Wednesday, May 26, 2010

More on the yield curve, and Greece

Some further thoughts on recent posts (most of this is captured in the comments, but I thought I would bring it up as well).

1. Chartalists (or MMT) talk about "setting the yield curve to zero" by having the Government set a price (%) on bonds and issuing as many as is demanded, instead of what it does now which is sets a certain quantity, and then has the market clear to set the price.

In practice, because bonds get resold, and because they are not consumption goods (especially at short durations -- the value of a 3 month treasury note is not set by a downward sloping demand curve, it's set by its interest rate) the Government cannot actually increase or lower price by adjusting the quantity.

However, for longer durations, the willingness to pay for a bond depends on what the individuals inflation expectations are, and therefore I can see a distribution of expectations, and therefore a spread in willingness to pay. This would create a downward sloping demand curve and the Govt could set the price by adjusting quantity. Therefore, at longer durations I believe bonds would act as consumption goods in this sense.

Still, the most sensible approach would be to eliminate bond issuance entirely. It's a remnant of our gold standard days.

2. The Greek Central Bank can credit and debit accounts by simply marking them up or down -- just like the Federal Reserve, and unlike US States. Therefore, the eurozone is more like a cluster of multiple currency issuers who restrict money creation by... political rules (like the 3% limits). I'm actually not sure how fiscal discipline is imposed, formally or informally. If anyone has a succinct answer, please note it in the comments!

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5 Comments:

Blogger Ramanan said...

Hey Winter,

Lots of unwritten rules out there ! Plus lots of rules which can be used to break other rules!

This article http://www.ecb.int/pub/pdf/annrep/ar2009en.pdf - the annual report talks of some fiscal issues in Section 2.5 (Page 71 onward). It talks of "deadlines" for countries and many of them have deadlines as close as 2012. The question that immediately arises is "What if the deadline is not met?" but I do not know the answer to that.

There seems to be some provisions in the Stability and Growth Pact on imposing fines on the members but I don't think they have used that yet because lots (most?) countries have broken the 3% deficit and/or the 60% public debt rule!

8:44 AM  
Blogger winterspeak said...

The Continentals certainly take a very different view of written rules than "Anon"!

9:03 AM  
Blogger Ramanan said...

Marshall confronts Anon here http://bilbo.economicoutlook.net/blog/?p=9956&cpage=1#comment-6610

1:59 PM  
Blogger winterspeak said...

LOL! Anon is positively Teutonic in his fixation on the formal rules, and inability to acknowledge that the informal reality actually gives you a better description of reality.

Maybe he's Angela Merkel? No -- she eventually saw the light!

He raised a good point that MMT should be more careful about the is/ought distinction. But the MMT "is" is closer to reality that his.

2:08 PM  
Blogger Ramanan said...

I liked Anon's phrase "anti-analogy" -

"BTW I remain completely uncomfortable with the gold standard “anti-analogy”, for reasons of operational detail relating to the gold standard"

3:24 PM  

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