This is a topic that is of interest for my book on banking. It may overlap some existing texts written some time ago (which is creating a future editing problem). Note that I refer to “this book” which should be read as “previous articles scattered around on my Substack.” A somewhat arcane point of debate is whether banks are “(financial) intermediaries” or not. The reason why this is supposed to matter is whether banks exist to match savers or borrowers, or whether they “create saving.” From my perspective, the problem is the term “intermediary” as it is too vague, and should be replaced by ..read more

The rapid decline of the Japanese yen — recently stabilised by a (presumed) round of intervention — has brought forth the usual “currency crisis” discussion from the usual suspects (people you do not want to listen to for macro views). I cannot say that I am following Japan closely right now (I used to in the now distant past…), so I will just make a few generic points. 1The yen is a floating currency, and no sector in Japan borrows in foreign currencies to any large extent. Historical currency crises are artefacts of managed exchange rate schemes or foreign borrowing. Although I would pr ..read more

This is a sub-section that I forgot to include in my previous article that discussed inflation and financial assets. This is for a section of my manuscript that replaced two problematic sections. I kept this new section as lightweight and brief as possible; I might add more content later. Currency trading is somewhat unusual in that the price reflects what is happening in two different currency zones. If we want to discuss how currencies relate to inflation, we should keep in mind that we should be talking about the inflation rate in the two currencies. For example, if the inflation rate in C ..read more

This article is a complete re-write of two existing sections of my manuscript. I was unhappy with the sections, and they were blocking my progress. I decided to throw in the towel, and just cut the text down to the minimum. The text probably needs work, but it is no longer going to be black hole for revisions. The beauty of the Cantillon Effect is that it gives a simple relationship between inflation and financial asset markets. Allegedly, people who somehow get “new money” first rush out and buy financial assets, driving up their price. This then leaks out into consumer prices. The problem ..read more

Note: This article would hopefully be worked into my banking manuscript. I think it overlaps other article(s), but I wanted to see how this line of argument looks. Needless to say, I have no put the articles into a single document… One of the difficulties with understanding banking is that one needs to use relatively complex macro models to see how the formal banking system interacts with the non-bank financial system. Analysis based on looking at the motivations of a single bank or based on models where only the formal banking system exists will be misleading. Stock-flow consistent (SFC) m ..read more

I recently wrote about r*, which is now the preferred way to refer to the “neutral” or “natural rate” of interest (in real terms). Although my concerns appear hand-wavy, there is a way of expressing them mathematically. I have discussed this in the past, but I hope this version is cleaner. The first thing to note is that there are multiple ways of estimating r*. I am not too concerned about which one is used, since the ones that I have seen share an important property, which I will shortly describe. The estimation algorithm is based upon a number of time series inputs. For my purposes, I di ..read more

The BIS Quarterly Review had a recent paper on r* (the preferred term for the “natural rate of interest”) by Benigno, Gianluca, Boris Hofmann, Galo Nuño Barrau, and Damiano Sandri. “Quo vadis, r*? The natural rate of interest after the pandemic.” This paper is an example of why I have largely given up on the DSGE literature. From my perspective, the contents may be summarised as: The authors describe r*, which is a necessary empirical complement to the dynamic stochastic general equilibrium (DSGE) literature. The DSGE literature assumes that the policy rate (and its expected path) are a k ..read more

Steve Keen recently wrote “I’m not Discreet, and Neither is Time” in which he discusses the alleged defects of discrete time models as opposed to continuous time ones. (In discrete time, the model state is defined on a time axis that can be labelled as integers: step 1, step 2, etc. In a continuous time, a model’s time axis is the real axis. A discrete time model can be thought of as being defined by difference equations, while continuous time is normally defined by differential equations.) Steve Keen has different modelling priorities than I do, so I will not attempt to respond to him poin ..read more

This is an unedited manuscript excerpt, from a chapter that discusses how asset price changes relate to inflation. Even if one believes that asset price increases represent inflation, the general reaction among North American central bankers would be to think you are crazy if you think asset prices should be included within an inflation target mandate. (I am less sure about the reaction of Continental European central bankers.) Although they might accept that exuberance in financial markets should be toned down, targeting asset prices directly poses many problems. Embedded in this reaction ..read more

Since I am still chugging away with edits, I have not been spending much time watching developments in markets. I just wanted to off some brief comments on events from central banks last week. I have a longer manuscript section for publication later this week.The Bank of Japan threw in the towel on negative interest rates last week. Yay, yen interest rates will go back to their low positive “normal.” This change is not that significant, other than on a psychological basis. I have not been following Japanese data closely, but my tendency is to expect glacial changes in economic conditions. T ..read more