tag:blogger.com,1999:blog-8897997766931633186.post4986054904410261977..comments2024-02-14T03:21:37.506-05:00Comments on Monetary Freedom: Do We Need Inflation? Do We Need a Permanent Increase in Base Money?Bill Woolseyhttp://www.blogger.com/profile/06330232724290161369noreply@blogger.comBlogger14125tag:blogger.com,1999:blog-8897997766931633186.post-29907520356898034852016-08-25T19:53:43.368-04:002016-08-25T19:53:43.368-04:00Got to be very careful when it comes to inflation ...Got to be very careful when it comes to inflation because it can make obvious difference, I am trading with OctaFX broker and that’s where I get ideal support which comes in shape of wonderful conditions present here whether it’s to do with small spreads from 0.1 pips to high leverage up to 1.500, zero balance protection, daily market updates and all that, so that’s why I can handle things easily and never worry about much at all which makes me relaxed.Sharmanoreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-32739526616422469942012-04-11T17:10:07.348-04:002012-04-11T17:10:07.348-04:00Bill,
some additional thoughts about the convertib...Bill,<br />some additional thoughts about the convertibility with NGDP bonds proposal (everything applies to NGDP futures too, if they are collateralized with cash or govt bonds).<br /><br />NGDP bonds have a low credit risk. Suppose there is a parallel private market where entities with high credit risk can easily trade, as is the case with NGDP swaps. In the beginning of the swap, the element of credit risk is very low, so entities with high credit risk can easily enter into such contracts between each other. On the other hand, it is very difficult for such entities to buy NGDP linked bonds or post high quality collateral in the NGDP futures market.<br /><br />In times of credit stress, expected NGDP readings in the NGDP swap market will diverge from expected NGDP readings in the NGDP linked bond market. As a result, the expected volatility of NGDP has increased. Open market purchases would do little to close the gap between these two readings. This is why it is a good idea to allow the use of risky private sector collateral in the operations of NGDP targeting central bank.123http://themoneydemand.blogspot.com/noreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-66880970078862659952012-04-11T16:24:48.814-04:002012-04-11T16:24:48.814-04:00Bill,
in addition to expected NGDP volatility and ...Bill,<br />in addition to expected NGDP volatility and NGDP risk premium, it may be useful to examine the related concept of probability of large deviations from NGDP trend.<br />Suppose the Fed targets 5% NGDP trend. Suppose a new Intrade contract is set up - "NGDP will deviate from target by more than 2% at least once during next five years".<br /><br />Do you agree that the price of such Intrade contract is relevant for the conduct of monetary policy?<br />Do you agree that the risk of financial instability would be correlated with the price of such contract?123http://themoneydemand.blogspot.com/noreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-17425697770490289592012-04-11T14:59:30.551-04:002012-04-11T14:59:30.551-04:00Bill,
Today I have read a speech by B. Coure, Mem...Bill,<br /><br />Today I have read a speech by B. Coure, Member of the Executive Board of the ECB. It clarifies a lot of the issues related to monetary policy, financial stability and volatility of NGDP.<br />The link is here:<br />http://www.ecb.int/press/key/date/2012/html/sp120326.en.html<br />Slides from the presentation are on the top right corner.<br /><br />Key takeaways:<br />- In addition to an implicit price level targeting, volatility of inflation is also a concern of the ECB.<br />- The success of the ECB in reducing the inflation risk premium has contributed to low volatility of inflation and real growth.<br />- Volatility of AD is determined by the inflation risk premium, real growth risk premium and default risk premium. The central banks can influence the first two risk premia, and they should be ready to accept private sector collateral to do so.<br /><br />Note that the ECB framework results in volatile overnight interest rates (EONIA in slide 12).<br /><br />When comparing Coure's framework to your NGDP bond convertibility proposal, I came to the following conclusions. I like explicit NGDP level target much more than I like implicit price level target. However Coure's framework includes active measures to reduce NGDP risk premia when they are needed to reduce the risk that AD would fluctuate too much along the target path. These measures necessarily involve private sector collateral.123http://themoneydemand.blogspot.com/noreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-73749874780520421392012-04-11T13:31:17.081-04:002012-04-11T13:31:17.081-04:00Bill,
Today I have read a speech by B. Coure, Mem...Bill,<br /><br />Today I have read a speech by B. Coure, Member of the Executive Board of the ECB. It clarifies a lot of the issues related to monetary policy, financial stability and volatility of NGDP.<br />The link is here:<br />http://www.ecb.int/press/key/date/2012/html/sp120326.en.html<br />Slides from the presentation are on the top right corner.<br /><br />Key takeaways:<br />- In addition to an implicit price level targeting, volatility of inflation is also a concern of the ECB.<br />- The success of the ECB in reducing the inflation risk premium has contributed to low volatility of inflation and real growth.<br />- Volatility of AD is determined by the inflation risk premium, real growth risk premium and default risk premium. The central banks can influence the first two risk premia, and they should be ready to accept private sector collateral to do so.<br /><br />Note that the ECB framework results in volatile overnight interest rates (EONIA in slide 12).<br /><br />When comparing Coure's framework to your NGDP bond convertibility proposal, I came to the following conclusions. I like explicit NGDP level target much more than I like implicit price level target. However Coure's framework includes active measures to reduce NGDP risk premia when they are needed to reduce the risk that AD would fluctuate too much along the target path. These measures necessarily involve private sector collateral.123noreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-91957137163470804592012-04-11T12:26:49.211-04:002012-04-11T12:26:49.211-04:00Woolsey:
Yes, but India and China have been prosp...Woolsey:<br /><br />Yes, but India and China have been prospering by running hot, and the ECB, Japan and USA are not prospering, by targeting 2 percent (or less in Japan) inflation.<br /><br />Really? You can just wave this away? This is just chance? There are not some monetary reasons for the prosperity of China and India and the flaccidity of the developed nations?<br /><br />If there is no monetary reasons for the prosperity of Chin and India, and the slowdown in ECB, USA and Japan, then why do we care about monetarism?<br /><br />In addition, we have the historical example of the USA from 1982 through 2007. Huge increases in industrial output and per capita incomes (even while the environment got a lot cleaner), nearly all the while inflation running between 2 percent and 6 percent. <br /><br />Really? You are so sure we also sweep away that real-world artifact? <br /><br />I understand the theoretical construct--the microeconomic underpinnings--of a macroeconomic policy that creates exactly the growth that can be sustained, without an inflation.<br /><br />In the real world, with huge institutional and social imperfections (sticky wages, need for improving environmental controls, wars, and currently an underwater real estate market, still heavily leveraged), I think your case is regrettably weakened.Benjamin Colehttps://www.blogger.com/profile/14001038338873263877noreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-53353438616007369782012-04-11T08:06:41.108-04:002012-04-11T08:06:41.108-04:00In your previous comment you said that "money...In your previous comment you said that "money, so called properly, does not bear interest." I disagree. I think interest bearing checkable deposits count as fully money. I define money as assets generally accepted in exchange.<br /><br />If interest bearing money is issued by the monetary authority, then it counts as "base money." My own preference is that any base money that exists should pay interest. I favor the full privatization of hand-to-hand currency, so none of that should serve as base money.<br /><br />I don't favor a monetary system where the face value of coins approximates or equals the value of the metal in them. Engineering a return to such a system seems like a bad idea to me.<br /><br />Whether hand-to-hand currency is made of metal or paper, interest can be paid on it. It just has to be numbered. My pet proposal is to pay interest to those withdrawing the money until it is returned to the issuing bank. This requires that the numbers be read and the appropriate deposit account debited when it is returned. However, there is a long standing proposal to choose particular units of money (the numbers) and then pay out interest in the form of a prize to whomever happens to hold it. <br /><br />When hand to hand currency is monopolized, it may be that paying positive interest is never to the advantage of the monopolist, and in fact, our expericnce is that they manipulate the monetary order so that the real interest rate is negative, allowing the issuer to borrow and negative real rates.<br /><br />I grant that negative nominal rates are difficult to manage with hand to hand currency.Bill Woolseyhttps://www.blogger.com/profile/06330232724290161369noreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-48520620974444225162012-04-10T22:51:41.568-04:002012-04-10T22:51:41.568-04:00“I would like to see all money bear interest.” Th...“I would like to see all money bear interest.” The gold (silver, copper) coins that constituted money in benighted former ages could hardly bear interest. And to pay interest on the fiat paper bills we carry around now would be more trouble than it was worth. So long as currency exists there will be non-interest-bearing money.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-36845955838260652922012-04-10T17:48:30.339-04:002012-04-10T17:48:30.339-04:00Benjamin: I think that 3% growth in nominal GDP w...Benjamin: I think that 3% growth in nominal GDP will do fine. If this implies deflation by some "true" measure of the price level, I don't think it will hurt anything. I don't think the economy will persistently run hotter at 5% growth.<br /><br />Ronson: If I really thought that scenario one and two were realistic, I would be less supportive of nominal GDP targeting. Still, the benefit in scenario one has to do with risk sharing. It is better for real interest rates to fall when there is an unexpected decrease in productive capacity.<br /><br />123: I don't understand your approach. I will think more about it.<br /><br />Anonymous: I don't at all agree with the statement that money bears no interest. I think most money bears interest. That some money doesn't bear interest is a bad thing. I would like to see all money bear interest.Bill Woolseyhttps://www.blogger.com/profile/06330232724290161369noreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-52922291309893774842012-04-10T13:29:19.308-04:002012-04-10T13:29:19.308-04:00@ 123:
You suggest: "Central banks should ta...@ 123:<br />You suggest: "Central banks should target the expected volatility of NGDP . . . ." How do you propose they do that? What influence does a central bank have over the *expected volatility of NGDP*?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-66459484529488289172012-04-10T13:27:11.863-04:002012-04-10T13:27:11.863-04:00You write that “the quantity of base money has inc...You write that “the quantity of base money has increased--more than doubled.” But the excess reserves on which the Fed is paying interest should not be counted as “base money”: “money” *properly so called* pays no interest.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-25014406635832956172012-04-10T12:51:39.094-04:002012-04-10T12:51:39.094-04:00Bill,
These three scenarios you describe are not r...Bill,<br />These three scenarios you describe are not realistic, but it is very useful to consider what could cause such large deviations from the NGDP path target. The answer is that large expected volatility of NGDP (and a related phenomenon of high NGDP risk premium) can cause large deviations from NGDP target path, even though at every point in time NGDP expectations are on target.<br /><br />Expected volatility of NGDP is closely related to financial stability. Suppose it is probable that the shadow banking system will collapse. Even though NGDP expectations are on target, realized NGDP will be above target if the shadow banking system survives, and realized NGDP will be below target if the system collapses.<br /><br />If the central bank is passive in the face of changing expected volatility of NGDP, perverse cycles become possible where increased expected volatility of NGDP increases the financial distress, and financial distress is likely to increase the expected volatility of NGDP even more, even though expected NGDP is on target all the time.<br /><br />Central banks should target the expected volatility of NGDP and keep it in a reasonable range. Some volatility of ex-post NGDP is unavoidable, and any attempt to suppress the volatility of NGDP below the natural level will cause large losses to the central bank. <br /><br />Greenspan used bailouts to reduce the expected volatility of NGDP. This is not a good way to do it. However, the proposal to purchase Treasury bills (zero yielding and others) without limit does little if anything at all to reduce the expected volatility of NGDP. <br /><br />The best way for the central bank to reduce the expected volatility of NGDP is to purchase more NGDP futures (where the CB is long NGDP, and counterparties are short). If the expected volatility of NGDP is too high, the central bank should reduce the bid-ask spread it targets in the NGDP futures market, it should lower the collateral requirements to outside parties that want to short NGDP using futures. <br /><br />There is no justification for holding government bonds on the asset side of central bank. For any given additional amount of risk central bank is ready to accept, NGDP futures reduce the expected volatility of NGDP much more than T-Bills or bonds.<br /><br />See my reply to Scott Sumner on the same topic (the whole comment thread is interesting):<br />http://www.themoneyillusion.com/?p=13774#comment-148854123http://themoneydemand.blogspot.com/noreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-72667522491004317152012-04-10T11:20:41.248-04:002012-04-10T11:20:41.248-04:00Great article that demonstrates how expectations s...Great article that demonstrates how expectations settings can have an immediate effect on the economy even at the zero-bound.<br /><br />I have a question on what difference it would make in the 3 scenarios if inflation was targeted rather than NGDP.<br /><br />In the second and third scenario where productive capacity remains unaffected by changes in nominal demand then inflation targeting and NGDP targeting have identical effects on keeping RGDP at capacity.<br /><br />In the first scenario however NGDP targeting appears to lead to 20% "unnecessary" inflation. Assuming that <br />most recessions have some loss in productive capacity and that inflation has some bad effects then would not an inflation target be better ?Ron Ronsonnoreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-83713905200219535872012-04-10T01:16:44.146-04:002012-04-10T01:16:44.146-04:00Interesting commentary, and well done.
I still do...Interesting commentary, and well done.<br /><br />I still don't know why you like to flirt with zero inflation, a dangerous place to be. Very easy to slide into deflationary perma-recessions, ala Japan, especially after a deep recession, real estate bust.<br /><br />He who trades economic prosperity for price stability will soon have neither. Certainly now we need to reflate real estate (within reason) and pump for robust growth for several years. <br /><br />Additionally, how do we measure inflation? Don Boudreaux says we overstate inflation by a lot. Obviously, any measure of inflation is subjective, and if errors are cumulative, could be well wrong.<br /><br />So we use a measure of inflation (even the broader GDP deflators etc.) and what we are really doing is promoting deflation---except the track record in deflations is a disaster. <br /><br />Better to burn a little hot, solve some wage stickiness, and help out real estate. Inflation is like a small spike in the punch at the office party---necessary if you want any sparks.Benjamin Colehttps://www.blogger.com/profile/14001038338873263877noreply@blogger.com