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A Small Corner of Intertemporal Public Finance - New Developments in Monetary Economics: 2 Ghosts, 2 Eccentricities, A Fallacy, A Mirage and A Mythos

Monetary theory and policy are part of intertemporal public finance. The lecture 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 in-consistent 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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10524.

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Date of creation: May 2004
Date of revision:
Publication status: published as Buiter, Willem H. "New Developments In Monetary Economics: Two Ghosts, Two Eccentricities, A Fallacy, A Mirage And A Mythos," Economic Journal, 2005, v115(502,Mar), 1-31.
Handle: RePEc:nbr:nberwo:10524
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  8. Willem H. Buiter & Nikolaos Panigirtzoglou, 1999. "Liquidity Traps: How to Avoid Them and How to Escape Them," NBER Working Papers 7245, National Bureau of Economic Research, Inc.
  9. John H. Cochrane, 1999. "A Frictionless View of U.S. Inflation," NBER Chapters, in: NBER Macroeconomics Annual 1998, volume 13, pages 323-421 National Bureau of Economic Research, Inc.
  10. Ilian Mihov & Anne Sibert, 2002. "Credibility and Flexibility with Monetary Policy Committees," Working Papers 232002, Hong Kong Institute for Monetary Research.
  11. Willem H. Buiter, 2003. "Overcoming the zero bound on nominal interest rates with negative interest on currency : Gesell's solution," LSE Research Online Documents on Economics 848, London School of Economics and Political Science, LSE Library.
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  13. Michael Woodford, 2001. "Fiscal Requirements for Price Stability," NBER Working Papers 8072, National Bureau of Economic Research, Inc.
  14. Anne Sibert, 2003. "Monetary Policy Committees: Individual and Collective Reputations," Review of Economic Studies, Oxford University Press, vol. 70(3), pages 649-665.
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  16. Woodford, Michael, 1995. "Price-level determinacy without control of a monetary aggregate," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 43(1), pages 1-46, December.
  17. Sims, Christopher A., 1998. "Econometric implications of the government budget constraint," Journal of Econometrics, Elsevier, vol. 83(1-2), pages 9-19.
  18. Mathias Drehmann & Charles Goodhart & Malte Krueger, 2002. "The challenges facing currency usage: will the traditional transaction medium be able to resist competition from the new technologies?," Economic Policy, CEPR;CES;MSH, vol. 17(34), pages 193-228, 04.
  19. Willem H. Buiter, 2002. "The Fiscal Theory Of The Price Level: A Critique," Economic Journal, Royal Economic Society, vol. 112(481), pages 459-480, July.
  20. Lars E.O. Svensson, 2003. "Escaping from a Liquidity Trap and Deflation: The Foolproof Way and Others," NBER Working Papers 10195, National Bureau of Economic Research, Inc.
  21. Buiter, Willem H., 2004. "Helicopter Money: Irredeemable Fiat Money and the Liquidity Trap," CEPR Discussion Papers 4202, C.E.P.R. Discussion Papers.
  22. Sims, Christopher A, 1994. "A Simple Model for Study of the Determination of the Price Level and the Interaction of Monetary and Fiscal Policy," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 4(3), pages 381-99.
  23. Weil, Philippe, 1991. "Is Money Net Wealth?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(1), pages 37-53, February.
  24. Marvin Goodfriend, 2000. "Overcoming the zero bound on interest rate policy," Working Paper 00-03, Federal Reserve Bank of Richmond.
  25. Robert J. Barro & David B. Gordon, 1981. "A Positive Theory of Monetary Policy in a Natural-Rate Model," NBER Working Papers 0807, National Bureau of Economic Research, Inc.
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  27. Brian M. Doyle, 2000. ""Here, dollars, dollars ..."estimating currency demand and worldwide currency substitution," International Finance Discussion Papers 657, Board of Governors of the Federal Reserve System (U.S.).
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