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A Small Corner of Intertemporal Public Finance - New Developments in Monetary Economics: Two Ghosts, Two Eccentricities, a Fallacy, a Mirage and a Mythos

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  • Buiter, Willem H

Abstract

Monetary theory and policy are part of intertemporal public finance. This Paper reviews some interesting recent developments. The two ghosts are the venerable liquidity trap and the Pigou effect or real balance effect. The eccentricities are negative nominal interest rates and the helicopter drop of base money – two unconventional policies for stimulating consumer demand even when nominal interest rates, short and long, present and future, are at their zero lower bounds. The fallacy is the so-called Fiscal Theory of the Price Level, a logically inconsistent theory of the link between the government budget and the general price level. The mirage is the prediction that financial deregulation and technical change in the payments and settlements technology (e-money etc.) will cause monetary policy to lose its capacity to influence even nominal economic variables. Mythos refers to the independent central bank.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4407.

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Date of creation: Jun 2004
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Handle: RePEc:cpr:ceprdp:4407

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Related research

Keywords: central bank independence; fiscal theory of the price level; liquidity trap; monetary theory; unconventional monetary policies;

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Cited by:
  1. Buiter, Willem H, 2004. "The Elusive Welfare Economics of Price Stability As A Monetary Policy Objective: Should New Keynesian Central Bankers Persue Price Stability," CEPR Discussion Papers 4730, C.E.P.R. Discussion Papers.
  2. Buiter, Willem H & Sibert, Anne, 2006. "Deflationary Bubbles," CEPR Discussion Papers 5637, C.E.P.R. Discussion Papers.
  3. Harashima, Taiji, 2007. "The Optimal Quantity of Money Consistent with Positive Nominal Interest Rates," MPRA Paper 1839, University Library of Munich, Germany, revised 19 Feb 2007.
  4. Harashima, Taiji, 2006. "The Sustainability of Budget Deficits in an Inflationary Economy," MPRA Paper 905, University Library of Munich, Germany.

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