My latest Macro Musings podcast is with Nick Rowe. Nick is a professor of economics at Carleton University in Ottawa, a member of the CD Howe Institute’s Monetary Policy Council, and part of the Centre for Monetary and Financial Economics at Carleton University. Nick is well-known for his writing on monetary economics at the Worthwhile Canadian Initiative blog.
Nick joins the show for a discussion of monetary economics. We talk about what makes macroeconomics fundamentally different than microeconomics. Nick argues that for short-run macroeconomics the key distinction is money, the one asset on every market. He notes that if you want to disrupt every market all you need to do is disrupt the demand for or supply of money. The potential for monetary disequilibrium, he argues, is at the heart of short-run macroeconomics.
We also discuss the difference between money created by banks (inside money) and money created by central banks (outside money). More importantly, we consider whether shocks to inside money or outside money is more important for monetary disruptions and recessions.
Another interesting question we explore is whether outside money is a liability for the central bank. Outside money (i.e. the monetary base) is generally not considered a liability (like inside money) since it is fiat money. It is often considered a net asset for the public. A credible commitment to price stability, however, effectively makes outside money a liability for the government. This is a point that many observers miss.
Finally, we discuss helicopter drops of money--Nick considers it "small beer"--and QE as well as the implications of Milton Friedman's thermostat analogy for understanding good central banking. This was a fascinating conversation throughout. If you enjoy Nick's blogging you will love this episode of the podcast.