Hi All, I have recently been catching up on Minsky's improvements and am loving the documentation! I am interested in how the effects of inflation can be been taken into account in Minsky. It would seem that there is some relationship between the quantity of Central Bank ( CB) money and inflation but I don't see it in the equations.
@profstevekeen I have heard you say that mainstream economist make a major mistake by not considering the banking system and money in their macro economic models. I don't hear you talk about the role of the quantity of CB money. I have also heard others talk about the ability of the CB to create unlimited amounts of CB money (reserves). I completely buy into the use of Minsky to gain a better understanding of things as it facilitates a discussion using common language and above all else it includes dynamics!
Questions:
How would one describe how the quantity of CB money (a state variable) enters the right hand side of the differential equations?
Are there really no constraints to the creation of CB money? Might the relative quantities of CB money and something like gold be important here?
Mike
Last edit: Michael Bridges 2022-01-25
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CB money is a misnomer. Money per se is the sum of bank liability (+ bank short term equity) accounts, so whatever changes that changes the money supply. The CB itself can't affect that directly unless it can add to the Asset side of the banking sector's ledger in its own right. Most CB activities affect the Asset side, except for QE when it buys bonds off non-bank financial institutions. This mainly affects asset price inflation rather than consumer price inflation.
To model consumer price inflation per se and its relationship to the money supply, you need a non-Godley-Table price change equation. I solved for that in work I'd need to locate once more, but it basically came down to a lagged convergence to a function that is a markup on prime costs of production (wages + raw materials) divided by the capital to output ratio.
As Basil Moore pointed out decades ago, this gives you a relationship from inflation to the money supply--not vice versa--if banks accommodate the additional demand for money from corporations to pay money wages and raw material costs.
In terms of the ODEs, the entries from money creation include changes in private sector debt and bank reserves+treasury bonds.
If you would like to refer to this comment somewhere else in this project, copy and paste the following link:
Hi Steve, thanks for the reply I know you are busy.
Regarding CB money i really did mean the FED's reserves (liability) that it has created as a separate trackable accounting entry or stock(state variable). I'm interested in its dynamics and any constraints on its growth.
So I think I understand how when bank liabilities (deposit accounts) go up then that can lead to price inflation since that money can easily go out and start chasing goods. by the way, please send me the price change equation reference when you find it as that will make it more clear for me. Thanks!
Its the asset inflation you mention and its relation to FED's outstanding reserves that puzzles me.
Took me a while to wrap my head around the fact that the amount in aggregate deposit accounts is not algebraically related to the total outstanding reserves at the FED.
These stock variables have separate dynamics. For example the FED could be buying bonds from the banks (i.e. an increase in total reserves) while consumers are paying off debt (i.e. deposit accounts go down without a corresponding decrease in total reserves)
So hear is my question.
What prevents the FED from expanding its balance sheet unrestrained and indefinitely? Presumably this would cause asset inflation but why would that force the FED to stop buying?
Mike
Last edit: Michael Bridges 2022-01-26
If you would like to refer to this comment somewhere else in this project, copy and paste the following link:
That's the killer: there is nothing to stop them expanding their balance
sheet. And since they're buying bonds off NBFIs, as well as banks, they're
expanding the money supply in the asset markets--but not the goods market.
Then you get leakage from the former to the latter through profits, bonuses
and salaries, goods purchases etc.
Hi Steve, thanks for the reply I know you are busy.
Regarding CB money i really did mean the FED's reserves (liability) that
it has created as a separate trackable accounting entry or stock(state
variable). I'm interested in its dynamics and any constraints on its growth.
So I think I understand how when bank liabilities (deposit accounts) go up
then that can lead to price inflation since that money can easily go out
and start chasing goods. by the way, please send me the price change
equation reference when you find it as that will make it more clear.
Its the asset inflation you mention and its relation to FED's outstanding
reserves that puzzles me.
Took me a while to wrap my head around the fact that the amount in
aggregate deposit accounts is not algebraically related to the total
outstanding reserves at the FED.
These stock variables have separate dynamics. For example the FED could be
buying bonds from the banks (i.e. an increase in total reserves) while
consumers are paying off debt (i.e. deposit accounts go down without a
corresponding decrease in total reserves.
So hear is my question.
What prevents the FED from expanding its balance sheet unrestrained and
indefinitely? Presumably this would cause asset inflation but why would
that force the FED to stop buying?
That's the killer: there is nothing to stop them expanding their balance
sheet.
So allow me to press you a bit further on this. I know there is nothing mechanically constraining the FED from expanding their balance sheet but I'm trying to figure out any feedback loops that might cause unwanted effects thereby pressuring the FED to stop expanding.
You mentioned expansion of the money supply in asset markets. I translate this to mean stock market bubbles. What prevents the FED from preventing the pop by continuing to intervene in markets (i.e. through the growth its balance sheet)? That is what happens when it buys bank, financial firm and corporate assets with freshly created reserves which are then used to bid up stock prices correct?
I'm trying to find the mechanism that breaks the unlimited FED balance sheet growth scenario because my intuition says nothing can grow exponentially forever.
You also mentioned this "leakage" from the asset market to the goods market. Can the FED balance sheet get to a point where it is so large that the leakage from the ever growing asset market into goods market causes inflation to grow beyond their target forcing them to shrink?
Can the FED successfully control inflation with only their funds interest rate control knob while continuing to expand their balance sheet?
That was a lot so I will stop there for now. Thanks for the dialogue.
If you would like to refer to this comment somewhere else in this project, copy and paste the following link:
Hi All, I have recently been catching up on Minsky's improvements and am loving the documentation! I am interested in how the effects of inflation can be been taken into account in Minsky. It would seem that there is some relationship between the quantity of Central Bank ( CB) money and inflation but I don't see it in the equations.
@profstevekeen I have heard you say that mainstream economist make a major mistake by not considering the banking system and money in their macro economic models. I don't hear you talk about the role of the quantity of CB money. I have also heard others talk about the ability of the CB to create unlimited amounts of CB money (reserves). I completely buy into the use of Minsky to gain a better understanding of things as it facilitates a discussion using common language and above all else it includes dynamics!
Questions:
Mike
Last edit: Michael Bridges 2022-01-25
Thanks Michael.
CB money is a misnomer. Money per se is the sum of bank liability (+ bank short term equity) accounts, so whatever changes that changes the money supply. The CB itself can't affect that directly unless it can add to the Asset side of the banking sector's ledger in its own right. Most CB activities affect the Asset side, except for QE when it buys bonds off non-bank financial institutions. This mainly affects asset price inflation rather than consumer price inflation.
To model consumer price inflation per se and its relationship to the money supply, you need a non-Godley-Table price change equation. I solved for that in work I'd need to locate once more, but it basically came down to a lagged convergence to a function that is a markup on prime costs of production (wages + raw materials) divided by the capital to output ratio.
As Basil Moore pointed out decades ago, this gives you a relationship from inflation to the money supply--not vice versa--if banks accommodate the additional demand for money from corporations to pay money wages and raw material costs.
In terms of the ODEs, the entries from money creation include changes in private sector debt and bank reserves+treasury bonds.
Hi Steve, thanks for the reply I know you are busy.
Regarding CB money i really did mean the FED's reserves (liability) that it has created as a separate trackable accounting entry or stock(state variable). I'm interested in its dynamics and any constraints on its growth.
So I think I understand how when bank liabilities (deposit accounts) go up then that can lead to price inflation since that money can easily go out and start chasing goods. by the way, please send me the price change equation reference when you find it as that will make it more clear for me. Thanks!
Its the asset inflation you mention and its relation to FED's outstanding reserves that puzzles me.
Took me a while to wrap my head around the fact that the amount in aggregate deposit accounts is not algebraically related to the total outstanding reserves at the FED.
These stock variables have separate dynamics. For example the FED could be buying bonds from the banks (i.e. an increase in total reserves) while consumers are paying off debt (i.e. deposit accounts go down without a corresponding decrease in total reserves)
So hear is my question.
What prevents the FED from expanding its balance sheet unrestrained and indefinitely? Presumably this would cause asset inflation but why would that force the FED to stop buying?
Mike
Last edit: Michael Bridges 2022-01-26
That's the killer: there is nothing to stop them expanding their balance
sheet. And since they're buying bonds off NBFIs, as well as banks, they're
expanding the money supply in the asset markets--but not the goods market.
Then you get leakage from the former to the latter through profits, bonuses
and salaries, goods purchases etc.
I'll post the price equation shortly. Getting ready for the Australian
election is taking priority right now.
Best, Steve
Professor Steve Keen
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On Wed, Jan 26, 2022 at 5:47 PM Michael Bridges mmbridges@users.sourceforge.net wrote:
Hi Steve, I know it has been a while but I wanted to circle back to a few unanswered questions if you have time. Firstly you wrote:
Do you anticipate being able to post this equation anytime soon?
Secondly, when you get a chance please take another peak at the unanswered questions I raised in my 2022-02-17 post. Thanks!
Hi Steve, you wrote:
So allow me to press you a bit further on this. I know there is nothing mechanically constraining the FED from expanding their balance sheet but I'm trying to figure out any feedback loops that might cause unwanted effects thereby pressuring the FED to stop expanding.
You mentioned expansion of the money supply in asset markets. I translate this to mean stock market bubbles. What prevents the FED from preventing the pop by continuing to intervene in markets (i.e. through the growth its balance sheet)? That is what happens when it buys bank, financial firm and corporate assets with freshly created reserves which are then used to bid up stock prices correct?
I'm trying to find the mechanism that breaks the unlimited FED balance sheet growth scenario because my intuition says nothing can grow exponentially forever.
You also mentioned this "leakage" from the asset market to the goods market. Can the FED balance sheet get to a point where it is so large that the leakage from the ever growing asset market into goods market causes inflation to grow beyond their target forcing them to shrink?
Can the FED successfully control inflation with only their funds interest rate control knob while continuing to expand their balance sheet?
That was a lot so I will stop there for now. Thanks for the dialogue.