I want to write a short rant, but my internet connection is down (and I don’t want to blow through my wireless data plan).
So I’ll do it here for now...
I keep seeing arguments like “the Bank of Canada is propping up the bond market, what would happen if they stop?”

That’s like saying “the 46 defence wouldn’t have been good if the Bears defenders couldn’t tackle people.”
The point is: that’s the way the system works.

(Shameless plug: Buy the inexpensive “Understanding Government Finance” so that you can, umm, understand government finance.)

UGF is somewhat distinctive in that I do MMT-style operations analysis on a simplified version of the Canadian system.

The main thing to note: what people call “reserves” are *normally* zero in the Canadian system.
That is, private banks aimed to keep their balance with the payments system/BoC zero at the end of the day.

Since the Ministry of Finance banks with the BoC, that means the BoC *has* to cancel all net transactions.
That is, if they issue a bond (and do nothing else), the BoC *has* to send money to the banking system to compensate. Normally - buy bonds, repos (relatively small in Canada).
So guess what: if the MinFin borrows, that is offset by BoC “lending” (counting secondary market bond buying as lending, which it de facto is).

So the BoC is always there.
The difference now is that the BoC is doing what all the other cool New Keynesian kids are doing, and launched QE. So purchases are even bigger, to create excess bank settlement balances (“reserves”).
Let’s say some brain surgeon had the idea of “weaning the MinFin off the BoC.” What would that entail?

They would launch bond sales to build up their balance. But the BoC needs to offset this.
So the BoC bulks up its balance sheet, and almost nothing changes. The only effect on the private sector is that banks get corporate welfare based on flipping bonds from auction to the BoC.

I think we should get banks off welfare. Perhaps they could spend less on takeout coffee.
Correction: I am perpetually behind the times. It’s the Department of Finance.

The Receiver General is the one with the bank account. Which is a cool title, brings to mind a militarised CFL offence.
Wrote up the above discussion in long form. Main advantage versus the previous thread is that I can refer to the BoC balance sheet chart.

“Central Banks are Always Involved in Government Finance”


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More from @RomanchukBrian

17 Oct
Thread on fiscal rules. There’s an article linked in this thread, that I have not yet read.

From what I saw, I largely agreed with the basic premises in this thread. Just a couple comments...
1) Conventional discussions of fiscal policy sustainability are silly since they often do not define sustainability. Meanwhile, the existing formal definitions make absolutely no sense, and fall apart under examination.

Since “rules” are about “sustainability,” this is awkward.
2) The MMT proposal - change fiscal review frameworks (which already exist) to look at inflation instead of debt/GDP or deficit/GDP measures - is the correct theoretical answer.

Doing the analysis is non-trivial.
Read 4 tweets
14 Oct
New article: “All Road Lead To r*”

I discuss the inevitability of r* in mainstream models. The argument is simple: central banks need to know what the effect of a policy rate is on the economy. bondeconomics.com/2020/10/all-ro…
At any given time, they need to know whether an interest rate setting is supposed to cause the economy (in some sense) to accelerate. For a linear model, there is always going to be a “no acceleration point” (which varies over time).

They need models to estimate that point.
r* is not this non-acceleration point; it is a steady-state neutral point. But if we are a neoclassical, we usually impose assumptions to enforce the existence and uniqueness of that steady state.

(Deviations of other variables determines the single period neutral rate.)
Read 5 tweets
13 Oct
I saw this on the ‘Hedge: “MMT notes that bank loans create deposits not the other way around. Well... it's obviously wrong.”

Ah yes, MMTers discovered an accounting identity that has been known probably from before WWII.
(In case why one wonders why an accounting identity is allegedly wrong, the QE operations create deposits if the sellers are non-banks. This has meant that deposits are greater than loans.)
However, being a MMT critic seems like fun. “MMT says that lead weights fall faster than feathers in a vacuum. This is wrong.”
Read 4 tweets
13 Oct
Yet more content - “Primer: Teaching Models Versus Empirical Models”

This is another preliminary article I got out of the way before getting to my analysis of DSGE macro. bondeconomics.com/2020/10/primer…
The distinction between a teaching (or toy) model and an empirical model seems easy to understand. The problem is that publication standards in economics result in an obfuscation of this rather critical distinction.

That is, people are treating teaching models as empirical ones.
If we keep this distinction in mind, then DSGE macro is a lot easier to understand. It’s almost exclusively teaching models, that can’t be plausibly fit to data - at least in any sense an applied mathematician would understand the term.
Read 5 tweets
12 Oct
New article: “DSGE Models As Arbitrage-Free Pricing Models”

After today’s highly exciting news about auction theory, going back to boring old macroeconomics.

This article ends a mini-cycle, which provides some background for a longer cycle of articles. bondeconomics.com/2020/10/dsge-m…
My argument is that there is too much mysticism about equilibrium concepts and DSGE models. They are just a variant of arbitrage-free pricing models, with the instruments including physically delivered composite consumer goods and labour hours.
An outsider might ask: why we are building arbitrage-free pricing models for non-existent markets? I’m sure there’s an entirely reasonable explanation for this. However, it obviously adds a near-crippling level of complexity to model construction.
Read 6 tweets
18 Jun
Thanks to “The Deficit Myth” hitting the NYT bestseller list, MMT is back on the Twitter menu. I’m going outside to write, but I just want to comment on what I’m seeing here.
If we look at tweets, we can split the MMT critics between “serious critics” and “trolls.” I follow a lot of the “serious critics,” but what I mainly see are “trolls” who get dragged into my timeline. My suggestion is to not give trolls oxygen; create a “bad MMT takes” account.
As for the serious critics, it all revolves around the “nothing new” charge. After seeing that debate 1,000 times, I’m bored of it - as I imagine any bystanders on Twitter are.

The “something new” debate is an academic debate, and should only be of interest only to academics.
Read 7 tweets

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