Brief Outline of Topics Covered in Lecture 12
Chapter 19 Money Demand [continued]
Keynes’s Liquidity Preference Theory
Is velocity a constant?
- Transactions Motive
- Precautionary Motive
- Speculative Motive
- Putting the Three Motives Together
Portfolio theories of money demand
Chapter 20 The IS curve (if time permits, will begin this chapter)
Extra Reading:
We talked in class about the Fed's worries about the use of reverse repos to control short-term interest rates. Here's an argument on the other side:
Blair and Reserves for All, by John Cochrane: I think the Fed's new Overnight Reverse Repurchase Facility is great. Sheila Blair, in the Wall Street Journal, thinks it's awful.
I think it will enhance the stability of the financial system. She thinks it will lead to instability. Well, at least we agree on the important issue.
What is it? Banks can have accounts at the Fed, called "reserves," and these accounts pay interest. In essence, the new program allows other financial institutions, that aren't legally "banks," to also have interest-paying accounts at the Fed. The program involves repurchase agreements, which is a bit silly -- who needs collateral from the Fed? -- but really think of it just as interest-paying bank accounts at the Fed.
I like the Fed's big balance sheet and interest-paying reserves, and I like opening up interest-paying reserves to everyone. I regard this as the first step to putting run-prone short-term financing out of business, by giving depositors a safe alternative. The Federal Government drove run-prone private banknotes out of business in the 19th century. Interest-paying reserves and Treasury floaters can drive run-prone interest-paying money out of business in the 21st. (This is the theme of "Toward a run-free financial system") Interest-paying money is not inflationary.
Blair does not like it. She is a voice worth hearing. ...[continue]...
