00If commitment is desirable (and I'm interested...If commitment is desirable (and I'm interested in your view if it is) then why isn't a higher inflation or price level target the way to go? (As Woodford would say).<br /><br />Kocherlakota doesn't mention it but it seems like it might be helpful.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-1849507490983220612010-09-30T14:43:24.995-07:002010-09-30T14:43:24.995-07:00The Lucas-Stokey story is that there is a sequence...The Lucas-Stokey story is that there is a sequence of governments. Commitment by the government is limited, each government must make good on the debt obligations of previous governments. Each government then structures the debt to effectively commit future governments. The story has some different elements here, but I guess the idea is essentially the same. The Fed is effectively structuring the debt of the consolidated government to bind its future self. Interesting.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-12055540785804651382010-09-30T14:33:06.212-07:002010-09-30T14:33:06.212-07:00Hey Steve, I think for commitment Kocherlakota is ...Hey Steve, I think for commitment Kocherlakota is thinking about kinda story in Lucus Stokey JME 1984, essentially the structure of nominal bond holding can support some future path of interest rate/ inflation rate time-consistently. This is observational equivalent to committing a particular interest rate policy.Anonymousnoreply@blogger.com