24

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. I'm not going to do any of this, but giving you three reasons for a desirable positive level of inflation. This list is of course incomplete, also there are ...


16

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 the economy. The most obvious are: It induces people to spend their money before it loses its value. In a deflationary environment there is an incentive to ...


13

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 sheet, while deposit money (the liability) is the money that is created by lending. Ever since the introduction of cheques specifically, and in general the ...


12

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 unwieldy, costly, and unsafe to have large amounts of cash lying around. Therefore, if there were no other alternatives, heavy spenders would still want some ...


12

"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, a portable medium of exchange, and a tool of economic accessibility for all including those in the informal economy, foreigners, the unbanked, and those with ...


12

I interpret your question more broadly as one about whether protectionism has ever "worked". Two economists that think it has are Chang Ha-Joon and Dani Rodrik. You can therefore look up their work. Two arguments they use are: The infant industry argument. In a 2007 article, Chang gives various examples of protectionism "working", including the US in the ...


10

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 approximation here: $MV = PY$ where $M$ is money, $V$ is the velocity of money, $P$ is the price level and $Y$ is the quantity of real goods. The equation says ...


9

You write "qualitative easing", but I think you refer to quantitative easing. I'll just do both. Quantitative Easing Quantitative easing corresponds to the central bank (CB) expanding its balance sheets by "buying" assets. This is typically done in secondary markets. It mainly injects liquidity into the system. To the extend that there is an additional ...


9

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 encourage inflation to force investment, but at the same time you need to control that inflation. For this reason QE should be used only when central banks believe ...


9

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 171) In the past decade, a number of engineers and economists have asked the question: "If modern control theory can improve the guidance of airplanes and ...


8

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 several levels of audit and review: The Government Accountability Office (GAO) conducts numerous reviews of Federal Reserve activities. The Board'...


8

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, which means that the usual arguments for subsidizing it apply. This makes the optimal rate of inflation negative (because inflation is a tax on holding money). ...


8

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 determined by consensus, but rather by the use or pleasure one can derive from them. To the first type— real assets are stuff like machines and cars and homes ...


8

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 taking off but persists at a low level, the central banking system has flooded the markets with money. The thought is that the money will "trickle down" from ...


7

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 prices. From a consumption standpoint, this may be advantageous. A high value USD may also make goods from the United States more expensive relative to goods ...


7

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 This is such a common misconception so I'll repeat it. Bitcoins limit the money base, but that does not limit the money supply. The money supply is the money ...


7

"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. The "value of work" is certainly not increased. And the important question is, does this increased nominal income lead to higher consumption? Consider a ...


7

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 dollars that are indistinguishable from genuine, Fed-printed dollars. How would you find out in the first place? How sure are you that nobody is doing it? :)


6

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 a low level of inflation is desired, and therefore should answer your question. The following were their main arguments: low deflation is to be avoided ...


5

If you think about it, there is really not much difference between a government budget constraint and a household budget constraint. Both have uncertain income streams, which are labor and capital income for the household, and mostly tax revenue for the government. On the other side of the constraint, you will find consumption and saving for the household. ...


5

Your question has been addresses in different ways. Kydland and Prescott (1977) argue that a central bank should follow defined policy rules instead of active stabilization methods because the latter contributes to economic instability. Barro and Gordon (1983) prove that under a discretionary regime, the central bank has an incentive to print money to ...


5

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 below zero, a radical move that involves charging banks to hold some types of deposits with the aim of encouraging them to lend. Similar trends have ...


5

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 transactions I don't know about? Indeed, there is always a way that money leaves the central bank without being paid back: the central bank does something with its net ...


5

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 conclusions of the paper: This paper studies the characteristics of departures from monetary unions. During the post-war period, almost seventy distinct ...


5

The description you're providing of how interest works is based on a couple of fairly common misunderstandings about how the system actually works, so lets clear that up first. Fractional reserve banking and the gold smith banking systems preceding it, are a result of the development of an accounting technology called double entry book keeping in the 13th ...


5

Two reasons: The United States has a capable federal government that takes care of social insurance transfers and countercyclical economic policies. The American states spend less. The American states have stronger anti-tax sentiments, and increasing public spendings face opposition from business and rich people. Take the 2008 crisis for example. As for ...


5

Every of the United States except Vermont is required by law to balance their budgets. 45 states have some sort of constitutional balanced budget provision and another 4 have it by statute. (Source) According to Inman (2003), such balanced budget provisions were mostly adopted after the state defaults of the 1840s: Following the defaults of state debts ...


5

The minimum required capital matters, but in the opposite direction: the more capital you have, the more likely you can challenge big banks. Because the costs of a new bank look like this: (http://www2.deloitte.com/content/dam/Deloitte/pt/Documents/financial-services/dttl-fsi-uk-Banking-Disrupted-2014-06.pdf) You need $15 mn just to keep it alive. Recall ...


5

It would seem logical that this would result in reverse-inflation or lower prices, but this is actually not the case (at least over time). The banking system has a "supply and demand" market for reserves. When say 1 million dollar is withdrawn and not redeposited, the banking system in the aggregate will bid more for current reserves to replace the ones ...


5

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 bankrupt during the lifetime of the bond and your deposit would be too large to be guaranteed, with the cost of default insurance being higher than the the ...


Only top voted, non community-wiki answers of a minimum length are eligible