Typography

Stephen Williamson had a good post recently in which he noted: Central to Old Monetarism - the Quantity Theory of Money - is the idea that we can define some subset of assets to be "money". Money, according to an Old Monetarist, is the stuff that is used as a medium of exchange, and could include public liabilities (currency and bank reserves) as well as private ones (transactions deposits at financial institutions). Further, Friedman in particular argued that one could find a stable, and simple, demand function for this "money," and estimate its parameters. Lucas does that exercise here, and then uses the estimated money demand function parameters to measure the costs of inflation. What's wrong with that? The key problem, of course, is that the money demand function is not a structural object. Some central bankers, including Charles Goodhart, figured that out. Goodhart's idea is a bit subtle, but there are more straighforward reasons to think that the para...

The Belgium-based think take Bruegel recently linked to my guide to the Federal Reserve Interdistrict Settlement Account . In my ongoing attempt to ensure the Target2 debate doesn't founder on faulty comparisons to the Interdistrict Settlement Account, here's another post. Although they have a better grasp on how the ISA works than most, the authors Michiel Bijlsma and Jasper Lukkezen do make an important error: The important difference between Target 2 and ISA, however, is that in the US all Reserve Banks are owned by the federal government. This means that in the US it is possible to safeguard the integrity of the system by changing the settlement rules. This is as exciting as a game of monopoly among friends. As all Federal Reserve banks are owned by the federal government, a loss in Richmond is irrelevant when there is an equal gain in New York. In the Eurozone, however, the ECB is owned by the national governments via the national central banks, not by the European Union ...

Nick Rowe has posts here and here that explain why money is not a liability. This is related to his point that   money is not a store-of-value . I have several comments on each thread. In short, I disagree with him. If you do the security analysis, central bank issued notes and deposits are unsecured senior perpetual liabilities with a limited floating conversion feature attached to them. Most people don't perceive them as such because in the normal course of life they only experience these liabilities as pure means-of-exchange. Only those individual's with a banker or investor's mentality treat central bank issued notes and deposits. Either way works - what is interesting is how these two mentalities weave together to create an integrated store-of-value and medium-of-exchange approach to understanding money. Nick also tries to re-conceptualize central bank issued money as put options. This money can be "putted" for CPI. I like this idea. Because I see central b...

Lars Christense n had some interesting comments and responses on market monetarism. I pushed him on how far market monetarists departed from traditional monetarists in admitting that money creation was endogenous, not exogenous. ie. determined by the central bank. If this is indeed the case, than the market monetarists stand nearer to the middle of the historic currency vs. banking school divide than Milton Friedman did. The latter would be considered a pure currency school theorist. Same with Mises and the traditional Austrians, although the Austrian free-bankers are surely not currency school theorists. The fact that market monetarists, according to Christensen, are willing to think about money endogenously, just as the banking school theorists did, is a healthy improvement.

Nick Rowe asks another interesting question. In the comments I eventually disagree. If the hypothesis is true, it should apply to equity markets. But Nick can't provide a measure of price stickiness in equity markets. I for one have don't know what a "sticky" stock is. My hunch, guided by experience, is that bids and offers for stock X will react almost as quickly to news and events as those for stock Y. But stocks are certainly more or less liquid. So you can have varying grades of liquidity without varying grades of stickiness. Thus, the two concepts aren't related.

Nick Rowe brings up the topic. There are plenty of interesting comments there on how this would work. In particular, how would the Icelandic banks secure liquidity if they were to move to a Canadian  dollar standard? It seems to me that local Canadian banks could act as lenders of last resort to the Icelandic banking system. Alternately, if Icelandic banks were willing to submit to Canadian regulation, then perhaps things could proceed one step further and get admittance to the Canadian Payments Association, Canada's central clearing system. As members they would get Bank of Canada lender of last resort assurance.