MONETARY EQUILIBRIUM AND NOMINAL INCOME TARGETING · 2018. 8. 11. · Short story –Before the...
Transcript of MONETARY EQUILIBRIUM AND NOMINAL INCOME TARGETING · 2018. 8. 11. · Short story –Before the...
MONETARY EQUILIBRIUM AND NOMINAL INCOME TARGETING
NICOLAS CACHANOSKYAssociate Professor
Department of [email protected]
OUTLINE
• Why the book?
• Book structure
• Lessons from free banking cases
• NGDP Targeting rule
• The 2008 Crisis
• Monetary reforms
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WHY THE BOOK?
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WHY THE BOOK?
• 2008 Crisis
– Price level stability suffered a major empirical disconfirmation (again)
– Renewed interest in nominal income targeting
– First book on the subject
• Put together a more comprehensive presentation on nominal income targeting
• How does it fit with the rest of the literature
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WHY THE BOOK?
• Table of contents1. Free banking and monetary equilibrium
2. Nominal income targeting and the productivity norm
3. Nominal income targeting and monetary rules
4. Nominal income targeting and monetary disequilibrium
5. Nominal income targeting as market outcome versus policy outcome
6. The 2008 financial crisis
7. Monetary reforms towards nominal income targeting
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LESSONS FROM FREE BANKING CASES
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LESSONS FROM FREE BANKING CASES
• A free market in money and banking is endogenously stable
– Equilibrium: Nominal income stable per capita
• Some arguments against free banking
– U.S. “free banking” period
– Great Depression in the U.S. vs Canada
– Diamond-Dyvbig Model
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NGDP TARGETING RULE
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NGDP TARGETING RULE
• 𝑀𝑉 = ณ𝑃↓
ณ𝑌↑
: Productivity Norm
▪ 𝑌 = 𝐴 ∙ 𝐹(𝐾; 𝑒𝐿)
• ณ𝑀↑
ณ𝑉↓
= 𝑃𝑌: Monetary rule
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NGDP TARGETING RULE
• Productivity shock with NGDP Targeting
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𝐴𝐷 = 𝑀𝑉 = ณ𝑃↓
ณ𝑌↑
= 𝑁𝐺𝐷𝑃 = 𝐶 + 𝐼 + 𝐺 + 𝑁𝑋
LRAS
𝑃0
P
Y
LRAS’
𝑃1
Good deflation
𝑌0 𝑌1
NGDP TARGETING RULE
• Productivity shock with price level stability
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𝐴𝐷 = ณ𝑀↑
ത𝑉 = ത𝑃 ณ𝑌↑
= 𝑁𝐺𝐷𝑃 = 𝐶 + 𝐼 + 𝐺 + 𝑁𝑋
LRAS
𝑃0
P
Y
LRAS’
𝑃1
Implied inflation
𝑌0 𝑌1
NGDP TARGETING RULE
• Where is the excess of money supply going?– To offset a fall in the price level
– Increase of prices not captured in price level indices (CPI, GDP deflator, etc.)• Stock prices (Great Depression)
• Housing prices (Great Recession)
• Imports (trade deficit)
• The main difference of a nominal income targeting rule is not what to do if AD falls, but what to do if there is a AS shock
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THE 2008 CRISIS
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THE 2008 CRISIS
• What happened? Short story
– Before the crash
– During and after the crash
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THE 2008 CRISIS
• 2001: Dot-com bubble and 9/11
– Federal Reserve lowers interest rates
– Regulatory framework channels credit expansion towards the housing market
• 1993: DHUD starts legal actions against banks
• 1996: Regulators are allowed to penalize banks with low CRA ratings
• 2000: DHUD requires larger allocation of mortgages to high-risk clients
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THE 2008 CRISIS
• Mortgage rates– Fixed rate
– ARM• Affected by the Federal funds rate
– New mortgages were issued with ARM rates
– Existing fixed rate mortgages were transformed into ARM mortgages
• Implicit bailout through Fannie Mac and Freddie Mae
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0
1
2
3
4
5
6
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9
10
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121
99
0-0
11
99
0-0
71
99
1-0
11
99
1-0
71
99
2-0
11
99
2-0
71
99
3-0
11
99
3-0
71
99
4-0
11
99
4-0
71
99
5-0
11
99
5-0
71
99
6-0
11
99
6-0
71
99
7-0
11
99
7-0
71
99
8-0
11
99
8-0
71
99
9-0
11
99
9-0
72
00
0-0
12
00
0-0
72
00
1-0
12
00
1-0
72
00
2-0
12
00
2-0
72
00
3-0
12
00
3-0
72
00
4-0
12
00
4-0
72
00
5-0
12
00
5-0
72
00
6-0
12
00
6-0
72
00
7-0
12
00
7-0
72
00
8-0
12
00
8-0
72
00
9-0
12
00
9-0
72
01
0-0
12
01
0-0
72
01
1-0
12
01
1-0
72
01
2-0
12
01
2-0
72
01
3-0
12
01
3-0
72
01
4-0
12
01
4-0
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1-year ARM 30-years fixed rate mortgage (% of disposable income)
NGDP TARGETING RULE
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19
0
5,000
10,000
15,000
20,000
25,000
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90
Q1
19
90
Q4
19
91
Q3
19
92
Q2
19
93
Q1
19
93
Q4
19
94
Q3
19
95
Q2
19
96
Q1
19
96
Q4
19
97
Q3
19
98
Q2
19
99
Q1
19
99
Q4
20
00
Q3
20
01
Q2
20
02
Q1
20
02
Q4
20
03
Q3
20
04
Q2
20
05
Q1
20
05
Q4
20
06
Q3
20
07
Q2
20
08
Q1
20
08
Q4
20
09
Q3
20
10
Q2
20
11
Q1
20
11
Q4
20
12
Q3
20
13
Q2
20
14
Q1
20
14
Q4
20
15
Q3
20
16
Q2
NGDP Hypothethical NGDP
20
0
20
40
60
80
100
120
140
160
1801
98
5-0
1
19
85
-12
19
86
-11
19
87
-10
19
88
-09
19
89
-08
19
90
-07
19
91
-06
19
92
-05
19
93
-04
19
94
-03
19
95
-02
19
96
-01
19
96
-12
19
97
-11
19
98
-10
19
99
-09
20
00
-08
20
01
-07
20
02
-06
20
03
-05
20
04
-04
20
05
-03
20
06
-02
20
07
-01
20
07
-12
20
08
-11
20
09
-10
20
10
-09
20
11
-08
20
12
-07
20
13
-06
20
14
-05
20
15
-04
20
16
-03
CPI PPI
THE 2008 CRISIS
• Bailouts
– Too big too fail doctrine (TBTF)
– Keep chain of payments from collapsing
• Change in monetary policy framework
– Bailout (QEs) where so large that monetary policy “fall out” of the downward slope zone of the federal funds market
– Start paying interest on excess reserves (IOER)
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THE 2008 CRISIS
• The corridor system
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𝑖
𝑖𝐷
𝑖𝐼𝑂𝐸𝑅D
q($)
𝑖𝐹𝐹
Conventional monetary policy(pre-2008)
Goes to excess reserves
S S’ S’’
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0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
3,500,000
4,000,000
4,500,000
5,000,000
Jan
-03
Jul-
03
Jan
-04
Jul-
04
Jan
-05
Jul-
05
Jan
-06
Jul-
06
Jan
-07
Jul-
07
Jan
-08
Jul-
08
Jan
-09
Jul-
09
Jan
-10
Jul-
10
Jan
-11
Jul-
11
Jan
-12
Jul-
12
Jan
-13
Jul-
13
Jan
-14
Jul-
14
Jan
-15
Jul-
15
Jan
-16
Jul-
16
Jan
-17
Jul-
17
Jan
-18
FEDERAL RESERVE, ASSETS(MILLIONS)
Gold + SDR + Coins US Treasury Securities MBS Other securities Maiden Lane LLC Central Banks Swaps Others
NICOLAS CACHANOSKYMETROPOLITAN STATE UNIVERSITY OT DENVER | DEPARTMENT OF ECONOMICSAMERICAN INSTITUTE OF ECONOMIC RESEARCH | SOUND MONEY PROJECT [email protected] | www.ncachanosky.comSource: Board of Governors of the Federal Reserve System. Factors Affecting Reserve Balances (H.4.1)qe1
QE1 QE2 QE3OP. TWIST
ALAN GREENSPAN BEN BERNANKE JANET YELLEN
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0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
3,500,000
4,000,000
4,500,000
5,000,000
Jan
-03
Jul-
03
Jan
-04
Jul-
04
Jan
-05
Jul-
05
Jan
-06
Jul-
06
Jan
-07
Jul-
07
Jan
-08
Jul-
08
Jan
-09
Jul-
09
Jan
-10
Jul-
10
Jan
-11
Jul-
11
Jan
-12
Jul-
12
Jan
-13
Jul-
13
Jan
-14
Jul-
14
Jan
-15
Jul-
15
Jan
-16
Jul-
16
Jan
-17
Jul-
17
Jan
-18
FEDERAL RESERVE, LIABILITES(MILLIONS)
Federal Reserve Notes REPOs Deposits Deferred availability Other and accrued dividiends
NICOLAS CACHANOSKYMETROPOLITAN STATE UNIVERSITY OT DENVER | DEPARTMENT OF ECONOMICSAMERICAN INSTITUTE OF ECONOMIC RESEARCH | SOUND MONEY PROJECT [email protected] | www.ncachanosky.comSource: Board of Governors of the Federal Reserve System. Factors Affecting Reserve Balances (H.4.1)
QE1 QE2 QE3OP. TWIST
ALAN GREENSPAN BEN BERNANKE JANET YELLEN
MONETARY REFORMS
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MONETARY REFORMS
• Free banking with U.S. dollar as base money
• Hayek’s currency competition
• NGDP Futures market
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NICOLAS CACHANOSKY
• Thank you
ASSOCIATE PROFESSOR
DEPARTMENT OF ECONOMICS
METROPOLITAN STATE UNIVERSITY OF DENVER
WWW.NCACHANOSKY.COM
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