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Five Buffer Stocks for Macroeconomic Policy

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Scott Fullwiler

on 13 June 2015

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Transcript of Five Buffer Stocks for Macroeconomic Policy

5
1
Scott Fullwiler
Wartburg College & Presidio Graduate School

2
3
4
labor
currency
treasuries
net financial assets
5 Buffer Stocks for Macroeconomic Policy
What's a buffer stock?
settlement balances
Unemployed Buffer Stock
vs.
Employed Buffer Stock
Treasuries as
Collateral
Results:

Unlimited risk-free investments at desired maturities, including overnight

Unlimited risk-free collateral at desired maturities at small penalty rate compared to market rate
Implications--
1. True buffer stock of risk-free securities consistent with needs of pvt sector
2. Obvious that interest on the national debt is a (monetary) policy variable
3. Separates Fed's operations for pmts from buffer of securities
Prior to 2008:
Treasuries = Net Debt - Currency - RR
Treasury or Mortgage-Backed Security
Reserve Balances
Deposits
Dealer
Reserve Balances
Deposits
SETTING PRICE AND LETTING QUANTITY FLOAT

"The costs of reserves, both intraday and overnight,
are policy variables. Consequently, a market for reserves does not serve the traditional role of information aggregation and price discovery."

Antoine Martin and James McAndrews
New York Fed, 2008
Domestic
Private
Sector
Rest
of the
World
Government
Sector
Quantity Theory of
Net Financial Assets
M V = P Y
Nominal
GDP
Net
Financial
Assets
Function of
Desired Private Spending

Private Sector Income
the endogenous nature of currency
FISCAL POLICY
MONETARY POLICY
OR
Cost of Funds
Cost of Credit
Current Mainstream View:
Monetary Policy manages the economy through "the" interest rate and "expectations"
Fiscal Policy gets out of the way
What is the opportunity cost of an employed buffer stock of labor?
1. Crime/Prisons/Prevention
2. Domestic/Community "Unrest"
3. Human capital
4. Poor Health/Medicaid/Health Insurance
5. Poverty/Social Safety Net/Social Services
6. Involuntary Unemployment
7. State/Local Government Budgets
8. Any "output" JG workers might provide
Productivity?
Think more carefully about opportunity cost--
How productive are the involuntarily unemployed?
Implications:
Settlement balances settle payments
Fed sets price and lets quantity float
Money multiplier model is inapplicable
Since currency is also a buffer, no direct control of the monetary base
Implications:
Direct control over settlement balances possible only with IOR at target rate or 0% target rate
"Excess money balances" without IOR is not operationally possible.
Private Sector Balance +
0 = Government Sector Balance +
Capital Account
Change in Buffer of Net Financial Assets
Reserve Balances
Debited
Deposits Debited
Treasuries on Demand at All Maturities
Treasury
Account
Credited
Treasury
Account
Credited
Dealer
Deposits Debited
Risk-Free Collateral on Demand
OR
Treasury spends via Fed overdraft
accompanied by IOR
Treasury auctions 3-Month
T-Bills ONLY
AN
ALTERNATIVE
APPROACH
and . . .
OR
Treasury spends via Fed overdraft
accompanied by IOR=target rate
Treasury auctions at roughly Fed's target rate
and
"Excess Money" = Buffer of Net Financial Assets Is Too
Large Given Desired Private Spending
Relative to Income
Sustainable Private Spending Relative to Income Implies Net Financial Assets Buffer as Part of Monetary Policy Reaction Function
Given Net Financial Assets Buffer in the Reaction Function, Debt Service As A Policy Variable Must Also Be in the Reaction Function
Currency Buffer Guaranteed at Par by Monetary Policy
Settlement Balances Guaranteed by Lending/Rumeneration Rates Set by Monetary Policy
Treasury Lending Facility and Treasuries Guaranteed at Rates Set by Monetary Policy
Sustainable, Not Excessive, Quantity of Net Financial Assets Fluctuates with the Business Cycle via Interaction of Fiscal and Monetary Policies
Employed Buffer Stock of Labor at Announced, Fixed Wage to Replace Unemployed Buffer Stock
Conclusion--5 Buffer Stocks for Macroeconomic Policy
Conceptually--not an actual equation
Account Debited
Treasury Security
Deposits
Debited
Reserve
Balances
Debited
Account
Credited
No change in net financial assets
From 2, no change in ability to create credit/deposits
From 3, Treasury collateral can finance more credit
Fiscal Policy--Creates/Destroys Net Financial Assets
"More Spending Out of More Income"

Monetary Policy--No Change in Net Financial Assets
"More Spending Out of Existing Income"
Private Government Capital
Sector = Deficit - Account
Balance
the endogenous nature of currency
Dooley and Prause, 2004
Mitchell, et al., 2008
Full transcript