Economic Perspectives, Vol. 42, No. 2, 2018 Crossref
A Monetarist View of the Fed’s Balance Sheet Normalization Period

Appendix: Money Demand Evidence

This appendix reproduces the figures in Lucas and Nicolini (2015) that contain the money demand evidence used in this article.

Notes

1 A deferred asset would reflect the amount of future earnings that would be needed to be withheld to cover the Fed’s current operating losses. During the period of time that a deferred asset remains on its books, the Fed’s remittances to the Treasury would be equal to zero.

2 An exception is the New York Fed’s most recent report (Federal Reserve Bank of New York, 2018). Instead of assuming that currency will grow at the same rate as nominal GDP, this report’s benchmark scenario uses the median response to a question in the December 2017 Survey of Primary Dealers (SPD) about the expected level of currency in 2025. Currency is then assumed to grow at a constant growth rate during the projection period consistent with that 2025 level. The resulting annual growth rate of currency of 5 percent is actually larger than the 4 percent median annualized growth rate in nominal GDP between 2017 and 2025 implied by the December 2017 SPD expected paths for GDP and the PCE (personal consumption expenditures) deflator. That is, the most recent New York Fed report has moved even further away from the scenario explored in this article. For an argument supporting the view that currency may actually grow faster than nominal GDP due to foreign demand for U.S. currency, see Haasl, Paulson, and Schulhofer-Wohl (2018).

3 The money multiplier is regularly described in textbooks as the consequence of commercial banks being required to hold only a fraction of their deposits as reserves, lending the rest and thus creating additional money in circulation.

4 This monetary aggregate is known as money of zero maturity (MZM).

5 Under such a stable money multiplier, implementing the huge contraction in monetary base that the Fed is planning to do during the normalization period would have created extreme deflationary pressures.

References

Federal Reserve Bank of New York, 2018, “Monetary policy implementation,” webpage, available online.

Federal Reserve Bank of New York, Markets Group, 2018, “Open market operations during 2017,” report, April, available online.

Federal Reserve Bank of New York, Markets Group, 2017, “Domestic open market operations during 2016,” report, April, revised May, available online.

Federal Reserve Bank of New York, Markets Group, 2016, “Domestic open market operations during 2015,” report, April, available online.

Ferris, Erin E. Syron, Soo Jeong Kim, and Bernd Schlusche, 2017, “Confidence interval projections of the Federal Reserve balance sheet and income,” FEDS Notes, Board of Governors of the Federal Reserve System, January 13. Crossref

Haasl, Thomas, Anna Paulson, and Sam Schulhofer-Wohl, 2018, “Understanding the demand for currency at home and abroad,” Chicago Fed Letter, Federal Reserve Bank of Chicago, No. 396. Crossref

Lucas, Robert E., Jr., and Juan Pablo Nicolini, 2015, “On the stability of money demand,” Journal of Monetary Economics, Vol. 73, July, pp. 48–65. Crossref

Opinions expressed in this article are those of the author(s) and do not necessarily reflect the views of the Federal Reserve Bank of Chicago or the Federal Reserve System.

More by this Author

Marcelo Veracierto

to

Reset