tag:blogger.com,1999:blog-8897997766931633186.post3801035884852498068..comments2024-02-14T03:21:37.506-05:00Comments on Monetary Freedom: Williamson on Nominal GDP TargetingBill Woolseyhttp://www.blogger.com/profile/06330232724290161369noreply@blogger.comBlogger3125tag:blogger.com,1999:blog-8897997766931633186.post-1747890625767776982012-07-03T11:36:05.470-04:002012-07-03T11:36:05.470-04:00Thanks for your detailed answer. You give 3 reas...Thanks for your detailed answer. You give 3 reasons why OMO is preferred to other ways to increase the money supply:<br /><br />1. OMO is more easily reversed out of when it is necessary to reduce NGDP. <br />My response would be that if one had (say) increased the money supply by unfunded tax cuts then one should logically increase them again when required.<br /><br />2. Fiscal policy should be used for political/social purposes and not adjusting the money supply. <br />If the re4quired "fix" is increased money supply then all ways of delivering this have some distributional effect, at least in the short-run. Tax reductions would benefit tax payers over non tax-payers. Asset purchases would benefit owners of these assets over non-owners. <br /><br />3. OMO will lead to the "correct" amount of investment for long-term equilibrium while fiscal policy will distort this.<br />This would seem to be the strongest argument but I'm not sure I understand it. A rise in the demand for money in a world of flexible prices would lead (other things being equal) to a uniform fall in all prices and cash balances increasing proportionally. In a world of sticky prices a perfect monetary solution would be to increase everyone's cash holdings by an equal amount until NGDP reaches its previous level (which is another way of saying that the value of money is reduced to its previous level). Investment levels (again other things being equal) would be the same before and after the change in the money supply. Assuming this view of things is correct I believe a carefully chosen fiscal policy has a greater chance of getting close to this model than OMO. If for example an unfunded subsidy on all transactions (including on asset sales) was introduced then the economy could get back to monetary equilibrium with minimum unfairness/distortions and investment would return to previous levels (though holders of large cash balances who engage in few transactions would lose out). OMO (by design) seems to have a bias towards encouraging investment spending that would need to be reversed out eventually for the economy to return to equilibrium.<br /><br />My point is that all ways of increasing the money supply are unfair or distortionary in some ways but appropriately chosen fiscal policy has a greater chance of minimizing them. OMO on the other hand seems to have some in-built distortions that would be better avoided.Ron Ronsonnoreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-76396672368894577402012-07-03T07:27:15.239-04:002012-07-03T07:27:15.239-04:00Why open market operations?
It gives the monetary...Why open market operations?<br /><br />It gives the monetary authority something to sell when the quantity of money needs to fall again.<br /><br />Using tax cuts or spending increases to add to the quantity of money means that when the demand for money falls, new interest bearing government debt must be issued, creating an tax burden to cover the interest or else taxes must be increased or government spending cut.<br /><br />In my view, government spending and tax decisions should be made by voters acording to the value of the government programs vs. the private goods that must be sacrificed due to the taxes paid. Whether or not the quantity of money needs to change to match the demand to hold money is not closely related to this issue.<br /><br />Fiscal policy has a "job." <br /><br />Money is an asset. Monetary policy is about adjusting the quantity of that asset to the demand to hold it. When people choose to hold more assets (save,) this should generate more invesetment. Open market operations make changes in the quantity of money match changes in the demand for other assets, which should signal appropriate investment.<br /><br />With fiscal policy, when new money is created, rather than signaling an needed increase in the production of new capital goods, so that there will be future output there when those holding the money want to spend it, instead, there are lower current taxes at best or more current government services.Bill Woolseyhttps://www.blogger.com/profile/06330232724290161369noreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-82352122383477760262012-07-02T22:02:42.405-04:002012-07-02T22:02:42.405-04:00Why do market monetarists look to open market oper...Why do market monetarists look to open market operations as the mechanism of choice to influence NGDP ?<br /><br />This always seems like a rather indirect route - involving forcing up asset prices to reduce the interest rate, plus hoping that people will spend some of the funds they get from asset sales on final goods and services.<br /><br />Unfunded fiscal policies like reducing taxes, sales and payroll subsides etc would seem like a much more direct approach - and would in addition cause less distortions to the patterns of demand than OMO might cause.Ron Ronsonnoreply@blogger.com