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Monday, July 22, 2013

Theme: MMT and SFC Models

This article is a list of my non-time sensitive articles on Modern Monetary Theory (MMT) and Stock-Flow Consistent models. Modern Monetary Theory is an offshoot of Stock-Flow Consistent modelling, so the distinction between them is somewhat arbitrary. I categorise my articles that are more focused on monetary operations as being MMT.


Stock-Flow Consistent Models


External Sites

Modern Monetary Theory


(c) Brian Romanchuk 2013

2 comments:

  1. Hi,

    I've enjoyed very much going through your articles. I was wondering if you'd write one on Fed issued reserves.

    Here's the main questions I have:

    1) Can banks ever convert reserves into cash? For instance, if they can purchase T Bonds with reserves, then sell the bonds, then haven't they converted reserves into cash?

    2) Can they leverage non-cash reserves?

    3) Since banks are now doing shadow bank operations (if that's how to say it), are shadow banks now back stopped by the CB?

    Anyway, I'm still really hung up on the role of reserves, and exactly how they work and what banks can and can not do with them.

    Thanks.

    ReplyDelete
    Replies
    1. I am working on a book, and I have some background material on the banking system. I could look and see whether some of that could be converted into a blog post.

      Reserves are just deposits at the central bank. They can be broken up into required reserves (what are needed to meet reserve requirements), and excess reserves. Pre-QE, excess reserves were as close to zero as possible.

      Banks can transfer reserves amongst themselves, but they cannot change the amount - unless they convert them to notes and coin (dollar bills). In that sense, reserves get converted into "cash".

      1. If they buy a TBond, they will transfer their excess reserves to the seller's bank. If they sell the bond, they will just get a transfer back of reserves. (I am not an expert on the U.S. banking system plumbing, so the exact details may not follow this description.)

      2. Reserves are part of bank's liquidity buffer, and so they are there to support the leverage on the rest of the balance sheet. They could not borrow directly against reserves, but the reserves allow them to borrow against other assets. (It is possible to borrow against other securities in the repo market.)

      3. The backstop was not what the regulators wanted, but that's what happened in practice. On paper, the shadow banking activities of the banks were supposed to be off balance sheet vehicles, ("conduits", "SIVs", and other lingo like that) that were allegedly not backed by the commercial bank (which is what is "backed" by the Fed's lender-of-last-resort activities).

      But what we discovered during the crisis is that the banks were not willing or able to walk away from those off balance sheet entities, As a result, the Fed and other central banks ended up bailing out a lot of those vehicles indirectly. But not all of the shadow banking system was covered, and so quite a few things blew sky high.

      "Shadow banking" includes a pretty wide range of activities, including some relatively transparent markets like the bond market, and the commercial paper markets.

      Delete

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