Recent Posts

Wednesday, December 7, 2016

Effect Of Interest Rate Rises In Simple SFC Models

Figure: Simulated National Production
The interest rate is raised at t=5, causing output to rise.

This article will be unfortunately brief. I started working on an adding financial asset markets to my Python Stock-Flow Consistent (SFC) Model library, and I was ambushed by various bugs. (As various economists have remarked, it is a bad idea to mix up stocks and flows.) It looks like the code is working, but I still want to look over the results before making longer commentary. However, the code did reproduce one of the distinctive implications of SFC models: raising the rate of interest increases national production (in nominal terms, at least).

Sunday, December 4, 2016

Book Review: Stock Market Trivia

The book Stock Market Trivia (Including a Special Section: The Weird Words of Wall Street by Fed Fuld III is entertaining, and would be of interest to readers who are not familiar with finance. As the title suggests, it is a collection of trivia (along with a couple of quizzes) based on stock markets. It could also be a distinctive holiday present.

Wednesday, November 30, 2016

Primer: Monetary Aggregates

Mysticism about money is damaging to economic theory. This shows up in even the most fundamental questions, such as defining what “money” really is. It is clear that the developed countries are “monetary societies,” and behaviour is very different from those societies where money is either not used or highly ceremonial in nature. Unfortunately, our usage of the word money is often muddled, as we say things like “she made a lot of money selling used cars,” even though what we really mean is that “she earned a high income selling used cars.” For those with an interest in describing macroeconomic behaviour, such vagueness is not enough; we have to pin down what we mean by money.

If money were to be abolished from economic theory, the only references to money might be in reference to the monetary aggregates. This primer explains the definitions of these aggregates (without diving into the institutional differences between different regions).

(Note: this article is an unedited excerpt from the upcoming Abolish Money (From Economics)!)

Monday, November 28, 2016

Effects Of Tax Cuts In A Simple SFC Model

This article follows up the previously published "Primer: Understanding Hoarding Behaviour in a SFC Model." In that article, I demonstrated what would happen if we modify the simplest model in Godley and Lavoie's Monetary Economics ("model SIM") to allow the the business sector to have a non-zero profit margin. That version of the model was broken, as the business sector hoarded the profits, creating a perpetually-growing stock of financial assets held by the business sector. In this version of the model, the business sector pays out all profits as dividends, allowing us to divide the household sector into business owners (capitalists) and workers. The chart above shows one way we can use the model -- simulate the varying effects of tax cuts.

Wednesday, November 23, 2016

Oh No, The Bond Vigilantes Are Back!

I missed it when it came out, but the article "The bond vigilantes are back, and Trump better pay attention" is suitably cringe-worthy. The analysis contained can only be described as silly, and expect to hear a lot more similar nonsense for the rest of the Trump administration. To the extent that bond yields rise would probably a fair indication of the success of fiscal policy to return growth to more reasonable levels.

My American readers will be celebrating Thanksgiving tomorrow (and then recovering from turkey overdoses and Black Friday shopping), and Canadian readers may be getting ready for the Grey Cup. Not sure what the seasonal greeting is for Thanksgiving, but have a good one, and I will be back next week.

Sunday, November 20, 2016

Is High Money Growth Telling Us Anything?

Chart: U.S. M2 Growth 2010-

Although money supply growth has dropped off the radar of most analysts, I occasionally see references to it. Given the sentimental attachment to the Quantity Theory of Money that still exists, a figure like the one above may raise eyebrows. With the annual growth rate of M2 in the United States near 8%, is that a signal that nominal GDP growth is about to accelerate?

Wednesday, November 16, 2016

Fiscal Policy Trumps Monetary Policy

Chart: 10-year U.S. Treasury Inflation Breakeven

One of the lessons to be drawn from recent events is that fiscal policy is far more potent than monetary policy. The mere threat of a looser fiscal policy in the United States has driven up inflation expectations (as measured by the 10-year TIPS inflation breakeven rate -- link to primer).  This is contrast to the complete inability of Federal Reserve jawboning -- or "unconventional monetary policy" -- to convince market participants that it would push the average inflation rate to near target.