tag:blogger.com,1999:blog-8897997766931633186.post7515712209006588032..comments2024-02-14T03:21:37.506-05:00Comments on Monetary Freedom: Rowe on the Liquidity TrapBill Woolseyhttp://www.blogger.com/profile/06330232724290161369noreply@blogger.comBlogger5125tag:blogger.com,1999:blog-8897997766931633186.post-34972489094616782832014-01-13T13:26:25.541-05:002014-01-13T13:26:25.541-05:00Is the bond not also a monetary asset aka "mo...Is the bond not also a monetary asset aka "money"? It promises to pay a certain amount of $ at a later time. When I add up my monetary net worth I don't make much of a distinction whether I hold $1 million as a deposit or as a bond note. Sure, the bond carries liquidity, default, and inflation risk that is what I receive interest for. But the principal is the same and that will be what matters in my spending decisions. <br />(The picture only changes when the central bank makes loans directly to businesses. Those loans will affect spending.)Odienoreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-25247273870456648342014-01-12T07:33:41.820-05:002014-01-12T07:33:41.820-05:00Bill: this is a very good thought-experiment.
(I...Bill: this is a very good thought-experiment. <br /><br />(I'm not quite sure where you are disagreeing with me.)Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-25896131313089424662014-01-11T13:08:33.930-05:002014-01-11T13:08:33.930-05:00The precise way of formulating the ZLB constraint ...The precise way of formulating the ZLB constraint is to consider whether the central bank is expected to earn an economic profit over the expected holding period. Headline yield on a security is not a good indicator. The ZLB problem may appear much sooner - consider the early 2013 when the term premium of treasury securities the Fed was acquiring became negative, i.e. 10 year bond yielded less than the expected future path of interest on reserves. See my comment at Rowe's blog:<br />http://worthwhile.typepad.com/worthwhile_canadian_initi/2014/01/monetary-policy-fiscal-policy-the-target-and-the-size-of-the-central-bank.html?cid=6a00d83451688169e2019b0491cde4970d#comment-6a00d83451688169e2019b0491cde4970dVaidashttps://twitter.com/VaidasUrbanoreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-38956559805995060362014-01-11T11:18:00.330-05:002014-01-11T11:18:00.330-05:00In the scenario I developed, currency is money. ...In the scenario I developed, currency is money. If the demand for currency rises, and the central bank creates more, it is satisfying a demand for currency. <br /><br />Your argument that if it buys corporate bonds, it isn't really satisfying a demand for currency, but is rather using its capital. And your argument is that it could develop an overnight lending market and only make well collateralized loans. And if the interest rate that would exist in that market that doesn't really exist would be zero, then it is really "using its capital" and not meeting an increased in demand for money.<br /><br />Well, currency is money, and there is a demand for it. And it is being met.<br /><br />As best I can tell, this is just the bills only norm. Central banks should be able to implement a monetary policy by trading short and safe government bonds. <br /><br />Market Monetarists claim that this is not always true. Bill Woolseyhttps://www.blogger.com/profile/06330232724290161369noreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-55460199946318885192014-01-11T10:33:43.094-05:002014-01-11T10:33:43.094-05:00If there are no safe assets to purchase, the CB ca...If there are no safe assets to purchase, the CB can create safe assets easily enough (in your example, it would make safe overnight loans with the corporate bonds as collateral). A bank that only holds well-collateralized overnight loans doesn't even need capital.<br /><br />Any financial entity with capital can borrow overnight and buy corporate bonds. You don't need to be a central bank.<br /><br />So if a CB buys a corporate bond, it's doing two things, one monetary and one non-monetary. It's creating money, and it's using its capital to take a risk position. If interest rates are at a lower limit, then all the action is in the non-monetary part of the operation. It's not satisfying a "demand for money", it's using its capital.<br />Maxnoreply@blogger.com