tag:blogger.com,1999:blog-2546602206734889307.post8137590248504178577..comments2024-03-28T04:29:22.717+00:00Comments on mainly macro: Kill the Money Multiplier!Mainly Macrohttp://www.blogger.com/profile/09984575852247982901noreply@blogger.comBlogger60125tag:blogger.com,1999:blog-2546602206734889307.post-9570056809155538102014-05-02T18:31:44.677+00:002014-05-02T18:31:44.677+00:00Again, this is a late comment, but in periods with...Again, this is a late comment, but in periods without a central bank -- for instance, in the Free Banking period of the 19th century US -- the money multiplier theory probably worked. <br /><br />Then, when a bank failed to meet its reserve requirement, it was shut down and liquidated!<br /><br />This causes much more conservative reserve management and means that the loan officers actually *did* call the deposit side to see if they had enough reserves (you can read about this in 19th century novels; doesn't happen any more).Nathanaelnoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-67268983447749452962014-05-02T18:28:30.674+00:002014-05-02T18:28:30.674+00:00This is a very late comment, but...
The Money Mul...This is a very late comment, but...<br /><br />The Money Multiplier theory appears to have been a tolerably good description of the broad money / base money behavior under a Free Banking system, with a gold standard, during a boom. These are, of course, the conditions under which the theory was developed!<br /><br />It has nothing to do with modern economies.<br /><br />A historical treatment of economics, focusing on changes in institutional structure and economic regime, might well want to include the money multiplier. <br /><br />As far as I know (correct me if I'm wrong) the money multiplier still works as a description of a free banking / required reserves / gold standard regulatory regime, where gold is the monetary base, required reserves must be made of gold, the bank-created money supply is limited by the legal ability of the licensed banks to create additional money due to the reserve ratio, and the reserve holdings of the banks are regularly audited.<br /><br />One little change in this policy -- allowing interbank loans to qualify as reserves without physical transfers of gold, or creating a Federal Reserve Bank -- causes the money multiplier theory to stop applying.<br /><br />The money supply is driven very much by regulatory, institutional considerations. The money multiplier is an artifact of a former institutional regime. Is it worth teaching? Perhaps it is, in order to remind your students that the correct macro analysis depends entirely on legal, regulatory, and institutional structure considerations. But it's not relevant to *today's* institutions.Nathanaelnoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-89886061279390959052014-04-03T19:16:39.789+00:002014-04-03T19:16:39.789+00:00"the money multiplier is applicable in fixed ..."the money multiplier is applicable in fixed fx regimes"<br /><br />Completely incorrect.<br /><br />Ditto<br /><br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-78399611497048761652014-01-16T11:17:13.845+00:002014-01-16T11:17:13.845+00:00Hello, Prof. Simon.
I'm an amature economist i...Hello, Prof. Simon.<br />I'm an amature economist in Japan.<br />I translated this article into japanese, please tell me if you don't like such translation.Tamura Toshimichihttp://whatsmoney.hateblo.jp/entry/2014/01/15/222653noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-5827450408164935792012-08-07T16:15:34.160+00:002012-08-07T16:15:34.160+00:00First of all I am not in the level of most people ...First of all I am not in the level of most people here, so please, correct me if I am wrong. Second I am trying to condensate a relatively complex idea in a few lines, please be nice to me .....<br /><br />I think that perhaps we can find a good reason for studying banking multipliers: the money offer becomes quasi-exogenous so that interest rates becomes a mere reference to the markets intead of being stone written trues.<br /><br />The thing is that the meaning of this seems to be particularly troublesome. If we consider the existence of a basic interest rate in the market that is considered as risk free, and at the same time we consider that this rate also represents government's capacity to pay for its debt once it represents this debt intertemporal cost, we will fastly conclude that government economic policy is about continualy inflating and deflating the same economic bubble. I know it sounds too strong, but I would need much more space in order to write down the whole idea.<br /><br />I will try to summarize it: there is in the idea of economic cicles the concept of expansion and recession. Recession is the time for government to do counter ciclical economic policy and expansion is the time for austeriry. <br /><br />The problem is that in a political society it is hard to take austerity measures due their impopularity while at the same time accumulating debt increases the cost of debt and financial instability.<br /><br />In the other hand when the time to cut budgetary expenses comes, what tends to be cutted are the non-essencial expenses - or in other words: social wellfare expenses. <br /><br />The thing is that this political reality leaves scars that could mean the shortening of the wellfare state or the accumulation of debt - and in the long run both of them. <br /><br />Which means that society is less prepared to the effect of recessions as an effect of the previous periods recessions. The Washington Consensus and Giddens Minimum State are examples of this. Paralel to this, the grouth of the servieces sector means a higher volatility due the instable character of the terciary sector. <br /><br />The consequence of the sum of all these factors are irrational exuberance and the Washington Consensus are one side of the coin and the ni-ni generation all over the world are in the other. Both sides reflecting different the same coin, or in toher words society's development.<br /> <br />How did I concluded this? By understanding the macro aggregates during my first courses in Macro. I believe the multipier itself is not so important, but the idea of quasi-exogenity of the monetery aggregates should lie at the base of a any macro analisis and therefore should be studied from the very begining <br /><br />Did I got everything wrong?Eduardo Weiszhttps://www.blogger.com/profile/03047849830283545090noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-23986037417664580502012-08-01T14:16:48.396+00:002012-08-01T14:16:48.396+00:00argh: 'depending on m'argh: 'depending on m'Unlearningeconhttps://www.blogger.com/profile/13687413107325575532noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-16766097554560756632012-08-01T14:16:14.189+00:002012-08-01T14:16:14.189+00:00"Fail. M=mB means B could decrease and if m i..."Fail. M=mB means B could decrease and if m increased sufficiently then M would increase. If m is not stable, m may increase. So the textbook does not suppose that B must first be increased to increase M."<br /><br />Fair enough. How's this:<br /><br />'there must be enough B for M to increase past a certain point, depending on B.'<br /><br />Also, when will you just admit that economics does not teach endogenous money?Unlearningeconhttps://www.blogger.com/profile/13687413107325575532noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-52007672322073886312012-08-01T13:35:37.002+00:002012-08-01T13:35:37.002+00:00Jake,
I don't know, I think you make some go...Jake, <br /><br />I don't know, I think you make some good points but you are overdoing it - I have my quibbles with your response to Pontus above. Would be interested to read your response to my comment on separate doc above, at comment dated 02:44. Move to email I think so as not to pollute this space.Luis Enriquehttps://www.blogger.com/profile/09373244720653497312noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-33550560994104649032012-08-01T13:14:50.112+00:002012-08-01T13:14:50.112+00:00Enrique: Please direct your efforts towards educat...Enrique: Please direct your efforts towards educating people like pontus who labor under the loanable funds delusion, <em>before</em> you complain about people who criticize neoclassical economics for misleading people about the nature of credit and its economic significance.<br /><br />If your textbooks have given pontus the impression that loanable funds are correct and banks are merely intermediaries, then <em>it doesn't matter what the textbooks <strong>say</strong></em>. What matters is what <em>people who read them take away from the process</em>.<br /><br />Because Murphey's Law applies to textbooks too: If a reader can come to a right and a wrong conclusion based on the textbook then, no matter how unkind a reading the wrong conclusion would be, then the textbook is fatally and fundamentally flawed as an educational device.<br /><br />- JakeJakeShttp://www.eurotrib.comnoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-10034931858826448322012-08-01T13:14:29.000+00:002012-08-01T13:14:29.000+00:00Fail. M=mB means B could decrease and if m increas...Fail. M=mB means B could <i>decrease</i> and if m <i>increased</i> sufficiently then M would <i>increase</i>. If m is not stable, m may increase. So the textbook does not suppose that B must first be increased to increase M.Luis Enriquehttps://www.blogger.com/profile/09373244720653497312noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-32313008097765246432012-08-01T13:10:51.755+00:002012-08-01T13:10:51.755+00:00"The fed does not control money supply, it co..."The fed does not control money supply, it controls reserves."<br /><br />Not when it wishes to defend an interest rate target. Which is always. Unless it pays a support rate on excess reserves and consistently maintains sufficient reserves in the system that no bank ever finds itself short of reserves.<br /><br />In other words, only when reserves are of no economic interest whatever.<br /><br />"It can expand or contract reserves with virtually unlimited discretion,"<br /><br />Not when it wishes to defend an interest rate target. Which is always.<br /><br />"but how these reserves will trickle through the economy is beyond the central bank's control."<br /><br />Now you're boarding the loanable funds crazy train. Reserves don't "trickle through the economy." They are created and destroyed at need.<br /><br />"My statement is simple: By engaging in open market operations, the fed can expand reserves. In normal times (positive nominal interest rate), these reserves will trickle through the economy and there will be more money created (endogenously!) than the reserve amount. This is called the money multiplier."<br /><br />This is false. The Fed can only create reserves <em>after</em> banks have <em>already</em> decided to extend loans. Otherwise, the interbank rate would crash clear down to the support rate.<br /><br />The bank decides to make the loan based on the CB's policy rate. No banker has ever checked the monetary aggregates before deciding whether to grant a loan application or not, and it is simply silly to suppose that any ever will.<br /><br />"And I have no idea what you're talking about when it comes to the example of the TV. Do you seriously not think that banks engage in intermediation? Well, fyi, it does."<br /><br />Nothing prevents a bank from lending without ever having a single deposit.<br /><br />To call this "intermediation" places a greater burden on the logic and semantic resources of the English language than it can reasonably be expected to bear.<br /><br />"And if you want to claim that *debt* raises AD, you must show that a simple rise in intermediation raises AD."<br /><br />Again, "debt is intermediation" is the loanable funds fallacy. Debt it is the creation of purchasing power out of thin air - no input of purchasing power is required at all, so there is nothing to "intermediate."<br /><br />This really shouldn't be controversial. It's not even Minsky or Keynes, it's fucking <em>Schumpeter</em>. If you don't understand this, then you haven't been paying attention <em>at any point in the last one hundred years</em>.<br /><br />"The central bank CANNOT purchase short term t-bills in the federal funds market?"<br /><br />It can.<br /><br />"The central bank cannot pay with reserves?"<br /><br />It can.<br /><br />"Reserves will not under normal times translate into debt?"<br /><br />Reserves will not translate into debt. An increase of debt forces the central bank to create more reserves. Once the central bank has decided upon an interest rate target and a set of margin requirements, it has no further discretionary power over the level of lending, or circulating reserves. Reserves are simply irrelevant to the story.<br /><br />"And debt will not multiply into more debt?"<br /><br />No. Debt is created and destroyed at need. Existing debt or money is not a prerequisite for the creation of debt.<br /><br />This has been another edition of "simple answers to simple questions."<br /><br />- JakeJakeShttp://www.eurotrib.comnoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-65312483841549617972012-08-01T12:49:44.773+00:002012-08-01T12:49:44.773+00:00Oh good god.
You are still not grasping that the ...Oh good god.<br /><br />You are still not grasping that the textbook still supposes that, in order to increase M, B must first be increased. That m is not stable does not changed this.<br /><br />I outlined why this is wrong in my response above.Unlearningeconhttps://www.blogger.com/profile/13687413107325575532noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-26155249552284266782012-08-01T11:07:44.147+00:002012-08-01T11:07:44.147+00:00UE
Get a grip.
Above I claimed mainstream econom...UE<br /><br />Get a grip.<br /><br />Above I claimed mainstream economics does not just teach "if B goes up M will go up" and you accused me of the one true Scotsman fallacy. You cited a textbook supposedly demonstrating economists teach M=mB as a causal mechanism, but I showed that same text book does no such thing because it goes on to say m is not stable. As I predicted elsewhere, you just respond with bluster instead when an apology would be more in order. <br /><br />One last try: profits=margin*revenue is not a casual relationship showing if revenues increase profits will increase because margin is not stable. It is an accounting relationship. M=mB is not a casual relationship showing if B increases M will increase because m is not stable. It is an accounting relationship. If you cannot understand this, I suggest you retire from your current career as the scourge of economics.<br /><br />Right now we have had a massive increase in B but not M because m has collapsed because reserve ratios have rocketed - that is what the bloody money multiplier captures.Luis Enriquehttps://www.blogger.com/profile/09373244720653497312noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-84351177002867584472012-08-01T10:48:59.165+00:002012-08-01T10:48:59.165+00:00Luis, that does not alter it at all and is not sel...Luis, that does not alter it at all and is not selective. I know they go on to assert that it is not stable. It doesn't change that they teach the fundamental money multiplier relationship. Endogenous money rejects this completely, stable or not. Monetary policy is not simply about the 'demand and supply' for base money.<br /><br />pontus, you should really stop making overarching statements that I assume I do not know what I am talking about. We've already established you do not understand the difference between endogenous money and the money multiplier, now I realise that you cannot even comprehend that there could be an alternative theory.<br /><br />The money multiplier teaches a causal relationship that goes like this:<br /><br />M0 > M1+<br /><br />So what does evidence suggest?<br /><br />"There is no evidence that either the monetary base or M1 leads the cycle, although some economists still believe this monetary myth. Both the monetary base and M1 series are generally procyclical and, if anything, the monetary base lags the cycle slightly."<br /><br />From the father of RBC,no less: http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=225<br /><br />This is not the money multiplier story - I am sure you will find a way to explain why reality is wrong, but whatever.<br /><br />The fact is that, in the real world, banks extend loans to people and credit their accounts with a deposit simultaneously. The result is extra purchasing power. The banks don't need deposits to 'lend out' (although capital base matters). In the short term they get reserves when they need them but the CB can exert long term influence via setting the rate.Unlearningeconhttps://www.blogger.com/profile/13687413107325575532noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-83348572356154934772012-08-01T09:56:30.773+00:002012-08-01T09:56:30.773+00:00if anybody is interested, I also looked at the Bla...if anybody is interested, I also looked at the Blanchard text, which is the one we use, and it's discussion of the multiplier does not emphasize that the reserve ratio may change in such a way that increasing B will not increase M, although it's plain that would be the case. Mankiw's text does talk about banks holding excess reserves and says the money supply sometimes moves in ways the Fed does not intend. <br /><br />So Nick Rowe's exhortation to all those who think economists don't understand money creation - read a first-year text book - looks justified.Luis Enriquehttps://www.blogger.com/profile/09373244720653497312noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-85635336554623191582012-08-01T09:50:50.593+00:002012-08-01T09:50:50.593+00:00perhaps I should have said, it's a comment on ...perhaps I should have said, it's a comment on the endogenous/exogenous money thingLuis Enriquehttps://www.blogger.com/profile/09373244720653497312noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-46641544763442119292012-08-01T09:44:14.368+00:002012-08-01T09:44:14.368+00:00To avoid clogging up Simon's blog, here's ...To avoid clogging up Simon's blog, <a href="https://docs.google.com/document/d/10Sv7LeYYnHLIwFONJo9xNLLo7f7yHPneWCCxtHPeeSk/edit" rel="nofollow">here's a comment as a google doc</a><br /><br />Alarmed by the prospect that I might be the only economist not to regard M=mB as a causal mechanism, I looked up this Griffith book (not one I'd heard of). After the excerpt Unlearning Economics quotes it goes on to say:<br /><br />"But what determines the value of m? In fact, there are two factors: the decisions of depositors about their holdings of currency and deposits, and the level of reserves the banks hold to meet customer demands for currency.... Whether the money supply multiplier is an adequate explanation of the money supply process depends partly on the stability of the ratios c and r [reserve ratio]...Certainly for the UK the general view is that the money supply multiplier is unstable in the short run"<br /><br />So the text book does not say M=mB is a causal mechanism with stable m - if r increases, B can increase and M will not. <br /><br />Unlearning Economics, I'm not impressed by your selective use of quotation.Luis Enriquehttps://www.blogger.com/profile/09373244720653497312noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-73260717696369101982012-08-01T08:07:42.194+00:002012-08-01T08:07:42.194+00:00@Jake, no there is no conflict whatsoever with wha...@Jake, no there is no conflict whatsoever with what I've previously said. The fed does not control money supply, it controls reserves. It can expand or contract reserves with virtually unlimited discretion, but how these reserves will trickle through the economy is beyond the central bank's control.<br /><br />My statement is simple: By engaging in open market operations, the fed can expand reserves. In normal times (positive nominal interest rate), these reserves will trickle through the economy and there will be more money created (endogenously!) than the reserve amount. This is called the money multiplier.<br /><br />And I have no idea what you're talking about when it comes to the example of the TV. Do you seriously not think that banks engage in intermediation? Well, fyi, it does. And if you want to claim that *debt* raises AD, you must show that a simple rise in intermediation raises AD. Otherwise your talking about monetary policy, and are just dressing up a decade old idea in new clothes, calling it "heterodox".<br /><br />unlearningecon - So that's not how monetary policy works? The central bank CANNOT purchase short term t-bills in the federal funds market? The central bank cannot pay with reserves? Reserves will not under normal times translate into debt? And debt will not multiply into more debt?<br /><br />Why don't you explain what is wrong here, and why? Let me guess: Because you can't.pontushttps://www.blogger.com/profile/08321967966569420139noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-76074249990713592692012-08-01T00:20:48.920+00:002012-08-01T00:20:48.920+00:00What intermediate undergrad and PhD macro texts do...What intermediate undergrad and PhD macro texts do you like?Richard H. Serlinhttps://www.blogger.com/profile/09824966626830758801noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-46355059998059629122012-08-01T00:14:17.035+00:002012-08-01T00:14:17.035+00:00"I think you should change the name of your b..."I think you should change the name of your blog to "neverreallylearnteconomics""<br /><br />Nope, I learned the theory you describe, then realised that the evidence doesn't corroborate with it. You, on the other hands, are ignorant of this fact yet continue to act condescending.<br /><br />Typical mainstream economist. Nothing new to see here, keep clinging to your models despite their abject failure to foresee and deal with the crisis.<br /><br />Sorry for triple post.Unlearningeconhttps://www.blogger.com/profile/13687413107325575532noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-56665542249320806002012-08-01T00:11:51.391+00:002012-08-01T00:11:51.391+00:00It's only nonsense because you make it so. At ...It's only nonsense because you make it so. At least now we know that when you assert you have incorporated endogenous criticisms you are wrong/lying.Unlearningeconhttps://www.blogger.com/profile/13687413107325575532noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-10776586288120014452012-07-31T23:45:40.266+00:002012-07-31T23:45:40.266+00:00pontus -
Yep, that's loanable funds theory. Y...pontus -<br /><br />Yep, that's loanable funds theory. You don't use endogenous money theory.<br /><br />That's all I wanted to establish ;)Unlearningeconhttps://www.blogger.com/profile/13687413107325575532noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-55313078004613850502012-07-31T22:46:38.451+00:002012-07-31T22:46:38.451+00:00pontus, everything you just wrote conflicts direct...pontus, everything you just wrote conflicts directly with your prior statement that "The economy creates whatever money it needs to keep the wheels spinning, but always and everywhere subject to the costs set by the fed."<br /><br />So which is it? Does the Fed decide the interest rate floor at which banks lend and accommodate whatever money demand might be at that rate, or does the Fed set the money supply and let the interest rate fall where it may?<br /><br />Can the Fed expand lending by expanding the money supply, as your immediately prior comment argues, or can it only reduce the contraction it imposes on lending by easing its constriction of the money supply? This is an important operational distinction, which the money multiplier story obscures.<br /><br />"For instance, if I don't buy that TV, but lend out the money to my neighbour (=debt), and he buys the TV, will that increase demand?"<br /><br />Loanable funds fallacy.<br /><br />In a modern economy your neighbor would borrow from a bank. Since the bank can <em>always</em> lend to your neighbor if it wants to (even with no deposits, because it can simply borrow from the central bank at the policy rate plus some minor spread), <strong><em>there is no causal relationship between your decision to not-buy the TV and your neighbor's ability to buy the TV</em></strong>.<br /><br />"But, but, but," you object, "the TV is a rival good - somebody has to produce it." Well, yes, but since <strong><em>money is not a veil over barter</em></strong> it does not follow from the fact that TVs are rival goods that the loanable funds fallacy is applicable to the example.<br /><br />- JakeJakeShttp://www.eurotrib.comnoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-43143364495183211932012-07-31T20:41:41.340+00:002012-07-31T20:41:41.340+00:00Ok, last reply. I don't want to pester Simon&#...Ok, last reply. I don't want to pester Simon's blog anymore with this nonsense.<br /><br />@ Unlearningecon. Here's how monetary policy normally works: If the central bank wishes to expand money supply, it conducts open market operations in the federal funds market. Normally by purchasing short term government debt. In exchange, it pays wish reserve money. Now, banks tend to use this money and lend it out (=debt). The debt will trickle through the economy and create more debt in a money multiplier fashion (you seriously don't believe that the total amount of money will widely exceed the additional reserves?). In the end we'll see a rise in demand and a rise in output (and eventually inflation).<br /><br />But that's monetary policy! The ideas are 200 years old. What does that have to do with Keen!? Expansionary monetary policy generates a lot of debt, and expansionary monetary policy have ... eh ... expansionary effects on economic aggregates. This is all old news.<br /><br />But this is not *debt* creating demand. It's money. If Keen, or you for that sake, want to claim that debt per se creates demand, you will have to isolate debt in the absence of money. For instance, if I don't buy that TV, but lend out the money to my neighbour (=debt), and he buys the TV, will that increase demand? No, it's a wash. So please explain to me how one person's non-spending which leads to another person's spending increases aggregate demand.<br /><br />I think you should change the name of your blog to "neverreallylearnteconomics"pontushttps://www.blogger.com/profile/08321967966569420139noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-38088737631048731082012-07-31T20:29:14.699+00:002012-07-31T20:29:14.699+00:00"no true Scotsman"
oh Lord well I suppo..."no true Scotsman"<br /><br />oh Lord well I suppose that for all I know most other universities taught and economists believe that M=mB is a straightforward causal mechanism with constant m, and what I had hitherto thought was my perfectly mainstream economics education at mainstream universities was the exception not the rule. If so, so much the worse for economics.<br /><br />I'd have thought it quite obvious that m ain't necessarily a constant and particularly in times such as these loans may stay unmoved whilst the reserve fraction rises. And maybe my mainstream experience is representative.Luis Enriquehttps://www.blogger.com/profile/09373244720653497312noreply@blogger.com