Monday, August 15, 2016

Macro Musings Podcasts: Nick Rowe

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.

You can listen to the podcast on Soundcloud, iTunes,  or your favorite podcast app. You can also listen via the embedded player above. And remember to subscribe since more shows are coming!

Related Links
Nick Rowe's coauthored blog - Worthwhile Canadian Initiative
Nick Rowe's twitter account


  1. I'm no economist but I have a question based upon your discussion with Nick Rowe today regarding the thermostat analogy. It seems that the Federal Reserve monetary policy committee believes in the Phillips Curve in the US. I've seen various economists stating there is no correlation between unemployment and inflation in the US and thus belief in the Phillips Curve on the part of the FOMC is ridiculous. But I ran across a paper on the Federal Reserve website which states that while there is no long term correlation between unemployment and inflation, there is some short term correlation. Is it possible that the FOMC believes in the Phillips Curve because of times in the past when the Fed mismanaged monetary policy?

    1. Anonymous: " Is it possible that the FOMC believes in the Phillips Curve because of times in the past when the Fed mismanaged monetary policy?"

      Yes. Not just possible, but very probable. You only really observe the downward-sloping short run Phillips Curve properly when the central bank is doing random stuff, and not when it is targeting inflation. And we saw it in the past (not just in the US). That's when the idea was invented.

    2. But it would be perfectly correct to say that the Short Run Phillips Curve is "still there"; it's just we can't see it in the data anymore.

    3. Thank you for answering my question. It leads to a follow up. I vaguely recall seeing a summary of some FOMC meeting minutes in which the committee members expressed the belief that because of the relationship between declining unemployment and increased inflation, they expected the drop in unemployment to push up the natural rate of interest. If true, was this a serious mistake on their part? And is the decline in the NGDP growth rate over the last 2 quarters an indication that the federal funds rate is above the natural rate? My concern is that by the time the FOMC meets again in September that they will be afraid to take the necessary action to counteract the decline in the natural rate because they have pushed it to a very low level.

  2. Concerning the example of pegging the Canadian Dollar to the US dollar as what defines a central bank. Let's instead assume the US pegs its currency to the Icelandic krone. Who runs monetary policy? I think it would be the US. Let's say Iceland has rampant inflation and raises rates to 20 pct. Will US rates go to 20 pct? I don't think so. Iceland is too small. The Fed could buy all the Iceland paper without noticing it.

    In the limit, Iceland could do a Zimbabwe and print notes of a billion krone and spray them out of helicopters. The Fed would have to buy them even though they are worthless. That would cause a problem!

    As another thought experiment, what would happen if both Canada and the US decided at the same instant to lock their currencies? Who would be in charge?

    Anyway, I thought this analogy for the power of the central bank perhaps didn't go to the core.

    I would say that the only reason BOC is the central bank and not BMO is that regulators define deposits with BOC as "reserves", and require commercial banks to hold reserves. Ie. BOC has a monopoly and can therefore set its own price. With a stroke of the pen the regulators could define BMO s deposits as "reserves" .
    This monopoly power would however seem to diminish when reserves are no longer constrained eg due to QE in the US system. If the restricted quantity of reserves is no longer a stick with which to beat the commercial banks why does a central bank still have power. Maybe it doesn't and we haven't realised it yet.