A Small Corner of Intertemporal Public Finance - New Developments in Monetary Economics: Two Ghosts, Two Eccentricities, a Fallacy, a Mirage and a Mythos

59 Pages Posted: 1 Jul 2004

See all articles by Willem H. Buiter

Willem H. Buiter

Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute); Columbia University; Independent Economic Adviser; Independent

Date Written: June 2004

Abstract

Monetary theory and policy are part of intertemporal public finance. This Paper 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 inconsistent 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: Central bank independence, fiscal theory of the price level, liquidity trap, monetary theory, unconventional monetary policies

JEL Classification: E00, E40, E50, E60

Suggested Citation

Buiter, Willem H., A Small Corner of Intertemporal Public Finance - New Developments in Monetary Economics: Two Ghosts, Two Eccentricities, a Fallacy, a Mirage and a Mythos (June 2004). Available at SSRN: https://ssrn.com/abstract=560071

Willem H. Buiter (Contact Author)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Columbia University ( email )

420 West 118th Street
New York, NY
United States

Independent Economic Adviser ( email )

Independent ( email )

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