MONETARY EQUILIBRIUM AND NOMINAL INCOME TARGETING NICOLAS CACHANOSKY Associate Professor Department of Economics

Transcription

1 MONETARY EQUILIBRIUM AND NOMINAL INCOME TARGETING NICOLAS CACHANOSKY Associate Professor Department of Economics

2 OUTLINE Why the book? Book structure Lessons from free banking cases NGDP Targeting rule The 2008 Crisis Monetary reforms 2

3 WHY THE BOOK? 3

4 WHY THE BOOK? 2008 Crisis Price level stability suffered a major empirical disconfirmation (again) Renewed interest in nominal income targeting First book on the subject Put together a more comprehensive presentation on nominal income targeting How does it fit with the rest of the literature 4

5 WHY THE BOOK? Table of contents 1. Free banking and monetary equilibrium 2. Nominal income targeting and the productivity norm 3. Nominal income targeting and monetary rules 4. Nominal income targeting and monetary disequilibrium 5. Nominal income targeting as market outcome versus policy outcome 6. The 2008 financial crisis 7. Monetary reforms towards nominal income targeting 5

6 LESSONS FROM FREE BANKING CASES 6

7 LESSONS FROM FREE BANKING CASES A free market in money and banking is endogenously stable Equilibrium: Nominal income stable per capita Some arguments against free banking U.S. free banking period Great Depression in the U.S. vs Canada Diamond-Dyvbig Model 7

8 NGDP TARGETING RULE 8

9 NGDP TARGETING RULE MV = ณP ณY : Productivity Norm Y = A F(K; el) ณM ณV = PY: Monetary rule 9

10 NGDP TARGETING RULE Productivity shock with NGDP Targeting P LRAS LRAS Good deflation P 0 P 1 AD = MV = ณP ณY = NGDP = C + I + G + NX Y 0 Y 1 Y 10

11 NGDP TARGETING RULE Productivity shock with price level stability P LRAS LRAS Implied inflation P 0 P 1 AD = ณM തV = തP ณY = NGDP = C + I + G + NX Y 0 Y 1 Y 11

12 NGDP TARGETING RULE Where is the excess of money supply going? To offset a fall in the price level Increase of prices not captured in price level indices (CPI, GDP deflator, etc.) Stock prices (Great Depression) Housing prices (Great Recession) Imports (trade deficit) The main difference of a nominal income targeting rule is not what to do if AD falls, but what to do if there is a AS shock 12

13 THE 2008 CRISIS 13

14 THE 2008 CRISIS What happened? Short story Before the crash During and after the crash 14

15 THE 2008 CRISIS 2001: Dot-com bubble and 9/11 Federal Reserve lowers interest rates Regulatory framework channels credit expansion towards the housing market 1993: DHUD starts legal actions against banks 1996: Regulators are allowed to penalize banks with low CRA ratings 2000: DHUD requires larger allocation of mortgages to high-risk clients 15

16 THE 2008 CRISIS Mortgage rates Fixed rate ARM Affected by the Federal funds rate New mortgages were issued with ARM rates Existing fixed rate mortgages were transformed into ARM mortgages Implicit bailout through Fannie Mac and Freddie Mae 16

17 year ARM 30-years fixed rate mortgage (% of disposable income)

18 NGDP TARGETING RULE 18

19 25, Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q2 20,000 15,000 10,000 5,000 0 NGDP Hypothethical NGDP 19

20 CPI PPI

21 THE 2008 CRISIS Bailouts Too big too fail doctrine (TBTF) Keep chain of payments from collapsing Change in monetary policy framework Bailout (QEs) where so large that monetary policy fall out of the downward slope zone of the federal funds market Start paying interest on excess reserves (IOER) 21

22 THE 2008 CRISIS The corridor system i S S S i D i FF i IOER D Conventional monetary policy (pre-2008) Goes to excess reserves q($) 22

23 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 FEDERAL RESERVE, ASSETS (MILLIONS) Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Gold + SDR + Coins US Treasury Securities MBS Other securities Maiden Lane LLC Central Banks Swaps Others 5,000,000 4,500,000 4,000,000 ALAN GREENSPAN BEN BERNANKE JANET YELLEN QE1 QE2 OP. QE3 TWIST 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000, ,000 0 NICOLAS CACHANOSKY METROPOLITAN STATE UNIVERSITY OT DENVER DEPARTMENT OF ECONOMICS AMERICAN INSTITUTE OF ECONOMIC RESEARCH SOUND MONEY PROJECT FELLOW ncachano@msudenver.edu Source: Board of Governors of the Federal Reserve System. Factors Affecting Reserve Balances (H.4.1)qe1 23

24 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 FEDERAL RESERVE, LIABILITES (MILLIONS) Federal Reserve Notes REPOs Deposits Deferred availability Other and accrued dividiends 5,000,000 4,500,000 ALAN GREENSPAN BEN BERNANKE JANET YELLEN QE1 QE2 OP. TWIST QE3 4,000,000 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000, ,000 0 NICOLAS CACHANOSKY METROPOLITAN STATE UNIVERSITY OT DENVER DEPARTMENT OF ECONOMICS AMERICAN INSTITUTE OF ECONOMIC RESEARCH SOUND MONEY PROJECT FELLOW ncachano@msudenver.edu Source: Board of Governors of the Federal Reserve System. Factors Affecting Reserve Balances (H.4.1) 24

25 MONETARY REFORMS 25

26 MONETARY REFORMS Free banking with U.S. dollar as base money Hayek s currency competition NGDP Futures market 26

27 Thank you NICOLAS CACHANOSKY ASSOCIATE PROFESSOR DEPARTMENT OF ECONOMICS METROPOLITAN STATE UNIVERSITY OF DENVER 27