tag:blogger.com,1999:blog-5362801348602268473.post3632555086294005216..comments2023-11-22T00:49:32.887-08:00Comments on Reflections on Monetary Economics: Diamond-Dybvig and the Monetary CircuitNick Edmondshttp://www.blogger.com/profile/15342983814699700396noreply@blogger.comBlogger15125tag:blogger.com,1999:blog-5362801348602268473.post-91499028595496213252014-11-16T08:53:10.911-08:002014-11-16T08:53:10.911-08:00I would tend to agree that one of the main way int...I would tend to agree that one of the main way interest rates operate is on the level of borrowing and therefore some degree of indebtedness is needed for this to work. It may also be the case, over some range, that more debt makes interest rate policy more effective. However, I still think that the instability introduced by high level of indebtedness means that manipulating interest rates may not be enough.Nick Edmondshttps://www.blogger.com/profile/15342983814699700396noreply@blogger.comtag:blogger.com,1999:blog-5362801348602268473.post-36539631965736054802014-11-16T01:05:55.582-08:002014-11-16T01:05:55.582-08:00I just checked over that link
http://web.calstate...I just checked over that link <br />http://web.calstatela.edu/faculty/rcastil/ECON_435/Bernanke.pdf<br />"Inside the Black Box: The Credit Channel of Monetary Policy Transmission"<br />I guess I was just extrapolating when I thought that Bernanke was directly making the point that greater indebtedness led to monetary policy having greater effectiveness (rate rises being able to curb inflation). But I still think that extrapolation is consistent with the point that Bernanke was making which was that much of the way that monetary policy causes its effects by higher interest rates causing the indebted to suddenly spend less and suddenly become worse prospects for further lending.stonehttp://directeconomicdemocracy.wordpress.com/noreply@blogger.comtag:blogger.com,1999:blog-5362801348602268473.post-44449432009591792582014-11-15T13:57:45.894-08:002014-11-15T13:57:45.894-08:00I thought that Bernanke made a case that indebtedn...I thought that Bernanke made a case that indebtedness actually made an economy more accessible to control with monetary policy. Indebtedness allows consumer spending to be turned on when interest rates fall such that more debt gets taken on and then choked off when interest rates rise (because when interest rates are high, debt expansion can not be afforded and a lot of wages goes to debt servicing). The hope is that it allows monetary policy to control the spending capacity of consumers without having too much unemployment and still having very sticky wage levels.<br />I hope this is the correct link, I haven't checked though -sorry.<br />http://web.calstatela.edu/faculty/rcastil/ECON_435/Bernanke.pdf<br />stonehttp://directeconomicdemocracy.wordpress.com/noreply@blogger.comtag:blogger.com,1999:blog-5362801348602268473.post-41349040917564918262014-11-15T09:02:52.940-08:002014-11-15T09:02:52.940-08:00"If the economy had a lot more equity financi..."If the economy had a lot more equity financing, and a lot less debt, would inflation be more likely?"<br /><br />I'm not sure you could necessarily conclude that. But I do think that an economy with high levels of debt may be more prone to fluctuations in demand. Amongst other things, that may make it harder to target inflation purely with an interest rate lever.Nick Edmondshttps://www.blogger.com/profile/15342983814699700396noreply@blogger.comtag:blogger.com,1999:blog-5362801348602268473.post-91362845437871559432014-11-14T14:33:20.533-08:002014-11-14T14:33:20.533-08:00If the economy had a lot more equity financing, an...If the economy had a lot more equity financing, and a lot less debt, would inflation be more likely? Do fixed interest and schedule debt repayments drive a lot of what ensures the value of money (rather than there just being the tax driver of money value that MMT people emphasize)? <br /><br />Hypothetically it would be possible to avoid a lot of debt wouldn't it? I think I heard somewhere that HSBC even looked into the idea of fully islamic mortgages where the householder payed rent on the portion of the house not yet bought and simply had the option to buy more of the house at a regularly revalued current market rate.<br /><br />I guess in the post WWII period, households were less indebted and inflation was more of an issue. The period from 1980 until now saw a massive increase in debt and a drop in inflation.<br /><br />QE seems to have caused a further step up in debt issuance. Companies have issued bonds to fund stock buybacks, shifting over from equity financing to more debt financing. Perhaps looking forward, that change to greater indebtedness will actually be deflationary?<br /><br />stonehttp://directeconomicdemocracy.wordpress.com/noreply@blogger.comtag:blogger.com,1999:blog-5362801348602268473.post-34212734985375423482014-11-08T07:11:34.734-08:002014-11-08T07:11:34.734-08:00There is an unstated moral apect to this process....There is an unstated moral apect to this process. It is unstated, but present all the same. In a period of price infaltion, people who don't allready have money are denied access to credit and the spending power there of, by high interest rates, and simultaneously people , that allready have money , contnue with there spending power unfettered by the policy. I'm not stating that is wrong or right, simply that it is interesting that it is present.Dinerohttps://www.blogger.com/profile/14632385731642361211noreply@blogger.comtag:blogger.com,1999:blog-5362801348602268473.post-61019765689792499472014-11-07T04:14:58.461-08:002014-11-07T04:14:58.461-08:00Yes, thanks. That sounds right.Yes, thanks. That sounds right.Olivernoreply@blogger.comtag:blogger.com,1999:blog-5362801348602268473.post-79631279168522660342014-11-07T01:48:35.327-08:002014-11-07T01:48:35.327-08:00This goes a bit beyond what I'm looking at her...This goes a bit beyond what I'm looking at here, but it wouldn't matter if the central bank was acting through influencing borrowers decisions as opposed to lenders. So, if it raised interest rates, so that borrowers decided to terminate projects and repay loans early, that would have the same effect. And, as I commented to Dinero above, there is a continual process of new loans being made and old ones being repaid and its the net flow that matters. Influencing the rate at which new loans are made is probably more important than influencing the rate at which old ones are repaid. Nick Edmondshttps://www.blogger.com/profile/15342983814699700396noreply@blogger.comtag:blogger.com,1999:blog-5362801348602268473.post-75838711689860467412014-11-07T01:41:45.180-08:002014-11-07T01:41:45.180-08:00Yes, although this is a very limited model. In re...Yes, although this is a very limited model. In reality, there are continually loans falling due and new loans being made, so the rate of change of loans outstanding is not at all set in stone.Nick Edmondshttps://www.blogger.com/profile/15342983814699700396noreply@blogger.comtag:blogger.com,1999:blog-5362801348602268473.post-29086250061477196412014-11-06T23:59:11.893-08:002014-11-06T23:59:11.893-08:00Thanks, that makes sense - I think. The value of t...Thanks, that makes sense - I think. The value of the dollar is maintained by banks calling in loans so that there are not too many outstanding loans vs. goods on sale. Entrepreneurs are incentivised to sell their goods for new money. The monetary circuits are 'closed'.<br /><br />Continuing off topic (sorry): what are the central bank's tools in this? Does it influence the maturity of loans? How exactly? Seems interest rates work mainly to curb demand for new loans, I don't see how they influence the maturity of outstanding loans. Is there even an opposing effect in that higher interest rates make new loans more attractive for banks?<br /><br />Personally, I've always found circuit theory interesting but also somewhat outdated in that its base model is no longer representative of modern finance. Most new bank money enters the economy through mortgages nowadays, not through corporate loans. So I've been trying to figure out for myself (not very successfully) how or indeed whether the base model would have to be adjusted to reflect this shift. That requires understanding the base model first....<br /><br />Wrt to my questions above I wonder: considering mortages are mostly fixed in maturity, i.e. cannot be called in at will, by which means do / should banks and central banks influence the value of their respective liabilities?Olivernoreply@blogger.comtag:blogger.com,1999:blog-5362801348602268473.post-36129037053157641452014-11-06T10:21:06.042-08:002014-11-06T10:21:06.042-08:00If the bank is contractually unable to call in loa...If the bank is contractually unable to call in loans early then it seems you are stuck with demand pull price inflation, unless you can offer the savers a further savings period with enhanced terms to encourage them to defer spending for a further time period.Dinerohttps://www.blogger.com/profile/14632385731642361211noreply@blogger.comtag:blogger.com,1999:blog-5362801348602268473.post-37752214073870201102014-11-06T08:53:18.685-08:002014-11-06T08:53:18.685-08:00I am assuming here that deposits are not convertib...I am assuming here that deposits are not convertible into anything else. A bit like central bank money, or like money issued by the banking sector as a whole. You can convert money issued by one bank into money issued by another bank, but that's all (we have to include central bank money in this).<br /><br />So the bank has to have another way to get people to accept its money and to do this it makes clear that it will try to maintain the value of its money, i.e. it will try to ensure a stable rate of exchange between its money and goods. This is what central banks do when they follow an inflation target or something similar. They are trying to maintain the value of the currency.<br /><br />So, after period 1, savers want to spend $52 on goods. However, if nothing else happens, there is no reason for anyone to sell them goods. There is therefore excess demand for goods and the price gets bid up, which means the value of dollars falls.<br /><br />The only action the bank can take to prevent this is to call in some loans. This means entrepreneurs are now forced to sell goods to obtain dollars to repay their loans. There is now a supply of goods to match demand, which prevents the price rising and maintains the value of the dollar.<br />Nick Edmondshttps://www.blogger.com/profile/15342983814699700396noreply@blogger.comtag:blogger.com,1999:blog-5362801348602268473.post-701038208987208282014-11-06T07:49:33.424-08:002014-11-06T07:49:33.424-08:00However, the bank undertakes to try and maintain t...<i>However, the bank undertakes to try and maintain the real value of such deposit balances, by targeting the dollar price of goods.</i><br /><br />Can you elaborate on this and explain how it relates to this:<br /><br /><i>To maintain the value of the dollar, the bank must create demand for dollars (and prompt supply of goods). It does this by calling in $52 of the entrepreneurs' overdraft.</i>Olivernoreply@blogger.comtag:blogger.com,1999:blog-5362801348602268473.post-83592999761964199162014-11-05T05:52:00.382-08:002014-11-05T05:52:00.382-08:00That is a fair point, but it is how DD do it in th...That is a fair point, but it is how DD do it in their model. They look at liquidity by reference to the ratio between an asset's pay-off on an early termination and that at its full term. The lower that ratio, the more illiquid the asset.<br /><br />I'm not trying to say anything here about whether I think that's a good way of looking at liquidity or not - I'm just going with the way they look at it.Nick Edmondshttps://www.blogger.com/profile/15342983814699700396noreply@blogger.comtag:blogger.com,1999:blog-5362801348602268473.post-76055144406458693042014-11-05T05:10:21.789-08:002014-11-05T05:10:21.789-08:00as the entrepreneurs were able to sell goods and s...as the entrepreneurs were able to sell goods and settle half the debt on demand as prompted by the depositors the debt wasn't really a long maturity asset in its actual execution, I think that how the account and the exchanges were able to add up in balance there.Dinerohttps://www.blogger.com/profile/14632385731642361211noreply@blogger.com