tag:blogger.com,1999:blog-8897997766931633186.post7334478773272117396..comments2024-02-14T03:21:37.506-05:00Comments on Monetary Freedom: Hall on Interest on ReservesBill Woolseyhttp://www.blogger.com/profile/06330232724290161369noreply@blogger.comBlogger4125tag:blogger.com,1999:blog-8897997766931633186.post-34873892151927754762013-10-02T23:46:13.404-04:002013-10-02T23:46:13.404-04:00Note that excess reserves are not part of M1.
T...Note that excess reserves are not part of M1. <br /><br />To me excess reserves should be viewed like Treasuries. Here is my post on that:<br /><br />http://howfiatdies.blogspot.com/2013/02/excess-reserves-is-like-government-debt.htmlVincent Catehttps://www.blogger.com/profile/06502618776820144289noreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-63188281403997653792013-10-02T11:28:44.590-04:002013-10-02T11:28:44.590-04:00Despite reading purported explanations, I still do...Despite reading purported explanations, I still don't understand how interest rates can fall below IOR. It seems like a risk-free arbitrage for banks that should be competed away.<br /><br />In any case, it would be an unambiguous technical improvement to shrink the monetary base. Holding interest rates constant (lowering IOR if needed), this would eliminate the arbitrage with no macro effects.<br /><br />But how could the Fed fund its purchases without creating reserves? Easily: it can borrow overnight from money market funds and others. The established repo mechanism can be used, even though it's a bit silly since nobody needs collateral to lend to the Fed.<br />Maxnoreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-38729002784369026062013-10-02T00:29:27.779-04:002013-10-02T00:29:27.779-04:00I think Hall is saying that an expansion of reserv...I think Hall is saying that an expansion of reserves is contractionary, if the reserves are not lent out. If banks hoard their reserves, to collect IOER. I agree with that, if that is what he meant.<br /><br />BTW, when will economists learn to write or speak well enough so that others, even highly intelligent economists, can understand them? Benjamin Colehttps://www.blogger.com/profile/14001038338873263877noreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-71196759888947131772013-10-01T18:50:41.749-04:002013-10-01T18:50:41.749-04:00Hi Bill,
My view is that IOR is important, but no...Hi Bill,<br /><br />My view is that IOR is important, but not macroeconomically relevant to a first order. The rate that matters is the lending rate (such as Fedfunds, or better yet the general collateral (GC) govt bond repo rate).<br /><br />The <i>spread</i> between the lending rate and IOR affects the quantity of reserves and the size of the banking system but not the path of NGDP (to a first order).<br /><br />In other words, two otherwise identical economies will have similar paths for NGDP (and inflation) if the lending rates are identical, even if one has IOR 25bps below lending, and other one has IOR 250bps below lending. (The latter will have a smaller base, smaller banking system and higher velocity).<br /><br />If we think banks are somehow better or more eager at deploying capital than a private investor that would invest his wealth himself or through a mutual fund, then maybe there's a second-order effect on NGDP there, but I don't really see why that would be the case.<br /><br />If the Fed were to move IOR and IOER to 0 or -25bps tomorrow, base would go from $3tn to $1tn in a matter of days (assuming the Fed maintains Fedfunds at its present level by repoing out its assets). Its good housekeeping but does nothing macroeconomically speaking.<br /><br />I've explained my view on this <a href="http://catalystofgrowth.com/theory/fiat-currency-construction/" rel="nofollow">here</a>.<br /><br />Cheers,<br />DOB-DOBhttp://catalystofgrowth.com/noreply@blogger.com