part 2, the fed, bitcoins, and inflation
TRANSCRIPT
THE FED, BITCOINS, AND
INFLATION2. MONEY AND THE REAL
ECONOMY
Dale R. DeBoer, PhDDepartment of Economics, UCCS
Three Channels
Interest rate channel
Price channel
Foreign exchange channel
Interest rate channel
Interest rate channel
Tools of monetary control
Required reserve ratio
Interest rate channel
Tools of monetary control
Required reserve ratio
Primary credit rate
Interest rate channel
Tools of monetary control
Required reserve ratio
Primary credit rate
Federal funds rate target
Interest rate channel
Tools of monetary control
Required reserve ratio
Primary credit rate
Federal funds rate target
Open market transactions
Bond market
Interest rate channel
Bond market
Interest rate channel
Bond market
PB and interest rates are inversely
related
Example 1
PB = $800
Face value = $1,000
Maturity date = 1 year
Interest rate?
Interest rate channel
Bond market
PB and interest rates are inversely
related
Example 1
PB = $800
Face value = $1,000
Maturity date = 1 year
Interest rate?
$200/$800 = 25%
Interest rate channel
Bond market
PB and interest rates inversely related
Example 2
Interest rate channel
Bond market
PB and interest rates are inversely
related
Example 2
PB = $900
Face value = $1,000
Maturity date = 1 year
Interest rate?
$100/$900 = 11%
Interest rate channel
Interest rates and economic activity
Bonds and money creation
Interest rate channel
Interest rates and economic activity
Excess reserves and lending
Excess reserves represent lost profits
More lending activity
Interest rate channel
Interest rates and economic activity
More lending
More borrowing
More spending
Interest rate channel
Does it always work?
Interest rate channel
Does it always work?
Interest rate channel
Does it always work?
Price channel
Price channel
Equation of exchange
Levels
Price channel
Equation of exchange
Rates of change
Money growth plus the rate of change
in velocity is equal to inflation plus
real output growth
Price channel
Inflation is always and everyway a
monetary phenomenon…
Milton Friedman (1970)
Price channel
Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output. … A steady rate of monetary growth at a moderate level can provide a framework under which a country can have little inflation and much growth. It will not produce perfect stability; it will not produce heaven on earth; but it can make an important contribution to a stable economic society.
Price channel
Recent history
Price channel
Recent history
Price channel
Recent history
Price channel
Recent history
Why?
Price channel
Recent history
Why?
Foreign exchange channel
Foreign exchange channel
Covered Interest Parity
Foreign exchange channel
Effect of an increase in MS?
RUS falls
Entails an increase in the spot
exchange rate
$/£ ↑
Foreign exchange channel
Effect of a rising spot exchange
rate?
Example
$1 per £1
Dollar cost of a £10,000 item?
Foreign exchange channel
Effect of a rising spot exchange
rate?
Example
$1 per £1
$2 per £1
Dollar cost of a £10,000 item?
Foreign exchange channel
Effect of a rising spot exchange
rate?
Example
$1 per £1
$2 per £1
Impact on imports? Exports?
Impact on aggregate demand?
Foreign exchange channel
Why might this not happen?
Foreign exchange channel
Why might this not happen?
Safe haven lending
Expected expansionary effects
Lower interest rates, increased
borrowing
Increased inflationary pressures
Higher net exports
But…
These are not certain effects
Monetary policy must be closer to
art if it is frequently confronted with
new, poorly anticipated and poorly
understood, contingencies.
Oliver Blanchard (2006)