tag:blogger.com,1999:blog-5902253799556549537.post5296799078540170654..comments2024-03-20T02:13:07.412-04:00Comments on Fictional Reserve Barking: On the (ir)relevance of the money multiplier model: The Fed viewcircuithttp://www.blogger.com/profile/08565443970730261572noreply@blogger.comBlogger30125tag:blogger.com,1999:blog-5902253799556549537.post-13858236911467393102014-01-15T20:54:30.607-05:002014-01-15T20:54:30.607-05:00Welcome Bernhard! I'll drop you an email soon....Welcome Bernhard! I'll drop you an email soon. Thanks for reaching out.circuithttps://www.blogger.com/profile/08565443970730261572noreply@blogger.comtag:blogger.com,1999:blog-5902253799556549537.post-72929154833599678172014-01-14T19:13:18.829-05:002014-01-14T19:13:18.829-05:00Hello Circuit. I enjoy reading your blog. I have ...Hello Circuit. I enjoy reading your blog. I have a similar blog at http://savingsandinvestment.blogspot.ca/. The reason I am writing is that I live in Ottawa as well and because of our similar interests, perhaps we can meet over coffee and chat. My personal email address is beichenlaub@gmail.com. Thanks Bernhard Eichenlaubhttps://www.blogger.com/profile/09165946749562640768noreply@blogger.comtag:blogger.com,1999:blog-5902253799556549537.post-42773644952769997962013-12-23T13:35:42.836-05:002013-12-23T13:35:42.836-05:00Hi,
Thanks for you reply. My view is that the ban...Hi,<br /><br />Thanks for you reply. My view is that the banks are just careful and once the conomiy recovers and confidence sets in, we will again see that there is no causal relationship between reserves and lending. However, I may be wrong.<br /><br />Regards!<br /><br />AlesUnknownhttps://www.blogger.com/profile/02644641255090021105noreply@blogger.comtag:blogger.com,1999:blog-5902253799556549537.post-9620106692871205912013-12-22T16:39:13.806-05:002013-12-22T16:39:13.806-05:00OOps!
I meant to say (and Japan BEFORE the QE ph...OOps! <br /><br />I meant to say (and Japan BEFORE the QE phases in the 2000s)circuitnoreply@blogger.comtag:blogger.com,1999:blog-5902253799556549537.post-85811728421633147572013-12-22T16:37:47.442-05:002013-12-22T16:37:47.442-05:00Ales,
Thanks for your comments and for the link....Ales, <br /><br />Thanks for your comments and for the link. The excerpt you provide is certainly consistent with the Fed mechanism prior to December 2008 (and Japan during the QE phases in the 2000s). The system works through the upward pull of reserves by deposit creation. Since December 2008, additional reserves creates deposits, one for one. In other words, there is a 'multiplier' of one. Under such circumstances, the central bank has the ability to exogenously control the money supply. Some folks disagree with this because the public is constantly rebalancing its portfolio, which implies that the money supply can't be controlled...My view is that the central bank has considerable influence. That said, whether or not that influence is helpful is another story...circuitnoreply@blogger.comtag:blogger.com,1999:blog-5902253799556549537.post-37694752222536755082013-12-22T11:04:01.091-05:002013-12-22T11:04:01.091-05:00Very good article - thanks for all the enlighting ...Very good article - thanks for all the enlighting citations! Nevertheless, I still think money multiplier or fractional reserve model is wrong. Banks can still create money by expanding the two sides of their balance sheet simultaneously. However, in crises when interbank market for reserves dries up, they are more careful and many of them need to be sure they have enough reserves on hand before they land. Also, excess reserves in the Fed system does not automaticaly imply that there is now a causal relationship between reserves and lending. For example, ECB in it's may 2012 Monthly Bulletin states that:<br /><br />"The large increase in Eurosystem lending to euro area credit institutions was mirrored by a significant increase in base money (see Chart B). Base money consists of currency in circulation, the deposits that credit institutions are required to maintain with the Eurosystem in order to cover the minimum reserve requirement (required central bank reserves) and credit institutions’ holdings of highly liquid deposits with the Eurosystem over and beyond the level of required central bank reserves (excess central bank reserves and recourse to the deposit facility), which can be considered “excess central bank liquidity”. The increase in base money is mainly attributable<br />to an expansion of the excess central bank liquidity held by some euro area credit institutions. The occurrence of signifi cant excess central bank liquidity does not, in itself, necessarily imply an accelerated expansion of MFI credit to the private sector. If credit institutions were constrained in their capacity to lend by their holdings<br />of central bank reserves, then the easing of this constraint would result mechanically<br />in an increase in the supply of credit. The Eurosystem, however, as the monopoly<br />supplier of central bank reserves in the euro area, always provides the banking system with the liquidity required to meet the aggregate<br />reserve requirement. In fact, the ECB’s reserve requirements are backward-looking, i.e. they depend on the stock of deposits (and other<br />liabilities of credit institutions) subject to reserve requirements as it stood in the previous period, and thus after banks have extended the credit demanded by their customers." (page 21)<br /><br />http://izvor-denarja.si/wp-content/uploads/2012/08/ECB-Mesecno-porocilo-maj-2012.pdf<br /><br />Any thoughts on that?<br /><br />AlesUnknownhttps://www.blogger.com/profile/02644641255090021105noreply@blogger.comtag:blogger.com,1999:blog-5902253799556549537.post-62374825542992549562013-11-22T18:29:06.683-05:002013-11-22T18:29:06.683-05:00That's why they explain that control is "...That's why they explain that control is "within a certain range or band". It implies the CB doesn't have complete control but it has significant influence over time. circuithttps://www.blogger.com/profile/08565443970730261572noreply@blogger.comtag:blogger.com,1999:blog-5902253799556549537.post-32862552270497243052013-11-22T17:34:12.190-05:002013-11-22T17:34:12.190-05:00@GC: Apologies...Looks like I am referring to a di...@GC: Apologies...Looks like I am referring to a different article (not the Lombra/Moran). The quote comes from Lombra's "Policy advice and policy making: Economic, political and social issues" from the book "The Political Economy of policymaking: essays in honor of W.E Mason"circuithttps://www.blogger.com/profile/08565443970730261572noreply@blogger.comtag:blogger.com,1999:blog-5902253799556549537.post-5110838308081182362013-11-22T09:23:25.872-05:002013-11-22T09:23:25.872-05:00Wonderful article! Wonderful article! Nunonoreply@blogger.comtag:blogger.com,1999:blog-5902253799556549537.post-39680071850189034972013-11-21T19:01:49.566-05:002013-11-21T19:01:49.566-05:00This is an interesting post! Thanks for the useful...This is an interesting post! Thanks for the useful links and references.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5902253799556549537.post-81769025419676395262013-11-21T17:35:08.139-05:002013-11-21T17:35:08.139-05:00Yes, I see what you mean. I originally discounted ...Yes, I see what you mean. I originally discounted (b) but having worked through the accounting, I get it. There is a one-to-one effect, as you describe it, between each dollar of QE and each dollar of deposits, and this could explain the correlation.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-5902253799556549537.post-84156448981726360532013-11-21T13:08:10.737-05:002013-11-21T13:08:10.737-05:00Hi JP,
I approach this stuff from the starting po...Hi JP,<br /><br />I approach this stuff from the starting point of other things equal logic.<br /><br />So if most of the bonds sold into QE originate from non-bank balance sheets (which they did), then QE increases reserves and M1 at origin 1:1. That’s pretty close to an accounting/operational tautology according to how the payment system works.<br /><br />As I said in my comment above, there may be subsequent changes in balance sheet composition for a variety of reasons. For example, new equity issued by banks during the QE period would be paid for by debit to M1 deposits – so that would result in a recomposition of the funding side of the banking system while reserves remained in tact on the asset side. That’s just one example. There are probably a zillion of them.<br /><br />Regarding your point on panic rebalancing from shadow banking into M2, I’d use the same approach from the start. In order for that to happen, there has to be an accompanying shift in which shadow banks sell their assets to banks – somehow. Other things equal, system balance sheets won’t balance otherwise. I haven’t thought about that, but you’d have to come up with a thesis that would explain the order of magnitudes involved in such a shift so as to:<br /><br />a) Correlate that asset expansion materially with that M2 expansion<br /><br />b) Explain what happened to the original M1 creation attributable to QE at origin<br /><br />What your thesis suggests is a double flow of assets into the banking system – QE reserves and shadow banking asset imports – matched by a double flow of deposit creation for the two reasons I’ve suggested.<br /><br />So there would seem to be a duplication of balance sheet expansion required at origination with a subsequent messy disentangling of that in order to explain where we finally got to. But I’m not sure that story works, because you have what are essentially two strong cyclical forces – QE and asset migration – working in parallel, both requiring bank balance sheet expansion, other things equal.<br /><br />In all cases, one must explain with some sort of summary model how balance sheets end up balancing. That’s what the story must be about.<br /><br />Not saying you’re wrong – just that I would be interested in your alternative balancing story.JKHhttps://www.blogger.com/profile/06322177539880818556noreply@blogger.comtag:blogger.com,1999:blog-5902253799556549537.post-41481113009563374562013-11-21T11:04:28.032-05:002013-11-21T11:04:28.032-05:00Like Ramanan and JKH, I disagree with Hetzel's...Like Ramanan and JKH, I disagree with Hetzel's view. But I'm not sure I agree with JKH's alternate theory. The correlation between M2 and the base could be due to a third causal factor -- namely outbreaks of fear and panic. When bad events happen investors rebalance their portfolios away from shadow banking deposits (and/or riskier European deposits) into M2 deposits. Thus the rise in M2. At the same time the Fed reacts to these outbreaks by initiating a new round of QE, driving up the base. So they are separate phenomena. Assuming that I'm right and there is no causal relationship between base and M2, then an outbreak of panic not met by a new round of QE would still be met by a rise in M2.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-5902253799556549537.post-55216780678424307002013-11-21T00:31:21.453-05:002013-11-21T00:31:21.453-05:00True it matters a bit but "control" is a...True it matters a bit but "control" is another thing. Control is moving it in the desired direction without difficulty. It may move it in one direction sometimes but this doesn't mean always. <br /><br />So let us consider the opposite case where the central bank is behaving like the 70s. If bond holders fear losses, the non-bank sector may sell bonds to the banks (who are prepared to buy and sell) and the stock of money can actually increase even if central banks try to reduce it. In this case it is true that the supply mattered but the result was opposite of what is intended. Ramananhttps://www.blogger.com/profile/11123448543333785121noreply@blogger.comtag:blogger.com,1999:blog-5902253799556549537.post-43478549980447434352013-11-20T19:49:26.123-05:002013-11-20T19:49:26.123-05:00"...sensible best..." LOL!
Also, I like..."...sensible best..." LOL!<br /><br />Also, I like Steindl's "Stagnation Theory and Stagnation Policy". Some parts read as though it was written today. Covers topics like austerity and debt.<br /><br />circuithttps://www.blogger.com/profile/08565443970730261572noreply@blogger.comtag:blogger.com,1999:blog-5902253799556549537.post-4419779757638976712013-11-20T19:16:43.598-05:002013-11-20T19:16:43.598-05:00@Ram:
In your post, you mention:
"In Post-K...@Ram:<br /><br />In your post, you mention:<br /><br />"In Post-Keynesian monetary theory, economists say that the stock of money is “demand-determined” and Hetzel’s arguments seems to be against this view. However what Hetzel forgets is that while the Federal Reserve influences the stock of money, it is still demand-determined."<br /><br />About the last sentence, surely the central bank can control money growth within a certain range, especially on a longer-term horizon. Doesn't that mean the supply side matters just as much?circuithttps://www.blogger.com/profile/08565443970730261572noreply@blogger.comtag:blogger.com,1999:blog-5902253799556549537.post-1321884539392918422013-11-20T18:27:49.742-05:002013-11-20T18:27:49.742-05:00These are all great comments so thanks to everyone...These are all great comments so thanks to everyone. As I wrote, I'm not altogether convinced about Hetzel's claim so I'm glad I stayed on the fence on this one. <br /><br />In fact, I thought a lot about this issue before writing the post, but I figured Hetzel thought it through. It seems to me he's using the expression 'reserve-money multiplier' as short-hand to express the fact that the Fed now has influence over both B and growth in M. I suppose he's saying that once that happens, then "the deed is done", the model applies.<br /><br />I've seen some textbooks with decent multiplier models that take into account complicating realities. They're still 'sausage grinder' models but they seem to allow for adjustments by banks and the public. Perhaps Hetzel is suggesting that with Fed actually exercising influence over B and growth in M, the models work better. <br /><br />@Ram: Nice follow-up on your blog. <br /><br />@GC: Thanks. The Lombra/Moran book is excellent. In fact, I really got a kick out of this part from Lombra's introduction on the monetarist critique of keynesianism: "While it is tempting to examine each of the above premises, there is a considerable risk of getting bogged down in analytic details which may not be essential to understanding policy advice and policy-making. A more productive route may be to focus on the key economic, social, and political aspects of the critique and the reaction to it". The analysis that follows is excellent. I enjoyed the part about the supposed harm associated with inflation vs unemployment. It includes some nice quotes by Tobin and Okun.circuithttps://www.blogger.com/profile/08565443970730261572noreply@blogger.comtag:blogger.com,1999:blog-5902253799556549537.post-21903400930148049612013-11-20T11:53:58.872-05:002013-11-20T11:53:58.872-05:00Oh inspired a post:
http://www.concertedaction.co...Oh inspired a post:<br /><br />http://www.concertedaction.com/2013/11/20/central-bank-lsap-is-the-money-stock-supply-determined-or-demand-determined/Ramananhttps://www.blogger.com/profile/11123448543333785121noreply@blogger.comtag:blogger.com,1999:blog-5902253799556549537.post-45614403435815791302013-11-20T10:47:41.916-05:002013-11-20T10:47:41.916-05:00As in I should say that even though Hetzel says mo...As in I should say that even though Hetzel says money multiplier framework, his mechanism - whether his reasoning is right or wrong - is that it is determined by the monetary authority and that itself is wrong even if money multiplier is wrong (which it is ie wrong). Ramananhttps://www.blogger.com/profile/11123448543333785121noreply@blogger.comtag:blogger.com,1999:blog-5902253799556549537.post-53057680809871092782013-11-20T10:07:09.250-05:002013-11-20T10:07:09.250-05:00I see y said about the same thing above, which I a...I see y said about the same thing above, which I agree with<br /><br />Again, IMO it's a very bad idea to conflate this with the money multiplier concept - two completely different levels of monetary operations logicJKHhttps://www.blogger.com/profile/06322177539880818556noreply@blogger.comtag:blogger.com,1999:blog-5902253799556549537.post-37873392697583138352013-11-20T09:55:57.633-05:002013-11-20T09:55:57.633-05:00I agree with JKH's nice comment.
In the quot...I agree with JKH's nice comment. <br /><br />In the quote you quote by Hetzel, there isn't any mutliplier and he just says that the Federal Reserve has more influence on the stock of money. <br /><br />However Hetzel is wrong that the Fed actually determines the stock and that it is not demand determined. Economic units still hold money balances as per their desire. The stock of money is still demand determined because of reflux, asset allocation mechanism etc. <br />Ramananhttps://www.blogger.com/profile/11123448543333785121noreply@blogger.comtag:blogger.com,1999:blog-5902253799556549537.post-55705185584863895132013-11-20T09:49:48.680-05:002013-11-20T09:49:48.680-05:00Very good work. I am particularly fond of your Tob...Very good work. I am particularly fond of your Tobin insertion. I would add a most important contribution that has inspired, in its own way, both Hetzel (sometimes difficult) and Ben Friedman; Lombra/ Moran: Policy Advice and Policymaking in the Fed Res. It has very valuable insights.<br /><br />I enjoyed all your posts but took nostalgic pleasure in seeing Samuelson at his sensible best and noting Steindl's name reappearing and being very seriously considered. <br /><br />!!!GChttps://www.blogger.com/profile/08375318534115974204noreply@blogger.comtag:blogger.com,1999:blog-5902253799556549537.post-9158359495604874712013-11-20T09:46:07.334-05:002013-11-20T09:46:07.334-05:00Right yeah I have seen the reference to it in this...Right yeah I have seen the reference to it in this blog. I actually found the reference in Moore's book Horizontalists and Verticalists.Ramananhttps://www.blogger.com/profile/11123448543333785121noreply@blogger.comtag:blogger.com,1999:blog-5902253799556549537.post-88384991508729227452013-11-20T09:36:47.236-05:002013-11-20T09:36:47.236-05:00Excellent post.
I think Hetzel is wrong though.
...Excellent post.<br /><br />I think Hetzel is wrong though.<br /><br />What is at work in QE is better described as a money duplication process rather than a money multiplier process. It's entirely different.<br /><br />The correlation between base changes and M2 changes during QE has nothing to do with the reserve ratio calculation that is part of the money multiplier math.<br /><br />It has to do with the fact that non-banks were the ultimate source for most of the assets acquired by the Fed under QE. To the degree that's the case, there is a 1:1 duplication of reserve expansion and M2 expansion at the point of transaction origin. Non-bank bond sellers basically convert their bonds to M2 at source.<br /><br />Subsequent commercial bank balance sheet changes may change the one-to-oneness that appeared at origination, but that also has nothing to do with money multiplier dynamics.<br /><br />So in total this has nothing to do with a standard money multiplier argument. The two should not be confused.JKHhttps://www.blogger.com/profile/06322177539880818556noreply@blogger.comtag:blogger.com,1999:blog-5902253799556549537.post-53398182757221995912013-11-19T20:01:02.319-05:002013-11-19T20:01:02.319-05:00Thanks Swells. Nod!!
Caught it all (youngsters, f...Thanks Swells. Nod!!<br /><br />Caught it all (youngsters, fiddles, Goodfriend, StatsCan(!)). How could I? Someone told me a while back to "pay attention to every word". <br />It'd be great to hear from a monetarist. In fact, I'm looking for good Harry Johnson references. circuithttps://www.blogger.com/profile/08565443970730261572noreply@blogger.com