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Showing posts from April, 2015

The problem of currency union, UK edition

In my last post, I discussed Richard Murphy's "green QE" proposal in the context of a functioning currency union in which the decision to monetise debt would be made by the UK government. But the context of Richard's piece opens the door to a disturbing idea. Some Scottish Nationalists interpreted his proposal as meaning that a fully fiscally autonomous Scottish government could demand that the Bank of England buy Scottish government bonds (whether or not issued by a Scottish Development Bank) in order to prevent Scotland's debt/GDP rising as a consequence of infrastructure investment.

The Scottish Nationalists who raised this possibility homed in on this part of Richard's piece:
In March 2014 Bank of England Governor Mark Carney confirmed in a letter to Green MP Caroline Lucas that “It is possible that if the Monetary Policy Committee did vote to increase its asset purchases in future, it could expand the range of assets it purchased. Such a decision, howeve…

Green QE and the Juncker Plan: a response to Richard Murphy

Richard Murphy proposes what he calls "green quantitative easing" to support the Scottish government's plans for fiscal expansion.

I've criticised the "green QE" proposal before. But this is a particular framing of it that raises some interesting issues about the nature of currency unions and the purpose of monetary policy.

Here's the heart of Richard's proposal:
It is worth explaining what I think the SNP is referring to when it mentions ‘innovative finance mechanisms’. It is my belief that they are referring to green infrastructure quantitative easing,which was the subject of a speech I made at the Convention of Scottish Local Authorities conference in March. In that speech I made clear that if the SNP wanted to do a service to Scotland, and to the rest of the UK, it would use its bargaining power after May 7 to demand that the UK government create a new form of quantitative easing that would be quite deliberately intended to provide the funding …

The Swiss have eliminated the Zero Lower Bound

So, this is fun. Via Zero Hedge comes this report from a little Swiss website, Schweizer Radio und Fernsehen (SRF). It seems that a pension fund tried to evade negative rates on deposits by withdrawing a very large amount of physical cash with the intention of vaulting it. But the bank refused to allow it to withdraw the money in the form of physical cash.

Is this lawful? Zero Hedge thinks it isn't. But the bank has not refused to allow the money to be withdrawn. It has simply restricted the form in which the money can be taken. Since electronic money and physical cash are fully fungible, it is hard to see how this restriction can be regarded as unlawful without undermining the value of electronic money - which would be highly destabilising in a modern monetary economy.

And this effectively means that the zero lower bound does not exist.....

Read the whole article on Forbes.

Related reading:

The ECB's policy mix is poison for banks - FT
The strange world of negative interest rate…

Rediscovering old economic models

Krugman says we do not need new economic models, we just need to make better use of the ones we already have. Indeed, even very old models that we long since consigned to dusty archives can help remind us of things we have forgotten about. Financial crises, for example.....

In his response to my speech at Manchester University in February - which became the post that whipped up the "state of macro" debate to which Krugman responded - Andrew Lilico gave four examples of economic models that in his view form the foundation of modern economics and (he claims) have not been shown to be inadequate or wrong. Lilico's four models are these:

- Capital Asset Pricing Model
- Modigliani-Miller Theorem
- Efficient Market Hypothesis
- Black-Scholes Option Pricing Model

Hmm.Only the EMH would I think be regarded as a macroeconomic model - and even then, is it really more fundamental than Shiller's irrational exuberance? When I was doing my MBA, we covered the other three in corpor…

Colds, strokes and Brad Delong

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Brad Delong takes issue with me over my criticism of Olivier Blanchard. Here's the paragraph from my piece "The failure of macroeconomics" that he finds particularly uncharitable:
Blanchard's call for policymakers to set policy in such a way that linear models will still work should be seen for what it is–the desperate cry of an aging economist who discovers that the foundations upon which he has built his career are made of sand. He is far from alone… "It's not that bad", says Brad. And he goes on to use the analogy of heart attacks and the common cold to explain why linear models are ok really, mostly:
A more charitable reading of Olivier is that he wants to make this point:

Heart attacks have little in common with the common cold.You treat heart attacks with by shocking the heart to restart it.Heart attacks and the common cold are both diseases that debilitate.Nevertheless, to get out the defibrillator pads when the patient shows up with the sniffles …

The limits of monetary policy

Here is Cullen Roche quoting Ben Bernanke:
"Let there be no mistake: In light of our recent experience, threats to financial stability must be taken extremely seriously. However, as a means of addressing those threats, monetary policy is far from ideal. First, it is a blunt tool. Because monetary policy has a broad impact on the economy and financial markets, attempts to use it to ‘pop’ an asset price bubble, for example, would likely have many unintended side effects. Second, monetary policy can only do so much. To the extent that it is diverted to the task of reducing risks to financial stability, monetary policy is not available to help the Fed attain its near-term objectives of full employment and price stability." And Cullen then goes on:
That’s a pretty interesting quote. You could actually apply that perfectly to, well, using monetary policy for anything. After all, it is an inherently indirect and imprecise policy tool. It works only through indirect transmission mec…