An enduring question in macroeconomics: does monetary policy have any important effects on the real (i.e, real GDP, consumption, etc) economy?

Transcription

1 MONEY AN BONS NOVEMBER 9, 2011 Introducton IS MONETARY POLICY NEUTRAL? An endurng queston n macroeconomcs: does monetary polcy have any mportant effects on the real (.e, real GP, consumpton, etc) economy? efnton: Money (and hence monetary polcy) s neutral f changes n the money supply (.e., changes n monetary polcy) have no effect on the real economy Monetary polcy s non-neutral f t does have effects on the real economy New Keynesan vew: money s non-neutral (because prces are rgd/stcky, often for long perods of tme) RBC vew: money s neutral (because prces are not rgd/stcky n any mportant way) To serously consder neutralty ssue, need to fnally explctly study money and monetary polcy It s only been n the background of the analyss so far November 9,

2 THE ROLES OF MONEY The roles played by money Medum of exchange Eases double-concdence of wants problem Unt of account A common language for all prces to be quoted n Store of value Apples wll persh n short amount of tme, dollar blls won t November 9, THE ROLES OF MONEY The roles played by money Medum of exchange Eases double-concdence of wants problem Unt of account A common language for all prces to be quoted n Store of value Apples wll persh n short amount of tme, dollar blls won t How to conceptually model money a surprsngly hard problem Much more dffcult than,.e., consumpton-lesure framework or consumpton-savngs framework How to formally (mathematcally) represent these roles of money? A shortcut: suppose money drectly yelds utlty Perod-t utlty functon M t u c, t Pt Money-n-the-utlty-functon (MIU) formulaton IMPORTANT: It s not M t n the utlty functon, but rather M t /P t November 9,

3 REAL MONEY BALANCES M t /P t a key varable for macroeconomc analyss Unt Analyss (.e., analyze algebrac unts of varables) Unts(M t ) = $ Unts(P t ) = $/unt of consumpton Unts(M t /P t ) = $ unt of consumpton = $ $ $ unt of consumpton = unt of consumpton November 9, REAL MONEY BALANCES M t /P t a key varable for macroeconomc analyss Unt Analyss (.e., analyze algebrac unts of varables) Unts(M t ) = $ Unts(P t ) = $/unt of consumpton Unts(M t /P t ) = $ unt of consumpton = $ $ $ unt of consumpton = unt of consumpton Utlty (composte of medum of exchange, unt of account, store of value) depends on real money (M/P), not nomnal money (M) Measures the purchasng power of (nomnal) money holdngs whch s presumably what people most care about M t and P t can potentally grow at dfferent rates between perods In whch case real money balances change from one perod to the next November 9,

4 MONEY MARKETS AN BON MARKETS A prerequste for analyzng monetary polcy: understandng bonds and bond markets Bond markets and money markets tghtly lnked to each other What s a bond? November 9, MONEY MARKETS AN BON MARKETS A prerequste for analyzng monetary polcy: understandng bonds and bond markets Bond markets and money markets tghtly lnked to each other What s a bond? Smply put, a debt oblgaton (.e., borrow funds today, repay at some future date wth nterest) Types of bonds Conventonal 30-day, 60-day, 90-day Federal government bonds monetary polcy 1-year Federal government bonds operates 2-year Federal government bonds through shortterm bonds 5-year Federal government bonds 10-year Federal government bonds 30-year Federal government bonds Foregn soveregn government bonds of varous maturtes State and local government bonds of varous maturtes Corporate bonds of varous maturtes Coupon bonds pay somethng back ( coupon payments ) every so often untl the fnal date of maturty Zero-coupon bonds only pay back at fnal date of maturty November 9,

5 BON MARKETS A prerequste for analyzng monetary polcy: understandng bonds and bond markets Bond markets and money markets tghtly lnked to each other What s a bond? Smply put, a debt oblgaton (.e., borrow funds today, repay at some future date wth nterest) Smplfy by supposng that all bonds are one-perod zero-coupon government bonds.e., short-term bonds Tradtonal smplfcaton for analyss of monetary polcy Understandng how short-term bond s prced Asset-prcng lurkng n the Key to understandng how all bonds are prced background Key to understandng how all sorts of fnancal assets are prced agan Also sheds lght on the prcng kernel (recall from Chapter 8) Stock prces lnked to bond prces November 9, BON MARKETS In normal tmes. ecouplng amdst severe recesson? A prerequste for analyzng monetary polcy: understandng bonds and bond markets Bond markets and money markets tghtly lnked to each other What s a bond? Smply put, a debt oblgaton (.e., borrow funds today, repay at some future date wth nterest) Smplfy by supposng that all bonds are one-perod zero-coupon government bonds.e., short-term bonds Tradtonal smplfcaton for analyss of monetary polcy Understandng how short-term bond s prced Key to understandng how all bonds are prced Key to understandng how all sorts of fnancal assets are prced Short-term government bond a rskless debt nstrument U.S. government has never defaulted on (nomnal ) bond payment But excess nflaton a backdoor way of defaultng (Important concept(s) for fscal-monetary analyss.) November 9,

6 BON MARKETS Bonds prced accordng to present-value of future payoff Key relatonshp between prce of a bond and nomnal nterest rate b FV + Pt = 1 + t 1 t Notaton P b t: nomnal prce of a one-perod bond t : nomnal nterest rate between perod t and perod t+1 FV t+1 : face-value of bond (.e., how much wll be repad n t+1) In realty, many dfferent values of FV ($100, $1000, $10,000, etc ) November 9, BON MARKETS Bonds prced accordng to present-value of future payoff Key relatonshp between prce of a bond and nomnal nterest rate b 1 1 Pt = t = b P t IMPORTANT: nverse relatonshp between P b and Notaton P b t: nomnal prce of a one-perod bond t : nomnal nterest rate between perod t and perod t+1 FV t+1 : face-value of bond (.e., how much wll be repad n t+1) In realty, many dfferent values of FV ($100, $1000, $10,000, etc ) Smplfy and assume FV = 1 (wll get man deas across) t Inverse relatonshp between prce of a bond and nomnal nterest rate crtcal Short-term bond markets are/have been the conventonal channel through whch Federal Reserve conducts monetary polcy November 9,

7 Conventonal Monetary Polcy MONEY MARKETS AN BON MARKETS Short-term bond markets and money markets tghtly lnked to each other P b S (ultmately a reflecton of fscal polcy ) S (controlled by Fed) BON MARKET bonds MONEY MARKET money November 9, Conventonal Monetary Polcy MONEY MARKETS AN BON MARKETS Short-term bond markets and money markets tghtly lnked to each other P b S (ultmately a reflecton of fscal polcy but Fed can nfluence too) S (controlled by Fed) CRUCIAL LINK P b = 1/(1+) BON MARKET bonds MONEY MARKET money can be thought of n two (mrror-mage) ways The nterest payoff of a bond Opportunty cost of holdng money Each unt of wealth held as a dollar s a unt of wealth not held as a bond, whch entals the loss of chance to earn nterest (.e., opportunty cost) s nterpreted as the prce of money Conventonal monetary polcy Intro macro: Fed open-market operatons conducted va short-term bond markets, so Fed operatons do affect bond supply November 9,

8 Conventonal Monetary Polcy MONEY MARKETS AN BON MARKETS Intro macro: open-market operatons conducted va short-term bond markets P b S of open market Total S what Congress actually sets S (controlled by Fed) CRUCIAL LINK P b = 1/(1+) bonds OPEN MARKET FOR BONS MONEY MARKET money Expansonary monetary polcy by Fed Fed buys short bonds from fnancal sector, reducng open-market supply by prntng new money, ncreasng supply n money market whch causes short-term to decrease November 9, Conventonal Monetary Polcy MONEY MARKETS AN BON MARKETS Intro macro: open-market operatons conducted va short-term bond markets P b S of open market Total S what Congress actually sets S (controlled by Fed) Revew from ntro macro notes or Chapter n macro refresher CRUCIAL LINK P b = 1/(1+) bonds OPEN MARKET FOR BONS MONEY MARKET money Expansonary monetary polcy by Fed Fed buys short bonds from fnancal sector, reducng open-market supply by prntng new money, ncreasng supply n money market whch causes short-term to decrease Contractonary monetary polcy by Fed Fed sells short bonds to fnancal sector, ncreasng open-market supply n exchange for money, decreasng supply n money market whch causes short-term to ncrease November 9,

9 Beyond Conventonal Monetary Polcy AMORE EXPANSIVE VIEW OF MONETARY POLICY? Conventonal monetary polcy: nterest-rate targetng va open-market operatons What else s monetary polcy and how else can t be conducted? Unconventonal polcy measures an mportant ssue the past few years Allow Fed to purchase other assets, not just short-term U.S Treasures.e., let t conduct other market operatons besdes only conventonal short-bond open-market operatons Allow Fed to ssue ts own bonds (legal ssues unclear) November 9, Beyond Conventonal Monetary Polcy AMORE EXPANSIVE VIEW OF MONETARY POLICY? Conventonal monetary polcy: nterest-rate targetng va open-market operatons What else s monetary polcy and how else can t be conducted? Unconventonal polcy measures an mportant ssue the past few years Allow Fed to purchase other assets, not just short-term U.S Treasures.e., let t conduct other market operatons besdes only conventonal short-bond open-market operatons Allow Fed to ssue ts own bonds (legal ssues unclear) Bal out/lend to banks and frms n tmes of dstress ( lender of last resort ) Communcate wth the publc and markets about how the economy s dong A soft role for monetary polcy A confdence-management role Current focus on quanttatve easng/credt easng Purchase assets not conventonally used n polcy mplementaton (term derves from Fredman s quantty of money theores) November 9,