Typography

Elijah and the Widow of Zarephath James Tobin wrote a paper back in 1963 called Commercial Banks as Creators of Money in which he pointed out that banks don't possess a widow's cruse . There has been a bit of a blog uproar over Tobin's paper (See Paul Krugman , Winterspeak , JKH , L. Randall Wray , Nick Rowe , Cullen Roche , Ramanan , Roger Sparks , and Steve Randy Waldman ). My two bits will hone in on the widow's cruse aspect of the debate. The phrase widow's cruse is defined as "an inexhaustible supply of something," which in turn is a reference to an obscure Bible story. Flip to I Kings 17:7–16 and there is a short passage in which the prophet Elijah asks a destitute widow to make him a loaf of bread. The Lord blesses the widow saying that the "jar of flour will not be used up and the jug of oil will not run dry until the day the Lord sends rain on the land." What Tobin was referring to in his paper is that unlike the widow and her jug of o...

The lever on which a central bank pushes or pulls in order to keep its target variable (say inflation) on track is commonly referred to as the central bank's policy instrument . The policy instrument is the variable that is under the direct control of a central banker. The classic story is that the pre-2008 Fed conducted monetary policy via its policy instrument of choice—the federal funds rate. By pushing the fed funds lever up or down, the Fed could change the entire spectrum of market interest rates. I think this is wrong. The fed funds rate was never the Fed's actual policy instrument. Now this isn't a novel claim. Market monetarists tend to say the same thing. According to folks like Nick Rowe, the quantity of money has always been the Fed's true policy instrument. The fed funds rate was little more than a useful shortcut (a communications device ) adopted by the Fed to convey to the public what it intended to do. I'm sympathetic to the market monetarist's ...

In response to a recent comment by Cullen Roche, Scott Sumner wrote that "I have no interest in banking or bookkeeping. My interest is monetary policy." Now this is a point that Sumner has made before. For instance, he wrote an old post back in January entitled Keeping Banks out of Macro , in which he claimed that bank lending "is not a causal factor—it mostly reflects the growth rate of NGDP." To Minskyites and Post Keynesians like Cullen, who put a lot of importance on the banking system and the financial instability that results from bank failures, this claim is blasphemous. But given the side of the field from which Sumner comes from, I think he makes a lot of sense. As Sumner points out in his comment, his main interest is monetary policy, and Sumnerian monetary policy boils down to exercising control over NGDP. Sumner usually explains this by reference to the medium of account role of money, and though I think his terminology is a bit buggy , I agree with hi...

I'm running into a lot of central bank doubt lately. Mike Sax and Unlearning Economics , for instance, both question the ability of the Federal Reserve to create inflation and therefore set NGDP. The title of my post borrows from Archimedes. Give any central banker full reign and they'll be able to increase NGDP by whatever amount they desire. But if rules prevent a central banker from building a sufficiently long lever, or choosing the right spot to place the fulcrum, then their ability to go about the task of pushing up NGDP will be difficult. It is laws, not nature, that impinge on a central bankers ability to hit higher NGDP targets. Sax and Unlearning give market monetarists like Scott Sumner, king of NGDP targeting, a hard time for not explaining the "hot potato" transmission mechanism by which an increase in the money supply causes higher NGDP. I'm sympathetic to their criticisms. I've never entirely understood the precise market monetarist process for...

Market monetarists have a reductio ad absurdum that they like to throw in the face of anyone who doubts the ability of central banks to create inflation. It goes like this; "So, buddy, you deny that central bank purchases can have an affect on the price level? What if a central bank were to buy up every asset in the world? Wouldn't that create inflation?" Since it would be absurd to disagree with their point, the buying up everything gambit usually carries the day. In this post I'll bite. I'm going to show how a money issuer can buy up all of an economy's assets without having much of an effect on the price level. Let's return to my Google parable from last week. You don't have to read it, but you should. If you don't have the time, here's a brief summary. In an alternate world, Google stock has become the world's most popular exchange media and all prices are expressed in terms of Google shares. Google conducts monetary policy by changin...

In trying to understand how modern monetary policy works, I find it useful to create parables, or alternate monetary worlds, and put them through the wringer. Hopefully I can learn a bit about our own world via these bizarro universes. Let's say that in an alternate universe, people have decided to use Google stock (in bearer and digital form) as way to conduct most transactions. To top it off, all prices are set in fractions of a Google share. Shares get issued into the economy when Google pays employees with stock, makes corporate acquisitions, or purchases things from suppliers. Shares are removed when Google does buybacks. Here are some questions we can ask of our Google priced world. What can Google do to cause the price level to rise? to fall? What do open market operations do, and what happens when Google "prints"?  Does Google QE have a large effect on the price level, or is it irrelevant? Once we've answered some of these questions, we can take what we've...