Working Paper: NBER ID: w10524
Authors: Willem H. Buiter
Abstract: Monetary theory and policy are part of intertemporal public finance. The lecture reviews some interesting recent developments. The two ghosts are the venerable liquidity trap and the Pigou effect or real balance effect. The eccentricities are negative nominal interest rates and the helicopter drop of base money - two unconventional policies for stimulating consumer demand even when nominal interest rates, short and long, present and future, are at their zero lower bounds. The fallacy is the so-called Fiscal Theory of the Price Level, a logically in-consistent theory of the link between the government budget and the general price level. The mirage is the prediction that financial deregulation and technical change in the payments and settlements technology (e-money etc.), will cause monetary policy to lose its capacity to influence even nominal economic variables. Mythos refers to the independent central bank.
Keywords: Monetary Theory; Liquidity Trap; Fiscal Theory of the Price Level; Negative Nominal Interest Rates; Helicopter Money
JEL Codes: E0; E4; E5; E6
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Unconventional Monetary Policies (negative nominal interest rates and helicopter drops of money) (E49) | Consumer Demand (D12) |
| Central Bank Independence (E58) | Improved Monetary Policy Outcomes (E61) |
| Fiscal Theory of the Price Level (FTPL) (E31) | Erroneous Conclusions about Fiscal Policy and Price Stability (E31) |