Tuesday , October 27 2020
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Tag Archives: Bank of Canada

A very very simple explanation of monetary policy

Scale & weights | Aylmer, Quebec | Canadian Museum of History This post is for my dad, who says he doesn't understand my writing but remains a loyal reader nonetheless.I am going to try and explain one of the most important things that central banks do: monetary policy. We often see news clips in which bespectacled central bankers discuss their "inflation targets," or tell us that they are ratcheting interest rates up or down, or that they are engaging in "quantitative easing". The...

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Pennies as state failure

We can all think of examples of state failure. The most obvious include the inability to protect citizens from criminals, failure to provide drinkable water, and incapacity to cope with a public health crisis like COVID-19. I would argue that the ongoing existence of the penny within a nation's borders is another example of state failure.The poster child for this particular example of state failure is the U.S. and its Lincoln penny. Many (though not all) developed nations have already rid...

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Is fiat money to blame for the Iraq war, police brutality, and the war on drugs?

I often encounter memes claiming that fiat money is to blame for all sorts of government evils. Here is one example from Kraken spokesperson & bitcoin meme factory Pierre Rochard: The military-industrial complex that deliberately creates wars is financed by inflationary State fiat currencies. — Pierre Rochard (@pierre_rochard) January 8, 2020 The rough idea behind this family of memes is that the Federal Reserve, the world's largest producer of "fiat" money (i.e. irredeemable...

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How the Bank of Canada’s balance sheet went from $118 billion to $440 billion in eight weeks

Ever since the coronavirus hit, the Bank of Canada's balance sheet has exploded. In late February its assets measured just $118 billion. Eight weeks later the Bank of Canada has $440 billion in assets. That's a $320 billion jump! To put this in context, I've charted out the Bank of Canada's assets going back to when it was founded in 1935. (Note: to make the distant past comparable to the present, the axis uses logarithmic scaling.) The rate of increase in Bank of Canada assets far exceeds...

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Stephen Poloz needs to be honest with Canadians about negative interest rates

To soften the blow of the COVID-19 pandemic, the Bank of Canada is running what it sees as an expansionary, or loose, monetary policy. I think an expansionary policy makes a lot of sense. The problem is this. The Bank of Canada has several tools it can use to loosen. Some are better than others. But it has stopped trying to use its best tool.What is its best tool? Well, there are three ways that the Bank of Canada can loosen monetary policy.Say interest rates are at 4%. Stephen Poloz, the...

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Flooding or marijuana? Two theories for falling cash demand

When Canada legalized marijuana in October 2018, the amount of banknotes in circulation took a sudden plunge. In a 2019 paper available here, economists Charles Goodhart & Jonathan Ashworth theorized that because the marijuana trade has always been conducted using anonymity-providing cash, legalization meant that Canadians could now buy pot with debit and credit cards. Thus the big drop in cash held that October.Here is one of the charts that the pair used:Source: Goodhart &...

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Should governments finance themselves through their central bank?

In places like the U.S. and Europe, it is actually difficult—if not impossible—for a government to have its central bank pay for government programs. All government spending must be financed by issuing bonds to the public or collecting taxes. Canada, my home country, is an interesting counter-example. The financial relationship between the Federal government and the Bank of Canada—our central bank—is fairly permeable. The government has the authority to ask the Bank of Canada to directly...

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Swish > cash and bitcoin

Ok, another Sweden post. I keep returning to Sweden because no country has gone further down the road to being cash-free. Since all of us seem to be following the same trajectory, we should probably be paying attention.Lucky for us, every two years the Riksbank—Sweden's central bank—-carries out a payments survey and puts the data up on its website. One of the most interesting questions that is asked is "which of the following payments methods have you used in the last month?" I plotted out...

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A tax, not a ban, on high denomination banknotes

Ken Rogoff has famously called for a ban on high denomination banknotes in order to help combat tax evasion and hurt criminals. But rather than banning notes, why not implement a market-based approach such as a tax? Among other advantages, a tax leaves people with flexibility to determine the cheapest way to reduce their usage of the targeted commodity. This is how society is choosing to reduce green house gas emissions. So why not go the tax route for banknotes too?My recent post for...

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Floors v corridors

David Beckworth argues that the U.S. Federal Reserve should stop running a floor system and adopt a corridor system, say like the one that the Bank of Canada currently runs. In this post I'll argue that the Bank of Canada (and other central banks) should drop their corridors in favour of a floor—not the sort of messy floor that the Fed operates mind you, but a nice clean floor.Floors and corridors are two different ways that a central banker can provide central banking services. Central...

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