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on 27-Jan-2019 (Sun)

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How do we know that the payer must be either dis-saving or investing? The payer is purchasing something, and it must be either for consumption or for investment. If it is for consumption, then the payer is taking money out of savings to pay for it. If it is for investment, then the payer is investing.

To take a simple example, suppose you’re a freelance software developer, and a company pays you to develop some custom software for long-term use. From the company’s point of view, that’s investment. As soon as they pay you, they’ve made an investment, and you have saved the exact amount of the investment they just made. Savings equal investment.
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Employment, Interest, and Money: Investment Makes Saving Possible
receiver’s new savings) or taking money out of their own savings (in which case that dis-saving offsets the receiver’s new savings, and there is no net change in either savings or investment). <span>How do we know that the payer must be either dis-saving or investing? The payer is purchasing something, and it must be either for consumption or for investment. If it is for consumption, then the payer is taking money out of savings to pay for it. If it is for investment, then the payer is investing. To take a simple example, suppose you’re a freelance software developer, and a company pays you to develop some custom software for long-term use. From the company’s point of view, that’s investment. As soon as they pay you, they’ve made an investment, and you have saved the exact amount of the investment they just made. Savings equal investment. And what happens when you spend the money? To take another simple example, let’s say you spend some of it on a haircut. You are taking money out of savings, so your savings are reduced




Monetary policy is central bank actions that impact the supply and demand for base money. In the past they impacted the supply through OMOs and discount loans, and the demand through reserve requirements. Since 2008 they also impact demand through changes in IOR. Thus they have 4 basic policy tools, two for base supply and two for base demand.
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TheMoneyIllusion » Nick Rowe on the New Keynesian model
ess prestigious than the Keynesian model, it’s actually a less egregious example of reasoning from a price change, as higher market interest rates really are expansionary, ceteris paribus. PPS. <span>Monetary policy is central bank actions that impact the supply and demand for base money. In the past they impacted the supply through OMOs and discount loans, and the demand through reserve requirements. Since 2008 they also impact demand through changes in IOR. Thus they have 4 basic policy tools, two for base supply and two for base demand. PPPS. Today interest rates and IOR often move almost one for one, so the analysis is less clear. Another complication is that IOR is paid on reserves, but not currency. Higher rates in




Keynesians tended to assume that the Fed was easing policy between August 2007 and May 2008, because they cut interest rates from 5.25% to 2%. But we’ve already seen that a cut in interest rates is contractionary, ceteris paribus. To claim it’s expansionary, they’d have to show that it was accompanied by an increase in the monetary base. But it was not—the base did not increase—hence the action was contractionary. That’s a really serious mistake.
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TheMoneyIllusion » Nick Rowe on the New Keynesian model
world data, they often focus on the interest rate and then ignore what’s going on with the money supply—and that gets them into trouble. Here are three examples of “bad Keynesian analysis”: 1. <span>Keynesians tended to assume that the Fed was easing policy between August 2007 and May 2008, because they cut interest rates from 5.25% to 2%. But we’ve already seen that a cut in interest rates is contractionary, ceteris paribus. To claim it’s expansionary, they’d have to show that it was accompanied by an increase in the monetary base. But it was not—the base did not increase—hence the action was contractionary. That’s a really serious mistake. 2. Between October 1929 and October 1930, the Fed reduced short-term rates from 6.0% to 2.5%. Keynesians (or their equivalent back then) assumed monetary policy was expansionary. But in




Of course, Keynesians often argue that an increase in interest rates is contractionary. Why do they say this? If asked, they’d probably defend the assertion as follows:

“When I say higher interest rates are contractionary, I mean higher rates that are caused by the Fed. And that requires either a cut in the monetary base, or an increase in IOR. In either case the direct effect of the monetary action on the base or IOR is more contractionary than the indirect effect of higher market rates on velocity is expansionary.”

And that’s true, but there’s still a problem here. When looking at real world data, they often focus on the interest rate and then ignore what’s going on with the money supply—and that gets them into trouble. Here are three examples of “bad Keynesian analysis”:

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TheMoneyIllusion » Nick Rowe on the New Keynesian model
] What can we learn from this model? 1. Ceteris paribus, an increase in the base tends to increase NGDP. 2. Ceteris paribus, an increase in the nominal interest rate (i) tends to increase NGDP. <span>Of course, Keynesians often argue that an increase in interest rates is contractionary. Why do they say this? If asked, they’d probably defend the assertion as follows: “When I say higher interest rates are contractionary, I mean higher rates that are caused by the Fed. And that requires either a cut in the monetary base, or an increase in IOR. In either case the direct effect of the monetary action on the base or IOR is more contractionary than the indirect effect of higher market rates on velocity is expansionary.” And that’s true, but there’s still a problem here. When looking at real world data, they often focus on the interest rate and then ignore what’s going on with the money supply—and that gets them into trouble. Here are three examples of “bad Keynesian analysis”: 1. Keynesians tended to assume that the Fed was easing policy between August 2007 and May 2008, because they cut interest rates from 5.25% to 2%. But we’ve already seen that a cut in in




“He also writes: “Keynesian fiscal stimulus works by transferring idle money balances in exchange for bonds at liquidity trap interest rate and using the proceeds to finance expenditure that goes into the pockets of people with finite (rather than infinite) money demand.””

He’s saying fiscal stimulus makes velocity rise, if it works. That’s true.

Regarding the battle between fiscal and monetary policy; the fiscal authorities can move V by a few percentage points. the Fed can move M by a billion percent. Guess who controls M*V?

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TheMoneyIllusion » Saving isn’t “setting money aside,” it’s BUILDING CAPITAL GOODS
revenue. Grapes dumped into the ocean out of inventory is depreciation, which makes net investment smaller than gross investment. (And net saving smaller than gross saving.) You quoted Glasner: <span>“He also writes: “Keynesian fiscal stimulus works by transferring idle money balances in exchange for bonds at liquidity trap interest rate and using the proceeds to finance expenditure that goes into the pockets of people with finite (rather than infinite) money demand.”” He’s saying fiscal stimulus makes velocity rise, if it works. That’s true. Regarding the battle between fiscal and monetary policy; the fiscal authorities can move V by a few percentage points. the Fed can move M by a billion percent. Guess who controls M*V? q, I don’t think people were saving more in aggregate. But that covered up the fact that people privately saved more and the Federal government saved way less, so national saving fell,




J Mann, Complicated question. If the bank is lending money out for home construction, then your saving is financiag gross investment. But banks also hold lots of government bonds, so you might just be (indirectly) lending money to the Feds. In that case your saving is offset by their dissaving.
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TheMoneyIllusion » Saving isn’t “setting money aside,” it’s BUILDING CAPITAL GOODS
hink people were saving more in aggregate. But that covered up the fact that people privately saved more and the Federal government saved way less, so national saving fell, if I’m not mistaken. <span>J Mann, Complicated question. If the bank is lending money out for home construction, then your saving is financiag gross investment. But banks also hold lots of government bonds, so you might just be (indirectly) lending money to the Feds. In that case your saving is offset by their dissaving. more to come . . . Marcelo 12. January 2012 at 10:44 Scott, Thought you might appreciate this Ryan Avent Tweet “Scott Sumner would be angry at all of you. He’d say, “They were right abo




ndy, You said;

“As a practical matter, if I choose to hoard money, I am saving. Depending on the central bank’s reaction function, I may be encouraging someone else to dissave by reducing their income, but for my part, I am saving, even if I don’t cause any capital goods to be produced. It’s meaningful to say that countries with trade surpluses are saving, even if they aren’t causing any capital goods to be produced.”

I’m going to quibble with both points. Global saving equals global investment. Everyone agrees that national saving differs from national investment by the CA. So no issues there. The saving of cash example is more complex issue. Cash can be viewed as government debt, or as a sort of capital good, like paper gold. Something that provides transactions services.

If it’s government debt then any extra cash you hold means equal dissaving by the government. National saving is unchanged. If it’s capital and your saving of cash causes the real quantity of cash to go up, then it is saving, but investment has also occurred. That interpretation makes most people queasy, but I throw it out there for completeness.

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TheMoneyIllusion » Saving isn’t “setting money aside,” it’s BUILDING CAPITAL GOODS
of the year you have earned $50,000 and all you have to show for it is a one year old car worth $18,000, then you’ve consumed $32,000 and saved $18,000 during that year. Can we agree on that? A<span>ndy, You said; “As a practical matter, if I choose to hoard money, I am saving. Depending on the central bank’s reaction function, I may be encouraging someone else to dissave by reducing their income, but for my part, I am saving, even if I don’t cause any capital goods to be produced. It’s meaningful to say that countries with trade surpluses are saving, even if they aren’t causing any capital goods to be produced.” I’m going to quibble with both points. Global saving equals global investment. Everyone agrees that national saving differs from national investment by the CA. So no issues there. The saving of cash example is more complex issue. Cash can be viewed as government debt, or as a sort of capital good, like paper gold. Something that provides transactions services. If it’s government debt then any extra cash you hold means equal dissaving by the government. National saving is unchanged. If it’s capital and your saving of cash causes the real quantity of cash to go up, then it is saving, but investment has also occurred. That interpretation makes most people queasy, but I throw it out there for completeness. Brito, Nope, It’s a definition. John, I agree, consumption of capital goods mean less net investment. Mike Sax, You said; “I don’t think anyone doubts the accounting identity I=S. It do