tag:blogger.com,1999:blog-5908830827135060852.post6839310529963260832..comments2024-03-01T02:40:14.946-05:00Comments on Bond Economics: What Is Monetary Policy?Brian Romanchukhttp://www.blogger.com/profile/02699198289421951151noreply@blogger.comBlogger3125tag:blogger.com,1999:blog-5908830827135060852.post-92184838513692639922016-04-07T18:03:22.412-04:002016-04-07T18:03:22.412-04:00The consolidated government (central bank and Trea...The consolidated government (central bank and Treasury) efforts to curb deflation or harmful inflation would be the essence of monetary policy since everything else is a mechanical requirement to issue a float of consolidated government liabilities equal to the sum of past deficit and surplus periods. If the consolidated government is also financing asset purchases under credit policy (central bank QE, direct student loans, direct small business loans, etc.) then it must either collect taxes or float more consolidated government liabilities to finance the assets it holds according to credit policy. If the central bank decides it must purchase assets to prevent deflation via quantitative easing then this is monetary policy in my view since the program is aimed at financial stability and not merely the mechanical finance of fiscal and credit policy. Joe Leotehttps://www.blogger.com/profile/01292763300917387201noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-35798455269105273312016-04-07T14:16:43.018-04:002016-04-07T14:16:43.018-04:00My understanding of the debate is that it is not a...My understanding of the debate is that it is not about the objectives of policy, it is just what are the policy mechanisms. <br /><br />If we want to discuss the institutional factors for the Fed, we end up with my first definition - monetary policy is what the statutes let the Fed do. That does not answer the question of whether that is what the Fed should be doing.<br /><br />For example, there is a argument that "helicopter money" is monetary policy. (As I note above, in my view it is fiscal.) The Fed is probably barred from such activities by statute. But the helicopter money advocates would say that the statute is preventing the Fed from implementing a legitimate monetary policy. Brian Romanchukhttps://www.blogger.com/profile/02699198289421951151noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-25209360905990864442016-04-07T13:48:57.218-04:002016-04-07T13:48:57.218-04:00Brian,
I am sure you know at least some of these ...Brian,<br /><br />I am sure you know at least some of these details, however, I think it is meaningful to discuss operative financial problems and institutional solutions. In the United States the U.S. Congress sets the federal tax, spend, and credit policies. Since it is impossible to match taxes and spending over any short period the Treasury issues securities to cover a deficit and net redeems securities to dispose of a surplus cash flow. This policy, to a first order approximation, means that federal government cash and debt management does not alter levels of bank reserves (issued as central bank liabilities) or levels of bank liabilities. During periods of aggregate bank balance sheet expansion (but not balance sheet contraction) this give the central bank exclusive control over the level of bank reserves, which can be used to control the federal funds interbank interest rate.<br /><br />Congress is further concerned to ensure price stability. The central bank (Fed) would do quantitative easing, in the absence of any other authorized price stabilizing mechanism, to prevent a sharp decline in credit formation and an accompanying steep drop in the prices of assets and market price of equities. To stop a credit fueled inflation the central bank would increase the interest rate in money markets to a high level which would bankrupt some of the nonbanks, banks, and financial intermediaries who could not rollover short term liabilities at a profit. So I would identify monetary policy as any measures the central bank or combined government does in an effort to ensure price stability. QE is not incoherent if it actually prevents deflation that would destroy the real economy in a counter-factual world without QE. - Joe.Joe Leotehttps://www.blogger.com/profile/01292763300917387201noreply@blogger.com