Money Printing Research Articles

Russia's External Debt, Solvency and Options for Alternative Capital Inflow

At the beginning of this year, Russia owed about $158 bn to foreign governments, Western banks, and multinational lending agencies such as the World Bank and the International Monetary Fund. Russia inherited a part of this debt burden from the former Soviet Union, while the rest of it has been accumulated during the transition years. The analysis in the report suggests that the problems of Russia's ability to service its external debt and the solutions to these problems are to be found in structural issues (especially fiscal issues) rather than in features of the current account. The short-term alternatives for financing Russia's external debt are limited. Significant budget cuts in government spending are unlikely in the near future, money printing would only add to inflation, and receipt of new credits is neither likely nor recommended. The hope of investors who are interested in Russia is that the government will take the route of structural reform. The money earned from Russia's trade surplus remains a significant source for debt finance. However, the extent to which Russia can rely on this source depends greatly on world market developments, particularly changes in natural resource prices. Also the Russian authorities will only be able to reap the full benefit of the trade surplus if they can drastically reduce capital flight, which again leads us back to the necessity of structural reforms. In the long-run, without significant improvements in state finances and the investment climate, Russia will continue to have difficulty in making external debt payments and attracting new financing from international capital markets. A debt write-off deal with the Paris Club similar to that, which Russia reached with the London-Club, would ease the debt burden in the short-run. However, this would not solve the fundamental problems. Instead, the long-term solutions lies in new investments, which are the engine of sustainable economic growth. Structural reforms, starting with tax reform, will encourage investments and also encourage people to pay taxes. An increase in real income stimulated by investments also leads to an increase in tax revenue, provided that fiscal discipline is maintained. It remains to be seen whether Russian decision makers have enough political will and fiscal discipline to move from words to actions and implement long-promised structural reforms.

The Deflation Bias and Committing to Being Irresponsible

I model deflation, at zero nominal interest rate, in a microfounded general equilibrium model. I show that one can analyze deflation as a credibility problem if three conditions are satisfied. First: The government's only policy instrument is increasing the money supply by open market operations in short-term bonds. Second: The economy is subject to large negative demand shocks. Third: The government cannot commit to future policy. I call the credibility problem that arises under these conditions the deflation bias. I propose several policies to solve it. They all involve printing money or issuing nominal debt. In addition they require cutting taxes, buying real assets such as stocks, or purchasing foreign exchange. The government credibly commits to being irresponsible by pursuing these policies. It commits to higher money supply in the future so that the private sector expects inflation instead of deflation. This is optimal since it curbs deflation and increases output by lowering the real rate of return.

PERANAN THE LENDER OF LAST RESORT (LOLR) TERHADAP PEREKONOMIAN: Suatu Kajian Empiris Terhadap Bantuan Likuiditas Bank Indonesia (BLBI)

The role of central bank as the lender of last resort (LOLR) has been well known since 19th century. LOLR is a lending facility to non liquid bank to avoid systemic financial crisis on banking. In Indonesia Central Bank of Indonesia provides this facility, namely Bantuan Likuiditas Bank Indonesia (BLBI). Using macro-econometric model to run two simulations; with and without BLBI, we find that BLBI can avoid national output fall while the existence of BLBI, the cost of liquidity crisis will be less. Our result also shows that BLBI tend to overshoot exchange rate by money printing to support non liquid bank which in turn increase the probability of systemic crisis.

Ražebné ve spojitém čase

The government is able to acquire real goods through printing money. Because government does not create wealth through printing money, this revenue, the seigniorage, is at the expense of the public, as the purchasing power of monetary units decreases because of the issue of new money. The authors use the model of auctions to which the public comes with their money and the government with the newly issued money. The value of goods acquired by the government in such an auction equals the newly printed money divided by the sum of the newly printed money and the money spent by the public. Upon this auction model, the authors develop the formula for seigniorage in continuous time. The seigniorage calculated in this way is lower than the seigniorage calculated upon the assumption of discrete changes in economic variables.

European's federation and currency: the contribution of Luigi Einaudi

Luigi Einaudi was a well-known economist in Italy and abroad, a very prolific journalist, a great public figure particularly after the end of the Second World War. As his thoughts and writings were permeated with a solid liberalism, he was keen on looking for constraint on the State's absolute sovereignty, propensity to interfere with consumer and producer choices, and ability to finance public expenditure through money printing; the first was the principal cause of war, the other two the origin of misallocation and the worst of taxes, inflation. To fight these evils he advocated federating the states of Europe, thus transferring to a supranational level part of the sovereign prerogatives, particularly in the defence, interstate-commerce and monetary fields. As to the strategy to achieve this result he started from a functionalist approach, moved to a technocratic one, and ended up embracing the thesis to have "political federation" right away. JEL Codes: B31, F02 Keywords: Luigi Einaudi

How to Fight Deflation in a Liquidity Trap: Committing to Being Irresponsible

I model deflation, at zero nominal interest rate, in a microfounded general equilibrium model. I show that deflation can be analyzed as a credibility problem if the government has only one policy instrument, money supply carried out by means of open market operations in short-term bonds, and cannot commit to future policies. I propose several policies to solve the credibility problem. They involve printing money or nominal debt and either (1) cutting taxes, (2) buying real assets such as stocks, or (3) purchasing foreign exchange. The government credibly to being irresponsible by using these policy instruments. It commits to higher money supply in the future so that the private sector expects inflation instead of deflation. This is optimal, since it curbs deflation and increases output by lowering the real rate of return.

How to Fight Deflation in a Liquidity Trap: Committing to Being Irresponsible

I model deflation, at zero nominal interest rate, in a microfounded general equilibrium model. I show that deflation can be analyzed as a credibility problem if the government has only one policy instrument, money supply carried out by means of open market operations in short-term bonds, and cannot commit to future policies. I propose several policies to solve the credibility problem. They involve printing money or nominal debt and either (1) cutting taxes, (2) buying real assets such as stocks, or (3) purchasing foreign exchange. The government credibly to being irresponsible by using these policy instruments. It commits to higher money supply in the future so that the private sector expects inflation instead of deflation. This is optimal, since it curbs deflation and increases output by lowering the real rate of return.

Reserve Requirements, Bank Runs, and Optimal Policies in Small Open Economies

Abstract: This paper rationalizes as the outcome of an optimal policy decision the pattern of reserve requirements and other macroeconomic variables in the aftermath of a bank run. The paper develops a general equilibrium model that departs from the standard small open economy (SOE) model in three dimensions: (i) capital mobility is not perfect, (ii) there exists a costly banking system, and (iii) there is an externality affecting individual banks' decisions. The results suggest that the path of reserve requirements would depend on the type of shock that the economy receives and the effect that this shock produces on the interest rate. Interestingly, the size of the risk premium will affect the reaction of the economy to the shock. It is also shown that the dynamic adjustment will be slightly different for permanent and temporary shocks, and it will also depend on the access that the economy has to foreign funds. JEL classification: E44, E58, F30, F41, G28 Key words: reserve requirements, optimal policy, financial crisis, emerging markets 1. Introduction Saving for a rainy day is well understood in all economic fields. If regulators want to apply this policy to the amount of liquidity that banks should hold, they will say accumulate liquidity in normal times and use it in bad times, which in principle seems intuitive and reasonable. But, the evidence does not support this conventional wisdom. In fact, it suggests that the policymaker flips a coin when bad times arrive. This paper shows that resorting to the liquidity accumulated during the good days will depend on the underlying shock and the state of the economy at the time of the shock. Also, it shows that the same shock will generate a cloudy day under some circumstances and will not under others. (1) Therefore, the policymaker's reaction could be understood as an optimal response to different situations, instead as of flipping coins. Liquidity provision is key in the management of systemic banking crises, especially in emerging economies, where the lack of systemic liquidity can exacerbate problems. On one hand, without enough support, a liquidity crisis could lead to a solvency crisis and/or a credit crunch in the economy. On the other hand, the overuse of rediscounts or repos to provide liquidity assistance could lead to excessive money printing, and could weaken the peg in a fixed exchange rate regime or generate inflationary pressures. There is evidence that shows that during the 90's several central banks provided systemic liquidity to finance the bank runs generated in the financial crises. (2) In general, the liquidity support includes all the funds provided to the system through rediscounts, repos, contingent contracts, and the reduction of reserve requirements. (3) This last instrument is the focus of the paper. The literature on the optimality of maintaining a stock of liquid reserves is broad (Baltensperger (1974), Santomero (1984), Cothren and Waud (1994), Stein (1995), Agenor et al. (2000)). Also, there are some works that analyze the use of reserve requirements from a macroeconomic standpoint: as a countercyclical tool (Edwards and Vegh (1997), Calvo et al. (1993)), as a mechanism to enforce capital requirements (Fernandez and Guidotti (1996)), or as an instrument that helps to collect the inflation tax (Englud and Svensson (1988)). There are some other papers that study optimal policies under financial crises (Lahiri and Vegh (2003); Rebelo and Vegh (2001), Ganapolsky (2003)). (4) But, in spite of the importance of reserve requirements as a liquidity provider, there is no work that studies its optimal use in a financial crisis. The purpose of this paper is to provide a framework to understand the behavior of reserve requirements as the outcome of an optimal policy decision. In particular, it rationalizes the pattern of reserve requirements and other macroeconomic variables in the aftermath of a bank run. …

Macroeconomic instability and inflationary financing in Ghana

Two co-integrated relations exist among macroeconomic variables. A class of vector error correction model has been estimated, identified and used to study policy implications. Although the budget deficit as a percentage of GDP was permanently reduced by improvements in financial intermediation, it was increased by changes in monetary policy, transactions, devaluation policy and inflation. Granger causality, impulse response functions, vector decompositions and sensitivity analysis showed budget deficits as a share of GDP to be inflationary, and were indirectly financed by base money through money printing; inflation was monetized, self-sustaining, and retarded economic growth.

Falling Tax Compliance and the Rise of the Virtual Budget in Russia

The decline in cash revenue in Russia has been the key macroeconomic policy failure of the transition. During 1994-98, a sharp deterioration in cash compliance was offset by a rise in non-cash revenue, as the government increasingly financed its spending through mutual arrears write-offs. This paper argues that the fall in cash compliance emerged when money printing was replaced with a method of budget financing that did not, in the short run, compromise the government's goals of low inflation, a stable exchange rate, and low interest rates, but which ultimately has led the government into a low cash revenue trap. Copyright 2002, International Monetary Fund

The Economic Future of Nuclear Power in Competitive Markets

The question to be addressed is whether there is any economic future for nuclear power, especially in more competitive electricity markets and assuming the need for private capital. The answer to this question is yes and maybe. For operating plants, the economic gains can be high - some are money printing machines. Hence, there exists a strong interest in extending the life times of these reactors. For new plants, at least in more competitive electricity markets, the answer under present conditions is rather no unless major changes are made in the capital costs of these plants. This paper explores what the future might be if such changes can be made, what the most important changes are that need to occur, and how such changes might be brought about by a combination of changes in engineering and regulation. For one, a focus on cost-effective safety must be an essential part of the economics of future nuclear power plants. For another, full inclusion of waste disposal and decommissioning costs must be an integral part of nuclear cost analyses, as they generally are today, in order to minimize uncertainties concerning potentially open-ended liabilities. The question then is whether evolutionary improvements of current generation nuclear power plants can do the job or whether new nuclear technologies need to be developed and commercialized.

Seigniorage and fiscal seigniorage in the czech republic

In this paper the concept of total gross seigniorage is used to analyze sources and uses of central bank seigniorage revenues in the Czech Republic during the period 1993 - 1997. A comprehensive framework for measuring total gross seigniorage and its main components is presented and estimates of seigniorage revenues (sources and uses) are computed and analyzed. The study shows that the conventional concept of monetary seigniorage should not be used as an estimate of government gains from money creation. Moreover, the analysis of the scope of budget deficit financing through money printing in the considered period in the Czech Republic shows that revenue from the creation of money has never been extensively used as a tool for financing government expenditures.

On the origin of movable metal-type technique

China is the birthplace of woodblock, copperplate and non-metal-type printing, movable metal-type technique, as the product of combination of copperplate and non-metal-type technique, also originated in China. However, the problem on the origin of metal-type has not well been solved for a long time. This paper proved that metal-type was cast and used for paper money printing in China since the early 12th century, copper-type and tin-type technique was further developed during the 13th to 14th centuries, on the basis of investigation of excavated findings, textual research and scientific judgment. Finally a comparative research of the early metal-type technique in China, Korea and Europe was briefly discussed. A lot of unearthed material evidence were provided here.

Impact of inflation on Chinese economy: Growth, investment, and regional development

After 15 years of economic reforms, the most notable feature of today's Chinese economy is high economic growth compounded with high inflation. The continuous coexistence of these events has raised two questions that are important to address. That is, what is the meaning of the positive correlation between high growth and high inflation, and what is the real impact of the current inflation on China's economy. The objective of this paper is to explore the impact of inflation on Chinese economy with particular reference to economic growth, investment in fixed assets, and spatial distribution of inflation. Findings of this paper suggest that high inflation that has accompanied the recent rapid economic growth has made the GDP growth rate of today's China highly suspicious. What is more, while inflation in China has mainly been generated by over‐investment and unfruitful development in the eastern region, which is financed by excess money printing and central budget deficit, the ill effects of inflation have ...

Monetary Policy in the United States: An Intellectual and Institutional History.

In this extensive history of U.S. monetary policy, Richard H. Timberlake chronicles the intellectual, political, and economic developments that prompted the use of central banking institutions to regulate the monetary systems. After describing the constitutional principles that the Founding Fathers laid down to prevent state and federal governments from printing money. Timberlake shows how the First and Second Banks of the United States gradually assumed the central banking powers that were originally denied them. Drawing on congressional debates, government documents, and other primary sources, he analyses the origins and constitutionality of the greenbacks and examines the evolution of clearinghouse associations as private lenders of last resort. He completes this history with a study of the legislation that fundamentally changed the power and scope of the Federal Reserve System-the Banking Act of 1935 and the Monetary Control Act of 1980. Writing in nontechnical language, Timberlake demystifies two centuries of monetary policy. He concludes that central banking has been largely a series of politically inspired government-serving actions that have burdened the private economy.

Hyperinflation with Currency Substitution: Introducing an Indexed Currency

Currency substitution (CS) and financial adaptation are in general believed to increase the equilibrium rate of inflation. This result derives from a setup in which the government finances a certain amount of real resources through money printing and where CS reduces the base of the inflation tax. This paper shows this intuition wrong for those situations where the hyperinflation is expectations-driven. Incorporating CS in an Obstfeld-Rogoff (1983) framework I show reduces the inflation rates along the hyperinflationary equilibrium. The intuition is simple: if agents have an easy way of substituting away from domestic currency then the required inflation rates to sustain a path where real balances disappears is necessarily lower. The implications of the model are then tested empirically.

Budget Deficits and the Current Account in the Presence of Classical Unemployment

This paper uses an intertemporal disequilibrium model of a monetary (i.e. cash-in-advance) economy to explain the effects of fiscal policy on the current account in the presence of flexible exchange rates and short-run real wage rigidity that gives rise to classical unemployment. The differing effects of alternative methods of financing government expenditures--by raising taxes, borrowing via the issue of governments securities, or printing money--are considered within a microtheoretic optimizing framework. Our results are strikingly different from those of standard sticky wage-price rational expectations models as well as those of the new intertemporal Walrasian-equilibrium models. For example, we show that reducing government spending will, in the presence of classical unemployment, worsen the current account. This worsening is larger the more 'permanent' the policy shift is perceived to be. These results are contrary to the usual presumption based on the above-mentioned alternative models.

Indexing and inflation

Much of the opposition to indexation as a means of adapting to ongoing inflation arises from the view that indexation is itself inflationary. This paper examines the basic for that view in a simple macroeconomic model in which budget deficits are in part financed through the printing of money. It is shown that all aspects of indexing — wage indexation, bond indexation, and tax indexation — tend to increase the impact on the price level of any inflationary shock. However, this association between indexation and inflation is in large part a consequence of the monetary and fiscal policies being followed by the government. Evidence from a cross-section of forty countries on the effects of indexation on the inflationary impact of the oil price shock of 1973–1974 suggests that indexation did not in general increase the inflationary impact of the oil shock. The evidence is, further, consistent with the view that the absence of an excess inflationary effect of indexation is a result of the countries with substantial indexation not having accommodated the oil price shock as much as other countries.

Europe and America: Double Isolationism?

EUROPE AND AMERICA: DOUBLE ISOLATIONISM? James Chace A he recent acrimonious debate in Europe over the placement of U.S. intermediate -range nuclear missiles on European soil goes far deeper than the frequent squabbles that have characterized the Atlantic Alliance for over a generation. There are today serious differences over how Europe and the United States perceive their vital interests. In most cases in the past, the differences have been patched over, such as the crisis over Suez in 1956 when France and Britain intervened militarily to prevent Egypt from seizing the Suez Canal, and the United States lined up with the U.S.S.R. against our allies in the United Nations. Nonetheless, the Atlantic Alliance, as much as anything else, has ensured peace for over a third of a century. But now, for economic as well as strategic reasons, there is a serious possibility ofa double isolationism—Europe and the United States each going its own way—a scenario that the Soviet Union, at least in the long run, devoutly desires. Nowadays, Europeans—particularly those outside of France—are most visibly concerned over the danger of Europe becoming a nuclear battlefield. A pacifist movement, while generally most prominent on the Left, is no longer confined to that sector. Instead, it has grown in proportion, largely influenced by church groups, to incorporate broader segments of the population . It is likely to have an even greater impact in the future, even though the so-called zero option offered by President Reagan has, in the near term, halted the outpouring of protesters. His proposal, as it stands, would mean no U.S. intermediate-range missiles deployed in Westen Europe and the James Chace is Managing Editor of Foreign Affairs and the author of several books, the most recent of which is Solvency: The Pnce of Survival (New York: Random House, 1981). 6 SAIS REVIEW dismantling of the 250 Soviet SS-20s already in place, 175 of which, with 525 warheads, are targeted on Western Europe. The reason why the Europeans and the Americans will not easily compose their differences—even if the offer of the zero option is picked up by the Russians, a highly unlikely turn of events when theirs are already in place and ours are only scheduled for deployment beginning in late 1983—is because of a fundamental divergence on both sides of the Atlantic over the nature of the Soviet threat and how to deal with it. Only if Europe and the United States coordinate their strategy on relations with the Soviets is it likely that the drift toward European isolationism and American unilateralism—perhaps a more precise definition of current American trends—will be arrested. The second major cause of U.S.-European conflict is a fundamental quarrel between the continental Europeans and Washington over the management of the American economy because of its effect on the international economic environment. Moreover, this dispute over economic policies profoundly affects defense policies toward the U.S.S.R. and may well prevent a needed restructuring of the Atlantic Alliance. With the dollar as the key currency providing liquidity or world money to finance global trade, the focus in U.S.-European relations for some time now has been on the United States' attempts to control inflation. For most of the 1970s, the United States financed its external trade deficit by simply creating more credit—IOUs that became worth less and less to whoever held them as our deficits increased and we went on printing money to cover them. Since the value of the dollar did not reflect a strong and increasingly productive economy, this resulted in a weak dollar internationally. Nonetheless, despite rising inflation, the Carter administration went ahead with its program of domestic economic expansion, which contributed to the dramatic rise in the U.S. inflation rate—from 1 1.3 percent in 1979 to 18 percent in 1980. The weakness of the dollar on the foreign exchanges forced the United States to take Draconian measures at home to shore up its currency. The Federal Reserve Board then took the lead in trying to restrict the money supply: The result was high interest rates. While the allies...

A Simple Macroeconomic Model with a Government Budget Restraint

In choosing a mix of monetary and fiscal policies, government authorities (including the central bank) are bound by a government budget restraint. This restraint is less severe than a private individual's or firm's restraint because government authorities can issue fiat money. Nevertheless, the government budget restraint is important. It requires that in each period total government expenditure (transfer payments plus purchases of goods and services) must be equal to the total flow of financing from all sources (including printing money). This means there is a constraint upon the government's freedom to choose arbitrary values of such policy variables as expenditures, taxes, net amount of borrowing from the private sector, and net amount of new money issued. For example, if a government has already decided upon its expenditures, taxes, borrowing, and all other means of finance besides printing money, then it has no further choice about how much money to issue: The net amount issued must be just enough so that the total of flows of financing is equal to expenditure. It is the purpose of this paper to introduce the government budget restraint into a very simple theoretical static macroeconomic model of aggregate demand with a rigid price level, and to show how the analysis of macroeconomic policies is affected by the budget restraint.1 To summarize: the results indicate that the multiplier effect of a change in government purchases cannot be defined until it is decided how to finance the purchases, and the value of the multiplier given by the generally * The work underlying this paper was done partly at the University of Essex and partly supported by a National Science Foundation grant to the John Hopkins University. I am indebted for helpful comments to G. C. Archibald, H. G. Johnson, J. Johnston, D. E. W. Laidler, R. A. Mundell, and F. G. Pyatt. 1 The government budget restraint has also been recognized by Patinkin (1956, pp. 361-65), Hansen (1958, chap. iii), Musgrave (1959, chap. xxii), and Enthoven (1960, pp. 303-59, esp. pp. 315 ff.), among others. After this paper was accepted for publication, two related pieces of work came to my attention: Ritter (1955-56) and Ott and Ott (1965). Both employ the idea of a government budget restraint, but neither carries the analysis as far as is done here.