tag:blogger.com,1999:blog-8702840202604739302.post1074563780266939116..comments2024-03-27T11:12:49.188-07:00Comments on MacroMania: What makes a central bank special?David Andolfattohttp://www.blogger.com/profile/12138572028306561024noreply@blogger.comBlogger29125tag:blogger.com,1999:blog-8702840202604739302.post-74845499196345930382015-02-22T21:49:59.906-08:002015-02-22T21:49:59.906-08:00I need to do more research on central bank. My fri...I need to do more research on central bank. My friends used to work for it and they all were telling me about their mixed experiences in this bank. Thank you David for this article. By reading your article I'm convinced that central bank is surely one of the best banks. <br /><br />Regards,<br />HCBL Bank - <a href="http://hcbl.in/" rel="nofollow">Tathastu</a><br />Anonymoushttps://www.blogger.com/profile/01628870659549741190noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-85966638735457997162011-09-16T17:28:11.975-07:002011-09-16T17:28:11.975-07:00Nick: "are you telling me it is logically imp...Nick: "are you telling me it is logically impossible for the Bank of Canada to give stuff away? Because this would violate an accounting identity?"<br /><br />Well if I were an accountant, yes it would be. Maybe I don't understand how things work, but are the Bank of Canada's books unbalanced? I don't think they are, provided you attach value the paper they hold for the currency they produce.<br /><br />I am pointing out a difference between running "printing presses" and what the Bank of Canada actually does. It could logically leave a wad of newly-printed $20 bills on a bench on Capital Hill but it doesn't do that.jessehttps://www.blogger.com/profile/02155122147972263497noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-12955052695479983922011-09-16T12:42:13.756-07:002011-09-16T12:42:13.756-07:00Mike: Excellent!Mike: Excellent!David Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-42400082742609669312011-09-16T07:38:25.293-07:002011-09-16T07:38:25.293-07:00David:
If I'm ever in St. Louis, or if you...David:<br /><br />If I'm ever in St. Louis, or if you're in LA, I'll hold you to that.Mike Sproulhttp://www.csun.edu/~hceco008/realbills.htmnoreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-38300834082090666832011-09-16T07:06:01.243-07:002011-09-16T07:06:01.243-07:00@Mike Sproul: OK, but I'd rather sit down and ...@Mike Sproul: OK, but I'd rather sit down and discuss this with you over a pint. :)<br /><br />@Anonymous: Yes, you are correct; that is what I was referring to.<br /><br />@Nick: I see what you mean now. The only thing I'll say is that in the "money is memory" explanation, it is individually rational for agents to use money for its record-keeping properties. Anyway, no big deal here. I want to discuss your recent posts at WCI, but am struggling to find the time...David Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-79359030480460164842011-09-15T16:50:36.891-07:002011-09-15T16:50:36.891-07:00David: "People are risk-averse and have idios...David: "People are risk-averse and have idiosyncratic shocks. Society would value insurance. Therefore insurance will be valued. Is this a functionalist fallacy too?"<br /><br />Yes, I think so. We can imagine societies where people are risk averse, and have idiosyncratic shocks, but insurance isn't valued. We need somebody to come up with the idea of insurance, and start selling it. Or something like that.<br /><br />There are things that would be good and valuable if we all did them, but that doesn't necessarily give each individual an incentive to do them.<br /><br />For example, if I know that a note is counterfeit, and so provides a "false memory", I might still accept it if it's in my interest to do so, even though it makes the value of money less, both in the normal sense of "price", and its value as memory in helping the economy work.<br /><br />The thing I like about the Menger/von Mises story of money, and fiat money, is that it tries to explain everything from rational *individual* behaviour.Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-21241554370495559412011-09-15T13:29:49.056-07:002011-09-15T13:29:49.056-07:00@ David,
There has always been an active repo mar...@ David,<br /><br />There has always been an active repo market for agency MBS (which have always been implicitly guaranteed by the government, and retain that mysterious status post-crisis). What I think you're referring to is the repo market for structured credit, inc. non-agency MBS, CDOs, ABS, etc.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-72895325117777287692011-09-15T11:05:53.703-07:002011-09-15T11:05:53.703-07:00David:
As an example, the British pound of 1796 w...David:<br /><br />As an example, the British pound of 1796 was convertible into about .25 oz. of gold. Nobody would have called it fiat money, and if the paper pound had had a liquidity premium, so that it traded on the street at .26 oz, then arbitragers would have pounced. <br /><br />Convertibility was suspended in 1797, and the value of the pound stayed the same for a few years, only gradually losing about 10% (maybe 20%, I forget) of its value by 1810. Where was the liquidity premium? The pound certainly had none when it was convertible, and since the B of E's asset to liability ratio was not much changed from 1796 to 1797, it seems that no liquidity premium developed during the suspension.<br />The idea of fiat money developed during this time, mostly due to Thornton and Ricardo, who clearly committed the error of thinking that inconvertible=unbacked. When convertibility was restored in 1821, their own logic would have said that the pound had switched back again from fiat to backed, but the obvious explanation is that the Bank's assets were there all along, and the pound was backed by the Bank's assets all along, with no trace of a liquidity premium.Mike Sproulhttp://www.csun.edu/~hceco008/realbills.htmnoreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-54425678796709427022011-09-14T20:37:51.055-07:002011-09-14T20:37:51.055-07:00Mike:
You claim that liquidity premia are genera...Mike: <br /><br />You claim that liquidity premia are generally small; at least in financially developed economies like the U.S. You may be correct (I have no idea, though I wish I did). But even if these premia are small, it doesn't mean that they are not important. Ricardo Lagos (NYU), for example, that asset pricing models that incorporate liquidity premia are better able to explain asset price movements. <br /><br />You seem to be suggesting that if the liquidity premium on an asset is large enough, that competition will bid it away. This is a proposition that needs to be proved, not assumed. If commitment is in short supply (say because people cannot be trusted to make good on their promises), it does not magically follow that competition will supply that commitment. It may try, but commitment is a scarce resource. The constraint may bind. <br /><br />One interpretation of the emergence of MBS in repo up to the crisis is that it represented the private sector's response to high Treasury prices (low interest rates). It is true that the AAA rated tranches of MBS seemed for a while to displace Treasuries as collateral for repo, but the crisis revealed just how difficult it is to manufacture good collateral objects. <br /><br />Finally, yes, a previous post of yours was sent to the spam folder. It is now recovered. Sorry about that. Still don't know why that happens!David Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-42662598692393188402011-09-14T15:49:55.133-07:002011-09-14T15:49:55.133-07:00David:
Let's say the liquidity premium is 3%....David:<br /><br />Let's say the liquidity premium is 3%. That seems small enough that it might not pay rivals to introduce competing moneys like credit cards, checks, gift certificates, eurodollars, foreign currency, etc. That means money is 3% fiat and 97% backed, so economists' emphasis on fiat money is misplaced. (A post I made an hour ago might have been dropped, BTW.)Mike Sproulhttp://www.csun.edu/~hceco008/realbills.htmnoreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-83030246260702937602011-09-14T14:42:11.995-07:002011-09-14T14:42:11.995-07:00David,
My point was that the risk of insolvency m...David,<br /><br />My point was that the risk of insolvency might interfere with the benefit of irredeemability. CB's add value through the latter, they subtract through the former. There is something about paying interest on large swaths of balance sheet liabilities that makes a CB more of an ordinary bank, and less "special".David Pearsonnoreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-84526146669380989372011-09-14T14:07:15.695-07:002011-09-14T14:07:15.695-07:00David:
Credit card companies charge about 3% for ...David:<br /><br />Credit card companies charge about 3% for the liquidity services they provide, so call that a good first guess of the liquidity premium for any kind of money. That means that the Fed, for example, could issue a dollar that trades on the street for 1 oz. of silver, while the fed only holds assets worth .97 oz. That .03 oz premium might be just low enough that it's not worth anyone's trouble to introduce a rival money of some kind (checks, credit cards, gift certificates, eurodollars, foreign currency, etc.)<br /><br />If that 3% figure is right, then the dollar is 3% fiat and 97% backed. So economists should be focusing 97% of their attention on the backing theory and 3% on the quantity theory, instead of the current levels of 99.999% on the quantity theory and .001% on the backing theory.Mike Sproulhttp://www.csun.edu/~hceco008/realbills.htmnoreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-80290452393383691842011-09-14T10:50:21.770-07:002011-09-14T10:50:21.770-07:00Mike,
Correct.
But do you really believe that l...Mike,<br /><br />Correct. <br /><br />But do you really believe that liquidity premia are zero? Think of the shares of large cap stocks relative to small cap stocks. I think that the large volumes on GM shares may confer GM shares a liquidity premium, though how large, I do not know.David Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-83774084987165292192011-09-14T10:45:15.513-07:002011-09-14T10:45:15.513-07:00David:
"if liquidity (commitment) is scarce&...David:<br /><br />"if liquidity (commitment) is scarce"<br /><br />Your "if" is a great peace maker. What if liquidity is not scarce? What if people can easily trade with computer blips, bits of paper, wooden tallies (like in the middle ages), clay tablets (ancient Babylon), etc.? Then wouldn't your models imply zero monetary premium?Mike Sproulhttp://www.csun.edu/~hceco008/realbills.htmnoreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-30566759996908620722011-09-14T10:28:22.113-07:002011-09-14T10:28:22.113-07:00Mike:
Evidently, you have a rational expectation....Mike:<br /><br />Evidently, you have a rational expectation. It is true that factors that compete with fiat currency are suppressed. In particular, an implicit assumption (as it appears to me, but some may disagree) is that a uniform government money is less susceptible to counterfeiting (relative to say, thousands of competing currencies circulating side-by-side.) <br /><br />But if we free up private money in these models, it remains the case that private monies trade at a liquidity premium, if liquidity (commitment) is scarce. Actually...now that I think about it...a role for government money (or debt) remains in these models even if private monies are allowed to circulate (the economy may be dynamically inefficient, for example). <br /><br />Joe is a great guy and a great economist. Please say hello to him for me!David Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-30805351936270333812011-09-14T10:18:12.842-07:002011-09-14T10:18:12.842-07:00David (and Nick):
I expect those math models of y...David (and Nick):<br /><br />I expect those math models of yours assume that rival moneys are partly or completely suppressed. Otherwise any token whose value exceeds its backing would attract rival tokens until value=backing. So maybe gold, silver, tobacco, etc. can have a small monetary premium (<20%?). But that premium would attract rival moneys like salt, cows, etc. until the premium was small. When you throw in the fact that people will trade with IOU's that also serve as rival moneys, it's hard to see how any monetary premium could be more than 1% or so. <br /><br />I'm with Nick on that "money is memory" thing. It sounds to me like a sunk cost fallacy.<br /><br />I didn't know you knew Joe Ostroy. I see him a few times a year at UCLA.Mike Sproulhttp://www.csun.edu/~hceco008/realbills.htmnoreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-64111422481931353952011-09-14T09:57:40.938-07:002011-09-14T09:57:40.938-07:00Nick: When I asked Joe Ostroy about it, he claimed...Nick: When I asked Joe Ostroy about it, he claimed to have come up with the "money is memory" idea independently (he was not aware of anyone else having done it). In any case, I have no idea what you are saying (haha). A "functionalist fallacy"? People are risk-averse and have idiosyncratic shocks. Society would value insurance. Therefore insurance will be valued. Is this a functionalist fallacy too? <br /><br />David Pearson:<br /><br /><i>In short, a CB is unique in part because it can never be illiquid.</i><br /><br />I like that. But I wonder whether it is, strictly speaking, true?<br /><br />The liquidity of an asset depends on how easily people accept it as payment. If people begin to distrust central bank money, they will discount it, just like any other asset they distrust. It may become illiquid as people flock to currency substitutes. Of course, if there are laws preventing currency competition, then what you say sounds true. But then, this is just saying that monopoly control over the base money is what makes central banks special. No?David Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-83316147694592807902011-09-14T07:07:23.724-07:002011-09-14T07:07:23.724-07:00BTW, my conclusion from the above is that Central ...BTW, my conclusion from the above is that Central Bank buying of risk assets should much not affect their price except when liquidity premia are abnormally high. The CB is just shifting ownership of a set of cashflows from one group (investors) to another (taxpayers). How does this shift add/subtract value to those cash flows? <br /><br />This assumes the CB creation of reserves adds zero value; i.e., they wind up in Excess Reserves.David Pearsonnoreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-73715763459936290672011-09-14T06:58:35.183-07:002011-09-14T06:58:35.183-07:00David,
I think there is something different about...David,<br /><br />I think there is something different about a central bank exposed to a "capital call". Irredeemability would imply that a CB has no liquidity risk. In fact, the function of a CB is partly to extinguish liquidity risk held by the private sector when that risk spikes.<br /><br />However, even its liabilities are irredeemable, that doesn't mean a CB has no solvency risk. A CB balance sheet made up primarily of interest-paying reserves and risk assets might experience a negative net worth. Nick Rowe argues this should not happen given the NPV of future seigniorage profits. I assume he means seigniorage on currency. However, when interest paying reserves are large relative to currency, the NPV of the CB may be negative.<br /><br />So what are the implications of CB negative net worth? I would say that the CB has a call on Treasury for its equity. Thus, any activity that increases CB non-liquidity risk actually just transfers that risk to the Treasury, and back to the private sector (through taxes). Therefore, a CB cannot change the private sector's aggregate duration or credit risk -- only liquidity risk.<br /><br />In short, a CB is unique in part because it can never be illiquid. It can be insolvent, but only if it engages in large QE programs. Implications?David Pearsonnoreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-64558465992074197142011-09-14T06:16:44.245-07:002011-09-14T06:16:44.245-07:00So, you might be interested in this:
http://www.f...So, you might be interested in this:<br /><br />http://www.freebanking.org/2011/09/13/the-free-competition-in-currency-act-of-2011/Prof Jhttps://www.blogger.com/profile/16539902592080231165noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-508935668273303192011-09-14T04:47:31.120-07:002011-09-14T04:47:31.120-07:00The money as memory idea is an interesting one. II...The money as memory idea is an interesting one. IIRC it goes back at least to Hicks.<br /><br />But I'm a bit dubious about using that idea to explain the *value* of fiat money. It sounds to be like it commits the "functionalist fallacy". "It would be a good and valuable thing for society if fiat money existed. Therefore each individual will value fiat money". Not sure. (That probably wasn't clear, anyway.)Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-62071102301528665182011-09-13T21:12:16.008-07:002011-09-13T21:12:16.008-07:00Mike:
You are not following me, but something tel...Mike:<br /><br />You are not following me, but something tells me that you are close.<br /><br />Your last sentence is a proposition that requires proof; it is inadequate to simply assume it, or to point to examples in history. <br /><br />As a matter of a theoretical proposition, I can show you a mathematical model economy that contradicts your last sentence. Ergo, it is logically possible for tokens to have value. The theory suggests that the value is closely tied to the value that a credit history possesses; it constitutes information.<br /><br />When I buy my morning coffee, I hand over a token ($) and someone goes through the effort of brewing me coffee. Presumably, I earned that $ somehow (I sacrificed my time delivering lectures, for example). Now the coffee brewer has the $. That $ (according to the interpretation of the theory I am explaining) is now a record of their own sacrifice. They may go use that $ to buy shoes; and so on.<br /><br />In this way, the token $ can represent information relating to personal contributions (acts of production) for members of society. <br /><br />Note: I am not saying that this is the only way that monetary objects can possess value. Surely, objects of intrinsic value will possess value relating to their backing. But when liquidity is scarce (this is a well-defined notion in our models), then even asset-backed monies will exchange at a "liquidity premium." The premium reflects a scarcity of good collateral assets; or more fundamentally, a scarcity of commitment. It is difficult to get people to make good on their promises.David Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-78076248311304000102011-09-13T20:37:35.177-07:002011-09-13T20:37:35.177-07:00David:
Maybe I'm not following you. People fo...David:<br /><br />Maybe I'm not following you. People follow my credit history because it tells them whether I pay my bills, and of course that information is valuable. If some token says "Mike harvested a bushel of wheat yesterday." then that token has value only if it entitles its bearer to a bushel.Mike Sproulhttp://www.csun.edu/~hceco008/realbills.htmnoreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-9966035977470777182011-09-13T19:44:26.823-07:002011-09-13T19:44:26.823-07:00@Mike:
Fiat money does not contradict common sens...@Mike:<br /><br />Fiat money does not contradict common sense if you think about it as a record-keeping device. Your personal credit history is "fiat" in the sense that it has no intrinsic value. And yet, companies will devote resources to collecting such information. Does this not seem to be common sense? And if a monetary token embeds within it information relating to a person's past contributions, why should such an object also not have value? (Having said this, I agree with the last thing you said; i.e., that people commonly confuse convertibility with backing.)<br /><br />@Nick: You made me chuckle with that image of Paul and Steve in a room together. Yes, even without the ability to engage in asset swaps or lending operations, the central bank could still undertake a form of monetary policy. But monetary policy, the way I define it, may take on more than one dimension. The ability to control the outstanding supply of base money is certainly one of these dimensions. But not the only one, in my view.David Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-73731492170063654132011-09-13T18:43:24.301-07:002011-09-13T18:43:24.301-07:00Nick:
Actually, it's the concept of fiat mone...Nick:<br /><br />Actually, it's the concept of fiat money that contradicts common sense. It starts by denying that liabilities are liabilities, then denies that assets matter to the value of those liabilities, then denies the no-free-lunch principle by asserting that the issuer of 100 paper dollars gets a $100 free lunch. All of this because people are misled into thinking that inconvertible=unbacked.Mike Sproulhttp://www.csun.edu/~hceco008/realbills.htmnoreply@blogger.com