From the Money Illusion:
There is an interesting debate taking place over the issue of whether we are in a new world, where monetary injections will no longer create inflation via a sort of “hot potato effect.” Instead, base money and short term debt would become almost perfect substitutes. Here’s Izabella Kaminska:The discussion/debate has been remarkably civil as, to date, none of the correspondents have degenerated to "Your mama dresses you funny"or anything remotely close.
In this way, we agree with Waldman that the moment IOER created a preference for excess reserves over short-term debt assets or cash, was the moment excess reserves became a new type of safe asset security in their own right.Excess reserves became the equivalent of state debt. But, very importantly, a state debt taken with the intention of never being spent, but rather for the purpose of creating safe assets instead.Fed exit...I sympathize with Krugman’s view, albeit probably for slightly different reasons. In his newest post Waldman says Krugman misinterpreted his argument. So perhaps they aren’t that far apart. But I still have reservations about where Waldman is going with his argument:
And herein lies the differentiation point. If and when the Fed decides to exit unconventional policy, it will be obliged to re-associate opportunity costs with excess reserves. As rates go up, the spread between between the Fed Fund rate and the rate on excess reserves will only widen....MUCH MORE
1. I’ve already shown that the zero lower bound on the stock of excess reserves means that large increases in the price level would require a larger monetary base, if only to boost the currency stock. So the quantity of money still matters, even with IOER....Click the link...BTW, Scott Sumner is a bit puzzled as to why Waldman refers to himself in the third person. :)] ...
