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Monetary Creation and the Financing of the markets efficiency - - PowerPoint PPT Presentation

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Monetary Creation and the Financing of the Energy Shift Gal Giraud I. What about the Monetary Creation and the Financing of the markets efficiency hypothesis ? Energy Shift I.1. Incomplete markets I. 2. Do prices convey information ?

slide-1
SLIDE 1

Monetary Creation and the Financing

  • f the Energy Shift

Gaël Giraud

  • I. What about the

markets efficiency hypothesis ? I.1. Incomplete markets

  • I. 2. Do prices

convey information ?

  • II. The mystery of

money II.1. What happened to the monetary multiplier ? II.2. Creation ex nihilo ? II.3. What about inflation ? II.4. And the discount rate ?

Monetary Creation and the Financing of the Energy Shift

Gaël Giraud1

1CNRS, Paris School of Economics

Centre d’Economie de la Sorbonne, UMR CNRS 8174 Labex REFI Houches

  • Feb. 2014.
slide-2
SLIDE 2

Monetary Creation and the Financing

  • f the Energy Shift

Gaël Giraud

  • I. What about the

markets efficiency hypothesis ? I.1. Incomplete markets

  • I. 2. Do prices

convey information ?

  • II. The mystery of

money II.1. What happened to the monetary multiplier ? II.2. Creation ex nihilo ? II.3. What about inflation ? II.4. And the discount rate ?

  • I. What about the market Inefficiency hypothesis ?

I.1. Incomplete markets

  • Markets are said to be efficient whenever

they allocate risk and capital in a first-best Pareto-optimal way.

slide-3
SLIDE 3

Monetary Creation and the Financing

  • f the Energy Shift

Gaël Giraud

  • I. What about the

markets efficiency hypothesis ? I.1. Incomplete markets

  • I. 2. Do prices

convey information ?

  • II. The mystery of

money II.1. What happened to the monetary multiplier ? II.2. Creation ex nihilo ? II.3. What about inflation ? II.4. And the discount rate ?

  • I. What about the market Inefficiency hypothesis ?

I.1. Incomplete markets

  • Markets are said to be efficient whenever

they allocate risk and capital in a first-best Pareto-optimal way.

  • Markets are complete whenever

everybody can hedge herself against any risk (at some cost).

slide-4
SLIDE 4

Monetary Creation and the Financing

  • f the Energy Shift

Gaël Giraud

  • I. What about the

markets efficiency hypothesis ? I.1. Incomplete markets

  • I. 2. Do prices

convey information ?

  • II. The mystery of

money II.1. What happened to the monetary multiplier ? II.2. Creation ex nihilo ? II.3. What about inflation ? II.4. And the discount rate ?

  • I. What about the market Inefficiency hypothesis ?

I.1. Incomplete markets

  • Markets are said to be efficient whenever

they allocate risk and capital in a first-best Pareto-optimal way.

  • Markets are complete whenever

everybody can hedge herself against any risk (at some cost).

  • A “proof” of the invisible hand:

Complete Markets populated by perfectly rational people are first-best efficient. Arrow & Debreu, 1950s.

slide-5
SLIDE 5

Monetary Creation and the Financing

  • f the Energy Shift

Gaël Giraud

  • I. What about the

markets efficiency hypothesis ? I.1. Incomplete markets

  • I. 2. Do prices

convey information ?

  • II. The mystery of

money II.1. What happened to the monetary multiplier ? II.2. Creation ex nihilo ? II.3. What about inflation ? II.4. And the discount rate ?

  • I. What about the market Inefficiency hypothesis ?

I.1. Incomplete markets

  • Markets are said to be efficient whenever

they allocate risk and capital in a first-best Pareto-optimal way.

  • Markets are complete whenever

everybody can hedge herself against any risk (at some cost).

  • A “proof” of the invisible hand:

Complete Markets populated by perfectly rational people are first-best efficient. Arrow & Debreu, 1950s.

  • Do you think that markets are complete ?
slide-6
SLIDE 6

Monetary Creation and the Financing

  • f the Energy Shift

Gaël Giraud

  • I. What about the

markets efficiency hypothesis ? I.1. Incomplete markets

  • I. 2. Do prices

convey information ?

  • II. The mystery of

money II.1. What happened to the monetary multiplier ? II.2. Creation ex nihilo ? II.3. What about inflation ? II.4. And the discount rate ?

  • I. What about the market Inefficiency hypothesis ?

I.1. Incomplete markets

  • Markets are said to be efficient whenever

they allocate risk and capital in a first-best Pareto-optimal way.

  • Markets are complete whenever

everybody can hedge herself against any risk (at some cost).

  • A “proof” of the invisible hand:

Complete Markets populated by perfectly rational people are first-best efficient. Arrow & Debreu, 1950s.

  • Do you think that markets are complete ?
  • Do you think that markets will ever be complete ?
slide-7
SLIDE 7

Monetary Creation and the Financing

  • f the Energy Shift

Gaël Giraud

  • I. What about the

markets efficiency hypothesis ? I.1. Incomplete markets

  • I. 2. Do prices

convey information ?

  • II. The mystery of

money II.1. What happened to the monetary multiplier ? II.2. Creation ex nihilo ? II.3. What about inflation ? II.4. And the discount rate ?

  • When markets are incomplete, first-best efficiency is no more

the relevant concept.

slide-8
SLIDE 8

Monetary Creation and the Financing

  • f the Energy Shift

Gaël Giraud

  • I. What about the

markets efficiency hypothesis ? I.1. Incomplete markets

  • I. 2. Do prices

convey information ?

  • II. The mystery of

money II.1. What happened to the monetary multiplier ? II.2. Creation ex nihilo ? II.3. What about inflation ? II.4. And the discount rate ?

  • When markets are incomplete, first-best efficiency is no more

the relevant concept.

  • Second-best efficiency is the right notion.
slide-9
SLIDE 9

Monetary Creation and the Financing

  • f the Energy Shift

Gaël Giraud

  • I. What about the

markets efficiency hypothesis ? I.1. Incomplete markets

  • I. 2. Do prices

convey information ?

  • II. The mystery of

money II.1. What happened to the monetary multiplier ? II.2. Creation ex nihilo ? II.3. What about inflation ? II.4. And the discount rate ?

  • When markets are incomplete, first-best efficiency is no more

the relevant concept.

  • Second-best efficiency is the right notion.
  • I.1. Incomplete markets are generically not even second-best

efficient. Geanakoplos & Polemarchakis (1986), et alii. Too bad... The invisible hand is invisible ’cause it does not exist!

slide-10
SLIDE 10

Monetary Creation and the Financing

  • f the Energy Shift

Gaël Giraud

  • I. What about the

markets efficiency hypothesis ? I.1. Incomplete markets

  • I. 2. Do prices

convey information ?

  • II. The mystery of

money II.1. What happened to the monetary multiplier ? II.2. Creation ex nihilo ? II.3. What about inflation ? II.4. And the discount rate ?

  • Sunspots (Roger Guesnerie, Collège de France)
slide-11
SLIDE 11

Monetary Creation and the Financing

  • f the Energy Shift

Gaël Giraud

  • I. What about the

markets efficiency hypothesis ? I.1. Incomplete markets

  • I. 2. Do prices

convey information ?

  • II. The mystery of

money II.1. What happened to the monetary multiplier ? II.2. Creation ex nihilo ? II.3. What about inflation ? II.4. And the discount rate ?

  • Sunspots (Roger Guesnerie, Collège de France)
  • Bush in Japan (2002).

The tweet of April 23 2013 (Associated Press) : - 115 G in 3’ !

slide-12
SLIDE 12

Monetary Creation and the Financing

  • f the Energy Shift

Gaël Giraud

  • I. What about the

markets efficiency hypothesis ? I.1. Incomplete markets

  • I. 2. Do prices

convey information ?

  • II. The mystery of

money II.1. What happened to the monetary multiplier ? II.2. Creation ex nihilo ? II.3. What about inflation ? II.4. And the discount rate ?

  • Sunspots (Roger Guesnerie, Collège de France)
  • Bush in Japan (2002).

The tweet of April 23 2013 (Associated Press) : - 115 G in 3’ !

  • Sunspots never happen in complete markets.
slide-13
SLIDE 13

Monetary Creation and the Financing

  • f the Energy Shift

Gaël Giraud

  • I. What about the

markets efficiency hypothesis ? I.1. Incomplete markets

  • I. 2. Do prices

convey information ?

  • II. The mystery of

money II.1. What happened to the monetary multiplier ? II.2. Creation ex nihilo ? II.3. What about inflation ? II.4. And the discount rate ?

  • Sunspots (Roger Guesnerie, Collège de France)
  • Bush in Japan (2002).

The tweet of April 23 2013 (Associated Press) : - 115 G in 3’ !

  • Sunspots never happen in complete markets.
  • I.1. Incomplete markets can never be immune against sunspots.

(Azariadis (1974), Guesnerie, Chiappori....)

slide-14
SLIDE 14

Monetary Creation and the Financing

  • f the Energy Shift

Gaël Giraud

  • I. What about the

markets efficiency hypothesis ? I.1. Incomplete markets

  • I. 2. Do prices

convey information ?

  • II. The mystery of

money II.1. What happened to the monetary multiplier ? II.2. Creation ex nihilo ? II.3. What about inflation ? II.4. And the discount rate ?

  • Financial innovation reduces incompleteness.

Does it reduce market inefficiency ?

slide-15
SLIDE 15

Monetary Creation and the Financing

  • f the Energy Shift

Gaël Giraud

  • I. What about the

markets efficiency hypothesis ? I.1. Incomplete markets

  • I. 2. Do prices

convey information ?

  • II. The mystery of

money II.1. What happened to the monetary multiplier ? II.2. Creation ex nihilo ? II.3. What about inflation ? II.4. And the discount rate ?

  • Financial innovation reduces incompleteness.

Does it reduce market inefficiency ?

  • It depends !

Elul (1995).

slide-16
SLIDE 16

Monetary Creation and the Financing

  • f the Energy Shift

Gaël Giraud

  • I. What about the

markets efficiency hypothesis ? I.1. Incomplete markets

  • I. 2. Do prices

convey information ?

  • II. The mystery of

money II.1. What happened to the monetary multiplier ? II.2. Creation ex nihilo ? II.3. What about inflation ? II.4. And the discount rate ?

  • Financial innovation reduces incompleteness.

Does it reduce market inefficiency ?

  • It depends !

Elul (1995).

  • Whether a transaction finds a customer (or not) does not mean

anything about its usefulness. E.g., Karine Berger and the French banking (non-)reform.

slide-17
SLIDE 17

Monetary Creation and the Financing

  • f the Energy Shift

Gaël Giraud

  • I. What about the

markets efficiency hypothesis ? I.1. Incomplete markets

  • I. 2. Do prices

convey information ?

  • II. The mystery of

money II.1. What happened to the monetary multiplier ? II.2. Creation ex nihilo ? II.3. What about inflation ? II.4. And the discount rate ?

  • Financial innovation reduces incompleteness.

Does it reduce market inefficiency ?

  • It depends !

Elul (1995).

  • Whether a transaction finds a customer (or not) does not mean

anything about its usefulness. E.g., Karine Berger and the French banking (non-)reform.

  • Who decides whether a new financial product is useful ?
slide-18
SLIDE 18

Monetary Creation and the Financing

  • f the Energy Shift

Gaël Giraud

  • I. What about the

markets efficiency hypothesis ? I.1. Incomplete markets

  • I. 2. Do prices

convey information ?

  • II. The mystery of

money II.1. What happened to the monetary multiplier ? II.2. Creation ex nihilo ? II.3. What about inflation ? II.4. And the discount rate ?

What about the markets efficiency hypothesis?

I.2. Do prices convey information ?

  • The curse of volatility.
slide-19
SLIDE 19

Monetary Creation and the Financing

  • f the Energy Shift

Gaël Giraud

  • I. What about the

markets efficiency hypothesis ? I.1. Incomplete markets

  • I. 2. Do prices

convey information ?

  • II. The mystery of

money II.1. What happened to the monetary multiplier ? II.2. Creation ex nihilo ? II.3. What about inflation ? II.4. And the discount rate ?

What about the markets efficiency hypothesis?

I.2. Do prices convey information ?

  • The curse of volatility.
slide-20
SLIDE 20

Monetary Creation and the Financing

  • f the Energy Shift

Gaël Giraud

  • I. What about the

markets efficiency hypothesis ? I.1. Incomplete markets

  • I. 2. Do prices

convey information ?

  • II. The mystery of

money II.1. What happened to the monetary multiplier ? II.2. Creation ex nihilo ? II.3. What about inflation ? II.4. And the discount rate ?

slide-21
SLIDE 21

Monetary Creation and the Financing

  • f the Energy Shift

Gaël Giraud

  • I. What about the

markets efficiency hypothesis ? I.1. Incomplete markets

  • I. 2. Do prices

convey information ?

  • II. The mystery of

money II.1. What happened to the monetary multiplier ? II.2. Creation ex nihilo ? II.3. What about inflation ? II.4. And the discount rate ?

slide-22
SLIDE 22

Monetary Creation and the Financing

  • f the Energy Shift

Gaël Giraud

  • I. What about the

markets efficiency hypothesis ? I.1. Incomplete markets

  • I. 2. Do prices

convey information ?

  • II. The mystery of

money II.1. What happened to the monetary multiplier ? II.2. Creation ex nihilo ? II.3. What about inflation ? II.4. And the discount rate ?

  • Suppose you invest in an asset whose ROE= 4.5%.

Volatility ≥ 3% ⇒ in every trajectory, you will go bankrupt ! Although your gains follow a > 0 martingale.

slide-23
SLIDE 23

Monetary Creation and the Financing

  • f the Energy Shift

Gaël Giraud

  • I. What about the

markets efficiency hypothesis ? I.1. Incomplete markets

  • I. 2. Do prices

convey information ?

  • II. The mystery of

money II.1. What happened to the monetary multiplier ? II.2. Creation ex nihilo ? II.3. What about inflation ? II.4. And the discount rate ?

  • Suppose you invest in an asset whose ROE= 4.5%.

Volatility ≥ 3% ⇒ in every trajectory, you will go bankrupt ! Although your gains follow a > 0 martingale.

  • Suppose your cash yields 10% return per annum.

Each year you toss a coin for half of your wealth. (+ 100%,

  • 100%).

Along each path, you will end up ruined.

slide-24
SLIDE 24

Monetary Creation and the Financing

  • f the Energy Shift

Gaël Giraud

  • I. What about the

markets efficiency hypothesis ? I.1. Incomplete markets

  • I. 2. Do prices

convey information ?

  • II. The mystery of

money II.1. What happened to the monetary multiplier ? II.2. Creation ex nihilo ? II.3. What about inflation ? II.4. And the discount rate ?

  • Suppose you invest in an asset whose ROE= 4.5%.

Volatility ≥ 3% ⇒ in every trajectory, you will go bankrupt ! Although your gains follow a > 0 martingale.

  • Suppose your cash yields 10% return per annum.

Each year you toss a coin for half of your wealth. (+ 100%,

  • 100%).

Along each path, you will end up ruined.

  • Nicolas Bouleau, “Finance et environnement”, forthcoming.

Steve Keen, Debunking Economics (2013).

slide-25
SLIDE 25

Monetary Creation and the Financing

  • f the Energy Shift

Gaël Giraud

  • I. What about the

markets efficiency hypothesis ? I.1. Incomplete markets

  • I. 2. Do prices

convey information ?

  • II. The mystery of

money II.1. What happened to the monetary multiplier ? II.2. Creation ex nihilo ? II.3. What about inflation ? II.4. And the discount rate ?

  • II. The mystery of money

II.1. What happened to the monetary multiplier ?

slide-26
SLIDE 26

Monetary Creation and the Financing

  • f the Energy Shift

Gaël Giraud

  • I. What about the

markets efficiency hypothesis ? I.1. Incomplete markets

  • I. 2. Do prices

convey information ?

  • II. The mystery of

money II.1. What happened to the monetary multiplier ? II.2. Creation ex nihilo ? II.3. What about inflation ? II.4. And the discount rate ?

slide-27
SLIDE 27

Monetary Creation and the Financing

  • f the Energy Shift

Gaël Giraud

  • I. What about the

markets efficiency hypothesis ? I.1. Incomplete markets

  • I. 2. Do prices

convey information ?

  • II. The mystery of

money II.1. What happened to the monetary multiplier ? II.2. Creation ex nihilo ? II.3. What about inflation ? II.4. And the discount rate ?

Conventional understanding of money creation.

  • The Central Bank creates (M0) by lending 100 to bank b.
slide-28
SLIDE 28

Monetary Creation and the Financing

  • f the Energy Shift

Gaël Giraud

  • I. What about the

markets efficiency hypothesis ? I.1. Incomplete markets

  • I. 2. Do prices

convey information ?

  • II. The mystery of

money II.1. What happened to the monetary multiplier ? II.2. Creation ex nihilo ? II.3. What about inflation ? II.4. And the discount rate ?

Conventional understanding of money creation.

  • The Central Bank creates (M0) by lending 100 to bank b.
  • Bank b keeps a fraction k ∈ (0, 1) as a mandatory reserve and

lends (1 − k) × 100. Euro zone: k = 1% (since 01/01/12). US: k = 4%. Sweden = 0%. China: k variable.

slide-29
SLIDE 29

Monetary Creation and the Financing

  • f the Energy Shift

Gaël Giraud

  • I. What about the

markets efficiency hypothesis ? I.1. Incomplete markets

  • I. 2. Do prices

convey information ?

  • II. The mystery of

money II.1. What happened to the monetary multiplier ? II.2. Creation ex nihilo ? II.3. What about inflation ? II.4. And the discount rate ?

Conventional understanding of money creation.

  • The Central Bank creates (M0) by lending 100 to bank b.
  • Bank b keeps a fraction k ∈ (0, 1) as a mandatory reserve and

lends (1 − k) × 100. Euro zone: k = 1% (since 01/01/12). US: k = 4%. Sweden = 0%. China: k variable.

  • Bank c keeps k(1 − k) × 100 and lends (1 − k)2 × 100.
slide-30
SLIDE 30

Monetary Creation and the Financing

  • f the Energy Shift

Gaël Giraud

  • I. What about the

markets efficiency hypothesis ? I.1. Incomplete markets

  • I. 2. Do prices

convey information ?

  • II. The mystery of

money II.1. What happened to the monetary multiplier ? II.2. Creation ex nihilo ? II.3. What about inflation ? II.4. And the discount rate ?

Conventional understanding of money creation.

  • The Central Bank creates (M0) by lending 100 to bank b.
  • Bank b keeps a fraction k ∈ (0, 1) as a mandatory reserve and

lends (1 − k) × 100. Euro zone: k = 1% (since 01/01/12). US: k = 4%. Sweden = 0%. China: k variable.

  • Bank c keeps k(1 − k) × 100 and lends (1 − k)2 × 100.
  • Eventually, the banking sector will create 1

k × 100.

Monetary multiplier = ρ := 1

k

Deposits make loans.

slide-31
SLIDE 31

Monetary Creation and the Financing

  • f the Energy Shift

Gaël Giraud

  • I. What about the

markets efficiency hypothesis ? I.1. Incomplete markets

  • I. 2. Do prices

convey information ?

  • II. The mystery of

money II.1. What happened to the monetary multiplier ? II.2. Creation ex nihilo ? II.3. What about inflation ? II.4. And the discount rate ?

  • Chicago plan : I. Fisher, the young M. Friedman, M. Allais,...,
  • M. Kumhof (2012): fix k = 100!

Does this make any sense with the conventional wisdom ?

slide-32
SLIDE 32

Monetary Creation and the Financing

  • f the Energy Shift

Gaël Giraud

  • I. What about the

markets efficiency hypothesis ? I.1. Incomplete markets

  • I. 2. Do prices

convey information ?

  • II. The mystery of

money II.1. What happened to the monetary multiplier ? II.2. Creation ex nihilo ? II.3. What about inflation ? II.4. And the discount rate ?

  • Chicago plan : I. Fisher, the young M. Friedman, M. Allais,...,
  • M. Kumhof (2012): fix k = 100!

Does this make any sense with the conventional wisdom ?

  • Question :

Can we empirically measure ρ ?

slide-33
SLIDE 33

Monetary Creation and the Financing

  • f the Energy Shift

Gaël Giraud

  • I. What about the

markets efficiency hypothesis ? I.1. Incomplete markets

  • I. 2. Do prices

convey information ?

  • II. The mystery of

money II.1. What happened to the monetary multiplier ? II.2. Creation ex nihilo ? II.3. What about inflation ? II.4. And the discount rate ?

slide-34
SLIDE 34

Monetary Creation and the Financing

  • f the Energy Shift

Gaël Giraud

  • I. What about the

markets efficiency hypothesis ? I.1. Incomplete markets

  • I. 2. Do prices

convey information ?

  • II. The mystery of

money II.1. What happened to the monetary multiplier ? II.2. Creation ex nihilo ? II.3. What about inflation ? II.4. And the discount rate ?

slide-35
SLIDE 35

Monetary Creation and the Financing

  • f the Energy Shift

Gaël Giraud

  • I. What about the

markets efficiency hypothesis ? I.1. Incomplete markets

  • I. 2. Do prices

convey information ?

  • II. The mystery of

money II.1. What happened to the monetary multiplier ? II.2. Creation ex nihilo ? II.3. What about inflation ? II.4. And the discount rate ?

Kydland and Prescott, “Business Cycles: Real Facts and a Monetary Myth”, Quarterly Review, Fed. Reserve Bank, Minneapolis, 1990.

slide-36
SLIDE 36

Monetary Creation and the Financing

  • f the Energy Shift

Gaël Giraud

  • I. What about the

markets efficiency hypothesis ? I.1. Incomplete markets

  • I. 2. Do prices

convey information ?

  • II. The mystery of

money II.1. What happened to the monetary multiplier ? II.2. Creation ex nihilo ? II.3. What about inflation ? II.4. And the discount rate ?

slide-37
SLIDE 37

Monetary Creation and the Financing

  • f the Energy Shift

Gaël Giraud

  • I. What about the

markets efficiency hypothesis ? I.1. Incomplete markets

  • I. 2. Do prices

convey information ?

  • II. The mystery of

money II.1. What happened to the monetary multiplier ? II.2. Creation ex nihilo ? II.3. What about inflation ? II.4. And the discount rate ?

slide-38
SLIDE 38

Monetary Creation and the Financing

  • f the Energy Shift

Gaël Giraud

  • I. What about the

markets efficiency hypothesis ? I.1. Incomplete markets

  • I. 2. Do prices

convey information ?

  • II. The mystery of

money II.1. What happened to the monetary multiplier ? II.2. Creation ex nihilo ? II.3. What about inflation ? II.4. And the discount rate ?

  • Kydland and Prescott (1990).
slide-39
SLIDE 39

Monetary Creation and the Financing

  • f the Energy Shift

Gaël Giraud

  • I. What about the

markets efficiency hypothesis ? I.1. Incomplete markets

  • I. 2. Do prices

convey information ?

  • II. The mystery of

money II.1. What happened to the monetary multiplier ? II.2. Creation ex nihilo ? II.3. What about inflation ? II.4. And the discount rate ?

  • II. The mystery of money

II.2. Creation ex nihilo ?

  • In real life:

Bank A creates 100 as a loan to, say, household h, in bank B.

slide-40
SLIDE 40

Monetary Creation and the Financing

  • f the Energy Shift

Gaël Giraud

  • I. What about the

markets efficiency hypothesis ? I.1. Incomplete markets

  • I. 2. Do prices

convey information ?

  • II. The mystery of

money II.1. What happened to the monetary multiplier ? II.2. Creation ex nihilo ? II.3. What about inflation ? II.4. And the discount rate ?

  • II. The mystery of money

II.2. Creation ex nihilo ?

  • In real life:

Bank A creates 100 as a loan to, say, household h, in bank B.

  • Bank B creates 150 as a loan to,say, corporate C in bank A.
slide-41
SLIDE 41

Monetary Creation and the Financing

  • f the Energy Shift

Gaël Giraud

  • I. What about the

markets efficiency hypothesis ? I.1. Incomplete markets

  • I. 2. Do prices

convey information ?

  • II. The mystery of

money II.1. What happened to the monetary multiplier ? II.2. Creation ex nihilo ? II.3. What about inflation ? II.4. And the discount rate ?

  • II. The mystery of money

II.2. Creation ex nihilo ?

  • In real life:

Bank A creates 100 as a loan to, say, household h, in bank B.

  • Bank B creates 150 as a loan to,say, corporate C in bank A.
  • Bank B needs to transfer 50 to A and to keep k × 150 in its

balance sheet.

slide-42
SLIDE 42

Monetary Creation and the Financing

  • f the Energy Shift

Gaël Giraud

  • I. What about the

markets efficiency hypothesis ? I.1. Incomplete markets

  • I. 2. Do prices

convey information ?

  • II. The mystery of

money II.1. What happened to the monetary multiplier ? II.2. Creation ex nihilo ? II.3. What about inflation ? II.4. And the discount rate ?

  • II. The mystery of money

II.2. Creation ex nihilo ?

  • In real life:

Bank A creates 100 as a loan to, say, household h, in bank B.

  • Bank B creates 150 as a loan to,say, corporate C in bank A.
  • Bank B needs to transfer 50 to A and to keep k × 150 in its

balance sheet.

  • Hence, B needs to find 50 + k × 150 − 100 = 50 × (3k − 1).

3 options:

  • the interbank market
  • the financial market
  • the Central Bank
slide-43
SLIDE 43

Monetary Creation and the Financing

  • f the Energy Shift

Gaël Giraud

  • I. What about the

markets efficiency hypothesis ? I.1. Incomplete markets

  • I. 2. Do prices

convey information ?

  • II. The mystery of

money II.1. What happened to the monetary multiplier ? II.2. Creation ex nihilo ? II.3. What about inflation ? II.4. And the discount rate ?

  • Can private banks create money “out of thin air” by extending

credit ?

slide-44
SLIDE 44

Monetary Creation and the Financing

  • f the Energy Shift

Gaël Giraud

  • I. What about the

markets efficiency hypothesis ? I.1. Incomplete markets

  • I. 2. Do prices

convey information ?

  • II. The mystery of

money II.1. What happened to the monetary multiplier ? II.2. Creation ex nihilo ? II.3. What about inflation ? II.4. And the discount rate ?

  • The supply of money and credit is determined by the demand

for money and credit. There is no independent supply curve as in standard micro theory All the CB can do is affect the price of credit (the interest rate + collateral requirements). (Hence, the failure of quantitative monetary policies in the 90s’.)

slide-45
SLIDE 45

Monetary Creation and the Financing

  • f the Energy Shift

Gaël Giraud

  • I. What about the

markets efficiency hypothesis ? I.1. Incomplete markets

  • I. 2. Do prices

convey information ?

  • II. The mystery of

money II.1. What happened to the monetary multiplier ? II.2. Creation ex nihilo ? II.3. What about inflation ? II.4. And the discount rate ?

  • The supply of money and credit is determined by the demand

for money and credit. There is no independent supply curve as in standard micro theory All the CB can do is affect the price of credit (the interest rate + collateral requirements). (Hence, the failure of quantitative monetary policies in the 90s’.)

  • Neo-classical economic “theory” of exogenous money supply

springs from the facts that:

  • Once, money was gold and silver coin.
  • Today, bank notes are state-issued legal tender
  • Conventional “theory” treats the latter as just a variant of the

former where deposits play the role of gold. (Cf. Banking school versus currency school, UK, 1820...)

slide-46
SLIDE 46

Monetary Creation and the Financing

  • f the Energy Shift

Gaël Giraud

  • I. What about the

markets efficiency hypothesis ? I.1. Incomplete markets

  • I. 2. Do prices

convey information ?

  • II. The mystery of

money II.1. What happened to the monetary multiplier ? II.2. Creation ex nihilo ? II.3. What about inflation ? II.4. And the discount rate ?

  • The supply of money and credit is determined by the demand

for money and credit. There is no independent supply curve as in standard micro theory All the CB can do is affect the price of credit (the interest rate + collateral requirements). (Hence, the failure of quantitative monetary policies in the 90s’.)

  • Neo-classical economic “theory” of exogenous money supply

springs from the facts that:

  • Once, money was gold and silver coin.
  • Today, bank notes are state-issued legal tender
  • Conventional “theory” treats the latter as just a variant of the

former where deposits play the role of gold. (Cf. Banking school versus currency school, UK, 1820...)

  • Why don’t bankers reveal their “secret” ?
slide-47
SLIDE 47
slide-48
SLIDE 48

Monetary Creation and the Financing

  • f the Energy Shift

Gaël Giraud

  • I. What about the

markets efficiency hypothesis ? I.1. Incomplete markets

  • I. 2. Do prices

convey information ?

  • II. The mystery of

money II.1. What happened to the monetary multiplier ? II.2. Creation ex nihilo ? II.3. What about inflation ? II.4. And the discount rate ?

  • II. The mystery of money

II.3. What about inflation ?

  • What happens to Fisher’s Quantity Theory of Money ?

Mv = pT

slide-49
SLIDE 49

Monetary Creation and the Financing

  • f the Energy Shift

Gaël Giraud

  • I. What about the

markets efficiency hypothesis ? I.1. Incomplete markets

  • I. 2. Do prices

convey information ?

  • II. The mystery of

money II.1. What happened to the monetary multiplier ? II.2. Creation ex nihilo ? II.3. What about inflation ? II.4. And the discount rate ?

  • II. The mystery of money

II.3. What about inflation ?

  • What happens to Fisher’s Quantity Theory of Money ?

Mv = pT

  • In conventional monetarist wisdom

v and T are constant in the short-run. So M ⇒ p and money should be neutral.

slide-50
SLIDE 50

Monetary Creation and the Financing

  • f the Energy Shift

Gaël Giraud

  • I. What about the

markets efficiency hypothesis ? I.1. Incomplete markets

  • I. 2. Do prices

convey information ?

  • II. The mystery of

money II.1. What happened to the monetary multiplier ? II.2. Creation ex nihilo ? II.3. What about inflation ? II.4. And the discount rate ?

  • II. The mystery of money

II.3. What about inflation ?

  • What happens to Fisher’s Quantity Theory of Money ?

Mv = pT

  • In conventional monetarist wisdom

v and T are constant in the short-run. So M ⇒ p and money should be neutral.

  • In real life,

p and T are endogenous. Money is no more neutral. Monetary creation need not be inflationary.

slide-51
SLIDE 51

Monetary Creation and the Financing

  • f the Energy Shift

Gaël Giraud

  • I. What about the

markets efficiency hypothesis ? I.1. Incomplete markets

  • I. 2. Do prices

convey information ?

  • II. The mystery of

money II.1. What happened to the monetary multiplier ? II.2. Creation ex nihilo ? II.3. What about inflation ? II.4. And the discount rate ?

  • II. The mystery of money

II.3. What about inflation ?

  • What happens to Fisher’s Quantity Theory of Money ?

Mv = pT

  • In conventional monetarist wisdom

v and T are constant in the short-run. So M ⇒ p and money should be neutral.

  • In real life,

p and T are endogenous. Money is no more neutral. Monetary creation need not be inflationary.

  • Empirically, money is non-neutral in the short-run and v is

highly volatile.

slide-52
SLIDE 52

Monetary Creation and the Financing

  • f the Energy Shift

Gaël Giraud

  • I. What about the

markets efficiency hypothesis ? I.1. Incomplete markets

  • I. 2. Do prices

convey information ?

  • II. The mystery of

money II.1. What happened to the monetary multiplier ? II.2. Creation ex nihilo ? II.3. What about inflation ? II.4. And the discount rate ?

slide-53
SLIDE 53

Monetary Creation and the Financing

  • f the Energy Shift

Gaël Giraud

  • I. What about the

markets efficiency hypothesis ? I.1. Incomplete markets

  • I. 2. Do prices

convey information ?

  • II. The mystery of

money II.1. What happened to the monetary multiplier ? II.2. Creation ex nihilo ? II.3. What about inflation ? II.4. And the discount rate ?

Some myths need to be debunked:

  • German hyperinflation in 1923 was not induced by an explosion
  • f public expenditures.
slide-54
SLIDE 54

Monetary Creation and the Financing

  • f the Energy Shift

Gaël Giraud

  • I. What about the

markets efficiency hypothesis ? I.1. Incomplete markets

  • I. 2. Do prices

convey information ?

  • II. The mystery of

money II.1. What happened to the monetary multiplier ? II.2. Creation ex nihilo ? II.3. What about inflation ? II.4. And the discount rate ?

Some myths need to be debunked:

  • German hyperinflation in 1923 was not induced by an explosion
  • f public expenditures.
  • Hjalmar Schacht used massive public money creation between

1933-1937 to finance a huge New Deal in Germany, with no inflation.

slide-55
SLIDE 55

Monetary Creation and the Financing

  • f the Energy Shift

Gaël Giraud

  • I. What about the

markets efficiency hypothesis ? I.1. Incomplete markets

  • I. 2. Do prices

convey information ?

  • II. The mystery of

money II.1. What happened to the monetary multiplier ? II.2. Creation ex nihilo ? II.3. What about inflation ? II.4. And the discount rate ?

Some myths need to be debunked:

  • German hyperinflation in 1923 was not induced by an explosion
  • f public expenditures.
  • Hjalmar Schacht used massive public money creation between

1933-1937 to finance a huge New Deal in Germany, with no inflation.

  • Hitler took power in 1933 after 3 years of deflationary policy put

into practice by Heinrich Brüning.

slide-56
SLIDE 56

Monetary Creation and the Financing

  • f the Energy Shift

Gaël Giraud

  • I. What about the

markets efficiency hypothesis ? I.1. Incomplete markets

  • I. 2. Do prices

convey information ?

  • II. The mystery of

money II.1. What happened to the monetary multiplier ? II.2. Creation ex nihilo ? II.3. What about inflation ? II.4. And the discount rate ?

Faustus II, Johann Wolfgang von Gœthe:

Kanzler: “Zu wißen sei es jedem, der’s begehrt: Der Zettel hier ist tausend Kronen wert. Ihm liegt gesichert, als gewißes Pfand, Unzahl vergrabnen Guts im Kaiserland. Nun ist gesorgt, damit der reiche Schatz, Sogleich gehoben, diene zum Ersatz. Kaiser: Und meinen Leuten gilt’s für gutes Gold? Dem Heer, dem Hofe gnügt’s zu vollem Sold? So sehr mich’s wundert, muß ich’s gelten laßen. Mephistopheles: Ein solch Papier, an Gold und Perlen Statt, Ist so bequem, man weiß doch, was man hat; Man braucht nicht erst zu markten, noch zu tauschen, Kann sich nach Lust in Lieb’ und Wein berauschen.

slide-57
SLIDE 57

Monetary Creation and the Financing

  • f the Energy Shift

Gaël Giraud

  • I. What about the

markets efficiency hypothesis ? I.1. Incomplete markets

  • I. 2. Do prices

convey information ?

  • II. The mystery of

money II.1. What happened to the monetary multiplier ? II.2. Creation ex nihilo ? II.3. What about inflation ? II.4. And the discount rate ?

  • II. The mystery of money

II.4. And the discount rate ?

  • Choose your normative social welfare function:
  • Utilitarian ?
  • Rawlsian ?
  • Hybrid ?
slide-58
SLIDE 58

Monetary Creation and the Financing

  • f the Energy Shift

Gaël Giraud

  • I. What about the

markets efficiency hypothesis ? I.1. Incomplete markets

  • I. 2. Do prices

convey information ?

  • II. The mystery of

money II.1. What happened to the monetary multiplier ? II.2. Creation ex nihilo ? II.3. What about inflation ? II.4. And the discount rate ?

  • II. The mystery of money

II.4. And the discount rate ?

  • Choose your normative social welfare function:
  • Utilitarian ?
  • Rawlsian ?
  • Hybrid ?
  • If you are Utilitarian, the normative discount rate should be

r = g with g= real GDP growth. (Mertens & Rubichink (2010)).

slide-59
SLIDE 59

Monetary Creation and the Financing

  • f the Energy Shift

Gaël Giraud

  • I. What about the

markets efficiency hypothesis ? I.1. Incomplete markets

  • I. 2. Do prices

convey information ?

  • II. The mystery of

money II.1. What happened to the monetary multiplier ? II.2. Creation ex nihilo ? II.3. What about inflation ? II.4. And the discount rate ?

  • II. The mystery of money

II.4. And the discount rate ?

  • Choose your normative social welfare function:
  • Utilitarian ?
  • Rawlsian ?
  • Hybrid ?
  • If you are Utilitarian, the normative discount rate should be

r = g with g= real GDP growth. (Mertens & Rubichink (2010)).

  • If you are Rawlsian, it should be

r < 0.