34 votes
Accepted

Is zero inflation desirable?

The optimal level of inflation is very debated with unclear answers. There are many reasons, and a great answer would be very long. It should also distinguish between expected inflation and surprises. ...
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25 votes

Can someone explain why sterling-dollar parity is bad?

There's nothing wrong with \$1=£1. Unless it was \$1.50=£1 last week - then it's a big problem - for the people who have £, at least! The people who have \$ will be glad they can buy things from the ...
17 votes
Accepted

From an economics perspective, what are the ramifications of a currency with fixed money supply?

FooBar is quite right that unless you expect GDP growth to stop, fixed nominal supply currencies will lead to deflation. A moderate degree of currency inflation serves a number of useful functions in ...
  • 16.6k
15 votes

Implications of abolishing Fractional Reserve Banking on mortgages and interest rates

There is a long standing problem in most discussions of Fractional Reserve Banking (FRB), around the precise definition of money. Cash money (that is M0) is an asset on the banking system balance ...
  • 2,729
14 votes

Is zero inflation desirable?

Money is produced at zero social cost but held at a positive private cost (because to hold money you must forgo holding other assets). Therefore there is a positive externality from holding money, ...
14 votes
Accepted

Why lower the deposit rate if it is already negative?

You are assuming that the supply of deposits is zero when the price (the rate) is zero but it definitely is not. There are several reasons for this. While you can withdraw cash from the bank it is ...
  • 16k
13 votes
Accepted

Wouldn't abolition of cash give rise to a substitute currency?

"Cash" is an emergent phenomenon of human economic organization. It exists for lots of reasons, as a provider of economic anonymity, a low transaction cost solution to the double-coincidence of wants, ...
  • 16k
12 votes

From an economics perspective, what are the ramifications of a currency with fixed money supply?

It is a fallacy to conclude that a steady number of coins will give you no change on the monetary value (inflation/deflation). The classical quantity theory of money can be used as a first-order ...
  • 10.5k
12 votes

Why doesn't the government create money, spend it for free without interest, and recollect it with taxes?

Why doesn't the government create money, spend it for free without interest, and recollect it with taxes, you ask. Well, it does. That's exactly what public investment & spending, and the taxation ...
  • 8,052
12 votes
Accepted

On what basis do countries repay international loans?

Only sufficiently credit worthy countries are able to borrow money internationally in their own currency. In principle you are right that such a country could effectively default by expanding the ...
  • 238
11 votes
Accepted

Cash and negative interest rates

Actually they're saying that, when cash is available, people need not to deposit their money into the bank, and hence is "guaranteed" (not taking into account risks associated with holding on to cash, ...
  • 2,764
10 votes

Is zero inflation desirable?

In the ECB's press conference of October 22, Draghi and his vice-president responded to the question of why the ECB is fighting low inflation so fiercely. Their answer provides a nice overview of why ...
  • 894
10 votes

Why can't countries print another country's currency?

Why assuming that it isn't done in the first place? Turns out, it was actually done by Nazis in WWII https://en.wikipedia.org/wiki/Operation_Bernhard Also, suppose that somebody actually made ...
  • 668
9 votes

What assurances are there that the Federal Reserve does not give money to banks?

According to this official link Does the Federal Reserve ever get audited? Yes, the Board of Governors, the 12 Federal Reserve Banks, and the Federal Reserve System as a whole are all subject to ...
9 votes
Accepted

Quantitative Easing in Africa

For Quantitative Easing to happen, a central bank needs to expand its balance sheet by, more or less, "printing money" from scratch. Quantitative Easing is a difficult policy in that you want to ...
  • 1,256
9 votes
Accepted

The Printing of Money for Paying Debt

Printing money causes inflation because someone (or some institution) will get the money and will spend it somehow. This increases demand for goods, but the number of goods, the supply was not ...
  • 27.2k
9 votes
Accepted

Does control system engineering have a place in economics?

Economists have been exploring control theory applications to macro economics for decades. For example, here is a 40 year-old research paper written in 1976 on the topic. top of page 2 (also numbered ...
9 votes
Accepted

What is the purpose of monetary expansion during an economic lockdown?

What is the purpose of monetary expansion in this environment? Avoiding (and preventing future) supply and demand shocks The purpose is to keep as much as possible markets (labor related, of goods ...
  • 1,405
8 votes

From an economics perspective, what are the ramifications of a currency with fixed money supply?

The other answers are correct in respect of what would happen if the money supply of a currency was kept constant, however there is nothing in bitcoins to ensure that money supply will stay fixed ...
  • 1,438
8 votes
Accepted

What's quantitative easing?

Before the edit, you wrote "qualitative easing", but I think you refer to quantitative easing. I'll discuss both. Quantitative Easing Quantitative easing corresponds to the central bank (CB) ...
  • 10.5k
8 votes
Accepted

Why do all countries recognize foreign wealth?

Countries do not just stop recognizing foreign wealth because there are two kinds of wealth: real assets, and claims on the production of others; the values of both of these types of wealth are not ...
8 votes

Why do central banks currently favor cheap money policies?

Most central banks' primary goal is maintaining a moderate inflation (around 2 %). In some cases, they also have a secondary and lesser mandate to care for employment numbers. Since inflation is not ...
  • 329
7 votes
Accepted

What is the advantage and disadvantage to have a high value of USD for USA?

When the USD is highly valued, it allows people from the home country, the United States in this case, to purchase goods relatively cheaply from abroad and put pressure on domestic firms to have low ...
7 votes
Accepted

Consequences to lending and value of national currency from a negative interest rate and 140-year mortgages in Sweden

There is some concern about the interest rates (currently at -0.5%) fueling a housing bubble in Sweden. This article at Fidelity states: In a bid to track the ECB, Sweden has cut its interest rate ...
7 votes

How can banks pay interest to the central bank?

You anticipate the answer when you ask: This question can be easily answered if there were any way in which new money can leave the central bank without being paid back. Are there such ...
7 votes

Should Finland leave the eurozone?

The closest we can get to an answer would be by looking at previous exits from currency unions. Rose published a paper studying extensively all exits after WWII. The abstract resumes well the ...
  • 1,256
7 votes

Why should I get a bond with negative interest instead of having a bank deposit account either zero interest or positive interest

It makes little sense to me either, but here are some possible reasons for buying a bond with negative interest rates rather than depositing the same amount in a bank: The deposit-taking bank may go ...
  • 4,694
7 votes

What are taxes for since law forbids printing of money?

"Why I don't hear nobody speaking about such idea?" Because historical experience says it won't work. By printing money instead of collecting taxes, what increases is the nominal disposable income....
7 votes
Accepted

What would monetarists do when interest rates approach zero and become ineffective?

An excellent overview of not just monetarist view on this issue but all other mainstream views on monetary policy at zero lower bound (ZLB) can be found in Ullersma (2002) The Zero Lower Bound on ...
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