Tag: monetary policy

June 1, 2016

Helicopter money: Too confused to be helpful

In his piece on helicopter money, Lord Adair Turner seemed to argue that:

1) The money multiplier provides the needed boost to expansionary fiscal policy, yet this boost could generate inflation.

2) The risk of inflation could be managed by raising reserve requirements as needed.

Both statements are incorrect.

And this is the slightly expanded version of my Letter to the Financial Times (FT.COM published an abridged version)

In ‘The helicopter money drop demands balance’ (May 22), Lord Adair Turner defends the notion that bigger fiscal deficits are needed to end the current stagnation, but leaves one question unanswered: Why should a money-financed deficit be more powerful than a traditional debt-financed deficit?

May 17, 2016

Debt and savings in the euro area: An update (and how net exports have been keeping the EA afloat so far)

This is an updated chart of the flow of financial savings and debt in the euro area (EA).

For each quarter, the red bars (when positive) measure the flow of financial savings to resident households (dark red) and financial corporations (light red).

The flow of financial savings has been consistently positive throughout the period, reflecting the quarterly addition to the stock of private savings. Notice the recent decline of financial savings of financial corporations.

February 1, 2016

The (asymmetrical) negative side of negative rates

Commenting on the last Japanese move, Lisa Abramowicz (The Negative Side of Negative Rates) rightly argues that the only positive effect on spending that one can expect from negative rates is through a depreciation of the yen (at least, as long as it lasts). She writes that negative rates is an idea that “sounds good in theory”, but she clearly acknowledges that the effect on bank lending is likely to be dampening, not stimulative. That negative rates do not have an expansionary, and have probably a deflationary effect has been maintained by some economists, including this blog here and here and also the Q&A here. It should be clear by now to an increasingly number of people that what we call a negative interest rate (on banks’ excess reserves) is actually a positive tax rate!

I suspect that those who believe that negative rates stimulate lending have a view of central bank interest rates that does not fit the reality of a monetary system. They seem to think there is a symmetry between positive and negative rates. They seem to think that because lower interest rates mean lower cost of borrowing, an interest that gets so low to turn negative is an even more powerful borrowing (and spending) stimulus. Equivalently, at negative rates lenders will get encouraged to lend less (and spend) more.

Stimulus?