Typography

WWI Liberty bonds, which according to Neil Wallace circulated alongside Federal Reserve notes [ source ] What follows are some thoughts on the coexistence puzzle as well as the folks who find it interesting. There is plenty of hyperbole over the difference between freshwater and saltwater economists, but one peculiarity that surely distinguishes a freshwater economist from his saltier cousin is that they tend to be interested in the underlying motivations guiding monetary exchange, the so-called microfoundations of money. (Saltwater economists tend to be content with broad assumptions about monetary phenomena). Representatives of the microfounded approach, which includes the blogosphere's own David Andolfatto as well as Stephen Williamson —who has anointed his approach New Monetarism—like to refer to their models as "deep models of money". One of the classic questions that continues to interest deep money types is the so-called coexistence puzzle. Zero-yielding financial...

Last week I wrote a post that attempted to dehomogenize Scott Sumner from Krugman. I left a similar but more precise comment on Bob Murphy's blog. Sumner seemed to endorse it. But there's something that doesn't make sense. Open market operations can really only have an effect if markets are not efficient. Yet Sumner is a great believer in efficient markets (as commenter Max notes on RM's blog). See Scott here and here . How can Sumner reconcile those two positions? First, some definitions. I'll define efficiency as the idea that financial assets trade in the market at the discounted value of their future cash flows. Any deviation from this value will be fleeting as investors arbitrage it away. Another word for discounted value is fundamental value . Here's the logic for why open-market operations need an inefficient market to work.* Say reserves are currently plentiful and yield 0%. Twenty-year 2% bonds are trading in the market at their fundamental value ...

Noah Smith has an interesting post in which he asks: "Is money fundamentally worth nothing more than the paper it's printed on?" He goes into some soul searching on the definition of "fundamental." His concern with definitions is helpful. The recent debt super-debate was largely blown out proportion due to definitional differences, in my opinion . If anyone is worthy of describing the word fundamental , it's the sage of Omaha. In deciding whether to purchase a stock or not, Warren Buffett conceptualizes the problem by imagining that he'll never be able to sell it again. He's stuck with it forever. If you abstract from an asset's ability to be exchanged onwards, what you're left with is pure fundamental value. This applies to commodities and consumer goods as well as it does to financial assets. The definition of fundamental having been dealt with, we're left with a thorny problem. The word money is still undefined. As Neil Wallace poin...

Miles Kimball gave me some help on understanding Wallace Neutrality , which in turn might help me understand more where Stephen Williamson is coming from when he says QE is irrelevant. I asked Miles: I'm not sure if I entirely understand the Wallace neutrality argument. If I may paraphrase, does it mean something like... the Fed could buy a bunch of stocks on the NYSE, and they might be able to push their prices up (their dividend rates down). But if they did so, the price of these stocks would rise above their intrinsic value and profit-seeking agents would immediately take the opposite side of the trade, thereby pushing the purchased stocks' value back to their intrinsic value. So in order for the Fed to permanently increase stock prices above their intrinsic value, there must be some sort of "friction" that prevents profit-seeking agents from taking the other side of the trade. Is that what it means? Miles: Yes... You said it very well. That's a relief. Someti...