Jeff Hummel wrote a nice article for Reason. Most of it isn't new and is similar to his chapter from Boom and Bust Banking.
His basic argument is that Bernanke used quantitative easing to bail out the banking system to maintain the flow of credit. This policy involved directing credit to where the Fed felt it was most needed.
This is in contrast with a more traditional monetarist approach, which Market Monetarists have emphasized. The reason to expand the quantity of money is to prevent (or reverse) decreases in spending on output.
Hummel's emphasizes some policies (much criticized by Market Monetarists) that appear counter-productive if the goal of quantitative easing was to prevent (or reverse) decreases in spending on output. First, the Fed undertook open market sales of Treasury bills to at least partly offset the expansion of loans to banks. And then the Fed introduced interest on reserves--a clearly contractionary policy.
What Hummel doesn't mention and a concern that many Market Monetarists have emphasized over the last five years, is the temporary nature of the quantitative easing. A temporary increase in the monetary base should have little effect on spending on output. However, it should be able to support particular credit markets.
For example, suppose a central bank is committed to an inflation target. Investors refuse to buy new issues of mortgage backed securities and sell off existing holdings. The central bank buys the mortgage backed securities, but insists that this is only temporary. If inflation starts to rise, it will sell off some sort of assets or perhaps raise interest on reserves. Any expansion in base money or broader measures of the quantity of money is temporary. For the most part, the demand to hold this additional money expands to meet the supply. There is little or no inflationary effect.
Perhaps more troubling, this logic appears to apply even more strongly to a central bank with a nominal GDP level target. Suppose that nominal GDP is on target. Further suppose that the central bank decides to support the President's plan for poor people to have homes, and so begins to buy mortgage backed securities. The quantity of money expands, but people hold the additional money balances--they believe that the expansion is temporary. There is little or no impact on total spending on output. This certainly appears to create an opportunity for malinvestment.
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"suppose that the central bank decides to support the President's plan for poor people to have homes, and so begins to buy mortgage backed securities. The quantity of money expands, but people hold the additional money balances--they believe that the expansion is temporary."
ReplyDeleteI'm trying to understand the thinking behind this.
The CB starts to buy up MBS. People who would rather hold money than MBS sell. I'm not quite following why the expectation that the CB will be buying these (or other) assets back for money in the future will affect what people do with the new cash in the present.
Is it that if people expect the money supply to fall in the future then they will expect less inflation and so ave less incentive to spend or is there another reason I am missing ?
That is correct. Sumner made this argument years ago, and later, so did Krugman.
DeleteSuppose the quantity of money doubles. A simple quantity theory says that the price level doubles. But if the quantity of money is expected to return to its initial value soon after, then a simple quantity analysis would have the price level halving again and returning to its initial value again.
Who would purchase any durable good during the period when prices are temporarilied doubled? Isn't it sensible to wait? So what happen to all of the extra money? It is held by people waiting to spend it later.
The price level should rise to a point where the expected deflation provides an incentive to hold the money.
Now, how does that fit in with manipulating credit markets? I am not sure, but I think it is possible.
It’s important to understand this policy clearly; if we’re trading blindly then we could suffer serious losses. I am always careful with the work especially in a business like Forex, it’s always harder. I find it simpler thanks to the support from OctaFX which is a lovely company with having free daily market news and analysis updates, it’s easier to follow and highly effective, so that’s why I am able to perform so very well and leads to success all the time.
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