In the concluding paragraph, Bossone writes,
"...this result vindicates the proposed measures to expand the money supply via overt monetary financing or neo-chartalism, which aims to inject new money independently of central banks' interet-rate policies, especially if these are limited by the zero lower bound."Fictional Reserve Barking
..the stock market sold off at the slightest notion that the Fed might pull the plug.
"Equity markets seem to think of asset purchases as magic pixie dust," Cloherty said. "They just make everything fly. No one has a transmission mechanism for how that works, they just know it does."
The Standard & Poor's 500 lost 1 percent following Wednesday's Fed release and was on pace to add to that decline Thursday.
The bond market, though, was humming along even though a Fed exit from bond buying would seem likely to decrease demand and thus put upward pressure on yields.
Instead, yields fell and a popular exchange-traded fund, the iShares Barclays 20+ Year Treasury Bond fund, gained nearly one percent.CNBC — US Markets
I have previously discussed Milton Friedman’s infamous 1953 essay, ‘The Methodology of Positive Economics.’ The basic argument of Friedman’s essay is the unrealism of a theory’s assumptions should not matter; what matters are the predictions made by the theory. A truly realistic economic theory would have to incorporate so many aspects of humanity that it would be impractical or computationally impossible to do so. Hence, we must make simplifications, and cross check the models against the evidence to see if we are close enough to the truth. The internal details of the models, as long as they are consistent, are of little importance.
The essay, or some variant of it, is a fallback for economists when questioned about the assumptions of their models. Even though most economists would not endorse a strong interpretation of Friedman’s essay, I often come across the defence ’it’s just an abstraction, all models are wrong’ if I question, say, perfect competition, utility, or equilibrium. I summarise the arguments against Friedman’s position below.Unlearning Economics
ConclusionFictional Reserve Banking
The point of this post is simple: the arguments concerning the endogenous nature of money and the irrelevance of the textbook multiplier do very little to challenge the case in favor of NGDP targeting (or inflation targeting, for that matter) and the general theoretical construct used by market monetarists. As I've shown, the case for NGDP targeting can be made (at least theoretically) using a quantity theory approach that is consistent with the endogenous nature of money.
Therefore, from a debating standpoint, those who support a functional finance approach to economic policy would be better served by focusing their efforts on challenging notions such as the natural rate of interest and in demonstrating the inadequacies of an approach to monetary policy whose monetary transmission mechanism relies largely on the portfolio balancing effect. While the issue of the natural rate is largely a theoretical problem (Does it exist? Can it be measured?), the question of the portfolio balance effect is essentially an empirical issue (Is the portfolio rebalancing effect substantial? Can the central bank control it for policy purposes?)
As for the bloggers and economists who think that post-Keynesians and MMT economists are wrong about the endogenous nature of money and its implications for central bank operations, I would suggest they review the work of Robert Hetzel. His take on these matters is in line with the post-Keynesian/MMT view.
You want concrete steps? I will give you a million different flights of concrete steps.
For example, like Lars Christensen, lets talk about the monetary transmission mechanism where the central bank adjusts the stock price index, rather than a short term nominal interest rate. No zero lower bound problem there.In case no one has noticed, the Fed is already fixing the stock price index through QE. Indeed, a Fed official admitted that asset prices are higher than they would be otherwise, and it is clear that this is policy objective to increase the "wealth effect." Markets have already priced in QE3 to a degree, and if it is not forthcoming, then eventually this expectation will be discounted.
Here is something you don’t see everyday...a Central Banker admitting that monetary policy is ineffective:
"Christian Noyer, a governor of the Central Bank of France (in an interview with Handelsblatt): 'We are currently observing a failure of the transmission mechanism of monetary policy. From the markets’ perspective, the interest rate facing individual private banks depends on the funding costs of the state where they are domiciled and not on the ECB overnight interest rate… Hence the monetary policy transmission mechanism does not work.'”Read it at Bubbles and Busts
Basically, the Fed has run out of ammo in terms of language about future policy intentions because it cannot credibly signal its intentions for more than two to three years ahead. It can extend the “late 2014” horizon into 2015, but that is fairly minor.
In terms of the asset purchases, the Fed is limited by law to the Treasury, agency, and agency MBS markets plus foreign exchange. Buying foreign exchange would be viewed as economic warfare by many countries, so it is probably ruled out even though it reflects rank hypocrisy on the part of foreign governments that are massively buying dollars. In the Treasury market, yields on three-year notes are only 0.3 percent, so the Fed must buy five-year to 30-year bonds to have any effect. With the 10-year yield at 1.5 percent, the scope for further effects is modest. Even if the Fed bought every 10-year Treasury, it would be hard to get the yield much below 1 percent, because the risks on such a bond become tremendously skewed toward future losses. There is more scope to buy agency MBS to lower the mortgage rate, but already mortgage rates are at a record low of 3.75 percent. At some point between 2 and 3 percent we are likely to reach the limit. So, the Fed has quite a bit of ammo left, but we can see that it is not inexhaustible.
Research I am doing suggests that it would be much more attractive for the Fed to buy a broad basket of U.S. equities to support the stock market than to try to push down bond yields from these already low levels. Sadly, the Fed is not authorized to buy equities, even though other central banks are allowed to do so.....
I think the average economist outside the Fed thinks the Fed has less ammo than the average economist inside the Fed. I frequently hear people say the Fed has done all it can do. I do not agree, but I do see a limit approaching. Note that that limit arises from legal restrictions on the Fed. If the Fed were empowered to buy all assets, it would never run out of ammo....2. Transmission mechanism needed to create credible expectations
...I fear that announcing a goal of higher inflation, either temporary or permanent, will not actually do anything unless it is backed by actions....3. NGDP Targeting Problems
Some have argued for a price path target or a nominal GDP path target. In that case you do make up for past deviations in inflation. But I think it is difficult to explain to the public how the specific path is chosen. Why should the CPI be 105 in 2013, 107 in 2014, 109 in 2015, and so on indefinitely? People care about the inflation rate not, some arbitrary price level. And it means that after booms you must have deflation. Indeed, if one had started the path in the early 1990s, the late 1990s boom would have put us way above it. Then the Fed would have had to make the 2001 recession much more severe to get us back on the path. That would have been a tough sell politically.4. Expectations
I think it is sensible for the Fed to stick to statements about things it is confident it can achieve, provided that it feels it is doing enough to achieve its objectives. For example, it can talk about purchasing MBS and pushing down the mortgage rate, thus stimulating the economy. The problem is that it has not achieved its objectives over the past three years and its own forecast shows it does not expect to achieve its objectives over the next three years.... I would tend to favor those for which the Fed has direct tools, such as buying foreign exchange to push down the dollar, rather than trying to raise inflation expectations by verbal jawboning.....5. Consolidation
...From the point of view of the United States, what matters is the consolidated government balance sheet (Fed + Treasury),...
Whenever he was faced with a blustering student - which was often - my old economics tutor, the late Andrew Glyn, would ask: "What's the mechanism?"Read it at Stumbling and Mumbling
