tag:blogger.com,1999:blog-5713178645208582139.post6278359069663163209..comments2024-03-22T02:37:15.030-05:00Comments on Macro Musings Blog: The Fed's Exit StrategyDavid Beckworthhttp://www.blogger.com/profile/04577612979801459194noreply@blogger.comBlogger58125tag:blogger.com,1999:blog-5713178645208582139.post-21161222800310204232010-02-17T06:53:57.956-06:002010-02-17T06:53:57.956-06:00All:
This has been interesting discussion, but I ...All:<br /><br />This has been interesting discussion, but I need to move on to other matters. Consequently, at this point I closing comments to this post. If you need to continue this conversation I recommend you do so at Nick Rowe's new post linked to above. Thanks to everyone for their comments.David Beckworthhttps://www.blogger.com/profile/04577612979801459194noreply@blogger.comtag:blogger.com,1999:blog-5713178645208582139.post-64864494610642730172010-02-17T00:20:16.228-06:002010-02-17T00:20:16.228-06:00Winterspeak:
On your second question let me begin...Winterspeak:<br /><br />On your second question let me begin by acknowledging that the quantity of the monetary base (and bank reserves by default) is endogenously determined if the central bank is targeting an interest rate. Clearly, if the Fed targets a fixed interest rate is must passively accommodate changes in demand for the monetary base and thus the quantity becomes endogenously determinedDavid Beckworthhttps://www.blogger.com/profile/04577612979801459194noreply@blogger.comtag:blogger.com,1999:blog-5713178645208582139.post-85088305551053451232010-02-17T00:16:30.205-06:002010-02-17T00:16:30.205-06:00Winterspeak:
Your first comment was never eaten; ...Winterspeak:<br /><br />Your first comment was never eaten; I just didn't get around to moderating comments until late in day. <br /><br />Let me speak first to your second post. There is a reason why some countries end up with mixed currency regimes: people don't trust the domestic currency. And this lack of trust arises because governments are debasing the currency in some form. In theDavid Beckworthhttps://www.blogger.com/profile/04577612979801459194noreply@blogger.comtag:blogger.com,1999:blog-5713178645208582139.post-80002336319321911222010-02-16T21:58:01.749-06:002010-02-16T21:58:01.749-06:00In case you want more of this discussion go see Ni...In case you want more of this discussion go see Nick Rowe's new post on bank reserves and the money supply<a href="http://worthwhile.typepad.com/worthwhile_canadian_initi/2010/02/fallacies-of-composition-and-decomposition-the-supply-of-money-and-reserves.html" rel="nofollow">here</a>.David Beckworthhttps://www.blogger.com/profile/04577612979801459194noreply@blogger.comtag:blogger.com,1999:blog-5713178645208582139.post-51840911220829898342010-02-16T18:12:05.646-06:002010-02-16T18:12:05.646-06:00David: My last comments seems to be eaten, but I&#...David: My last comments seems to be eaten, but I'm continually struck by how the "expectations crowd" (monetarists) are so awful at actually understanding how real people think about the future.<br /><br />Of course observers "believe Japan's monetary authority did not do enough to fight the deflation" -- if they believed any differently they would have to admit that winterspeakhttps://www.blogger.com/profile/13611241702356475764noreply@blogger.comtag:blogger.com,1999:blog-5713178645208582139.post-40036984580832899762010-02-16T12:07:15.684-06:002010-02-16T12:07:15.684-06:00David: Help me out here.
You clearly believe that...David: Help me out here.<br /><br />You clearly believe that interest rates have a clear net effect on the non-Govt sector's desire to spend or save, as a consequence of "inflation expectations".<br /><br />OK.<br /><br />Can you list 3 other things you believe influence, at a sector level, the desire to spend/save/"inflation expectations"?<br /><br />Then, can you please winterspeaknoreply@blogger.comtag:blogger.com,1999:blog-5713178645208582139.post-78397714672050405612010-02-15T17:53:04.561-06:002010-02-15T17:53:04.561-06:00David Pearson,
I think you’ve got the exit risk a...David Pearson,<br /><br />I think you’ve got the exit risk about right (one of the few).<br /><br />There are two elements to the exit risk – the policy rate and the balance sheet.<br /><br />It turns out that the balance sheet strategy is mostly about influencing long (mortgage) rates at this point.<br /><br />Together, it’s about the entire curve.<br /><br />The balance sheet/long rate piece isJKHhttps://www.blogger.com/profile/10275975730082410689noreply@blogger.comtag:blogger.com,1999:blog-5713178645208582139.post-45974803782326875582010-02-15T12:17:52.833-06:002010-02-15T12:17:52.833-06:00If the expansion of the monetary base only results...If the expansion of the monetary base only results in inflation if the Central Bank successfully influences inflation expectations, then doesn't that mean the base expansion (i.e. Excess Reserve creation) is at best a precondition for creating hyper-inflation?<br /><br />The risk of the Fed's "exit" is not whether Excess Reserves are lent out in a growing (real) economy. It is David Pearsonnoreply@blogger.comtag:blogger.com,1999:blog-5713178645208582139.post-89080156634217904522010-02-15T11:24:48.913-06:002010-02-15T11:24:48.913-06:00Winterspeak:
One doesn't need Zimbabwe, but i...Winterspeak:<br /><br />One doesn't need Zimbabwe, but it is the most recent experience so I referenced it. And I already responded to the supply shock question. Here goes again... <br /><br />Supply shocks do not create hyperinflation. Creating excessive amounts of monetary base does. Negative supply shocks make a one-time increase in the price level, they not alter the inflation rate. David Beckworthhttps://www.blogger.com/profile/04577612979801459194noreply@blogger.comtag:blogger.com,1999:blog-5713178645208582139.post-82324393078469007662010-02-15T10:37:37.683-06:002010-02-15T10:37:37.683-06:00David: Good discussion. As others have done before...David: Good discussion. As others have done before, you kill me by bringing up "Zimbabwe" while ignoring the fact that 1) Mugabe contracted real output by about 50% and 2) Zimbabwe runs a mixed currency regime with very limited ability to tax. The similarity between this situation and the US is zero.<br /><br />"Zimbabwe" has become this totemic verb monetarists like to utter winterspeakhttps://www.blogger.com/profile/13611241702356475764noreply@blogger.comtag:blogger.com,1999:blog-5713178645208582139.post-24945206909987493862010-02-15T08:29:15.369-06:002010-02-15T08:29:15.369-06:00David: Your post (including its quotes) makes good...David: Your post (including its quotes) makes good sense.<br /><br />Reading through the comments has increased my respect for the importance of teaching the standard textbook money multiplier model, in particular the dynamic aspects of that model.<br /><br />Take for example the case where banks have a 10% desired reserve ratio. In that case, the textbook story takes great pains to explain that Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-5713178645208582139.post-3817230173687428302010-02-15T07:25:11.516-06:002010-02-15T07:25:11.516-06:00"Conventional" monetary theory involves ..."Conventional" monetary theory involves an excellent understanding of how interest rate targeting by the central bank makes the quantity of reserves endogenous. <br /><br />The money multiplier analysis, instead, looks at what happens when the Federal Funds rate is left to adjust according to market forces, and the quantity of bank reserves is given. <br /><br />Determining what the Bill Woolseyhttps://www.blogger.com/profile/06330232724290161369noreply@blogger.comtag:blogger.com,1999:blog-5713178645208582139.post-57985934682981609972010-02-14T23:05:45.199-06:002010-02-14T23:05:45.199-06:00David,
Thanks for responding to the many comments...David,<br /><br />Thanks for responding to the many comments.<br /><br />The "equivalence" argument is that the Fed supplies any reserves the banking system needs at the target Fed Funds rate. If the banking system needs reserves to support $1tr in new lending, demand for reserves would push up the Fed Funds rate, and the Fed would inject reserves to push it back down. <br /><br />David Pearsonnoreply@blogger.comtag:blogger.com,1999:blog-5713178645208582139.post-60375973375013852882010-02-14T22:28:37.462-06:002010-02-14T22:28:37.462-06:00David,
"Thus, you want to ask bank managers ...David,<br /><br />"Thus, you want to ask bank managers how ER affect them now and I want to ask how it will affect them in the future."<br /><br />I’m asking both.<br /><br />“Also, you believe that the ER will simply disappear once the Fed withdraws its support for the financial system.”<br /><br />They disappear as quickly as the Fed chooses to settle incoming cash flow from any JKHhttps://www.blogger.com/profile/10275975730082410689noreply@blogger.comtag:blogger.com,1999:blog-5713178645208582139.post-40398210914863140232010-02-14T21:35:26.960-06:002010-02-14T21:35:26.960-06:00JKH:
I think most everyone who is concerned about...JKH:<br /><br />I think most everyone who is concerned about the large stock of ER being a problem down the road understands their creation was a byproduct of the Fed's attempt to repair/prop up the financial system. No one has said the ER were created to "motivate commercial bank asset management". What people are saying, however, is that they may just do that in the future whenDavid Beckworthhttps://www.blogger.com/profile/04577612979801459194noreply@blogger.comtag:blogger.com,1999:blog-5713178645208582139.post-41898830946069760812010-02-14T19:39:30.814-06:002010-02-14T19:39:30.814-06:00David,
I’m aware of the Swedish move, but haven’t...David,<br /><br />I’m aware of the Swedish move, but haven’t followed it closely. Haven’t seen much written about it either, but can’t say that I’ve looked for it. And I’m not a student of the Fed in the 30’s unfortunately.<br /><br />But here is a two part piece by Scott Fullwiler that you might find interesting:<br /><br />http://neweconomicperspectives.blogspot.com/2009/07/JKHhttps://www.blogger.com/profile/10275975730082410689noreply@blogger.comtag:blogger.com,1999:blog-5713178645208582139.post-88031284724318483122010-02-14T17:59:16.499-06:002010-02-14T17:59:16.499-06:00JKH:
I promise to stop with the comments and ques...JKH:<br /><br />I promise to stop with the comments and questions soon. I am after all, an untenured professor who needs to spend time publishing. Oh, the dangers of running a blog. <br /><br />I am guessing you think the Swedish's central bank policy of penalizing banks for holding excess reserves is an exercise in futility. Along those same lines the Fed increasing required reserves in David Beckworthhttps://www.blogger.com/profile/04577612979801459194noreply@blogger.comtag:blogger.com,1999:blog-5713178645208582139.post-88488817529665569762010-02-14T17:36:40.688-06:002010-02-14T17:36:40.688-06:00Thanks too JKH for engaging.Thanks too JKH for engaging.David Beckworthhttps://www.blogger.com/profile/04577612979801459194noreply@blogger.comtag:blogger.com,1999:blog-5713178645208582139.post-76589732969641565602010-02-14T17:16:19.267-06:002010-02-14T17:16:19.267-06:00P.S.
thanks, JonathanP.S.<br /><br />thanks, JonathanJKHhttps://www.blogger.com/profile/10275975730082410689noreply@blogger.comtag:blogger.com,1999:blog-5713178645208582139.post-32499218593583688592010-02-14T17:14:26.203-06:002010-02-14T17:14:26.203-06:00“Fifth, your original assertion that all of these ...“Fifth, your original assertion that all of these concerns about the threat of excess reserves is just theatre is simply wrong. Most economists believe it. There is abundance of empirical evidence to support it (see above). Bernanke, for one, believes it because he wrote the book on the bank lending channel. There is no conspiracy here to give the misinformed masses what they want to hear. You JKHhttps://www.blogger.com/profile/10275975730082410689noreply@blogger.comtag:blogger.com,1999:blog-5713178645208582139.post-64425719694441221662010-02-14T17:10:28.974-06:002010-02-14T17:10:28.974-06:00...
The second piece of this theme is that mainst......<br /><br />The second piece of this theme is that mainstream economics specifically does not have a good understanding of how the reserve system functions at an operational level. The fact that it has not had an inadequate grasp on the function of capital has been the catalyst for this dual error. My own personal story is based on some direct experience in the area. But it’s not an isolated JKHhttps://www.blogger.com/profile/10275975730082410689noreply@blogger.comtag:blogger.com,1999:blog-5713178645208582139.post-13816768741169836342010-02-14T17:09:22.201-06:002010-02-14T17:09:22.201-06:00“Fourth, there is a large literature on how moneta...“Fourth, there is a large literature on how monetary policy affects the broad economy. There are many transmission mechanisms or channels (see here for overview). One of them is called the bank lending channel which basically says that monetary policy can drain reserves from the banking system which in turn leaves fewer funds to lend. Now this is not the most important channel but many empirical JKHhttps://www.blogger.com/profile/10275975730082410689noreply@blogger.comtag:blogger.com,1999:blog-5713178645208582139.post-1120095666870693212010-02-14T17:08:39.417-06:002010-02-14T17:08:39.417-06:00...
The multi-year calculation is a matter of ari......<br /><br />The multi-year calculation is a matter of arithmetic extrapolation, as I described it:<br /><br />E.g. January 2009:<br />Required Reserves held as deposits at the Fed: $ 66 billion<br />Commercial Banking System Deposits: $ 7.6 trillion<br />EFFECTIVE reserve ratio: 1 per cent<br />Excess Reserves: $ 1 trillion<br /><br />Applying a (arbitrary but not unreasonable) growth rate of JKHhttps://www.blogger.com/profile/10275975730082410689noreply@blogger.comtag:blogger.com,1999:blog-5713178645208582139.post-27628908288414671662010-02-14T17:05:57.045-06:002010-02-14T17:05:57.045-06:00...
The idea that banks use pre-supplied reserves......<br /><br />The idea that banks use pre-supplied reserves to expand loans and deposits is an erroneous fantasy put forth by textbook multiplier analysis. In fact, banks make loans that create deposits, and the central bank supplies required reserves in response (with a data recognition lag). This pattern is factual at the operational level of central banking. It is supported statistically in JKHhttps://www.blogger.com/profile/10275975730082410689noreply@blogger.comtag:blogger.com,1999:blog-5713178645208582139.post-80408615930036571522010-02-14T17:04:43.559-06:002010-02-14T17:04:43.559-06:00“Third, I agree that the Fed controls total bank r...“Third, I agree that the Fed controls total bank reserves, but I am surprised at your claim that excess reserves turn into required reserves at a tortoise pace. I thought excess reserves in normal times were minimal as the banks would quickly get rid of them given their opportunity cost. I am even more surprised at your claim of it taking 45 years to convert the current excess reserves into JKHhttps://www.blogger.com/profile/10275975730082410689noreply@blogger.com