Re: Taylor Rule: Question for Basil Moore

["John O'Donnell" <jackodonnell@xxxxxxxx>]

Basil Moore wrote:
>
> Chris
>
> Sorry, I should have unpacked that. You remember in the textbooks the CB
> can lower or raise rates by increasing or withdrawing reserves from the
> sytem, which has a multiplied affect on the money supply. So the Fed can
> lower rates if it floods the market with money, and raise them if it
> reduces the MS.
>
> But in fact there is no necessity for the money supply to change
> perceptibly for the Fed to alter the rate.

The change in the quantity of reserves may not be
perceptible but the fact remains that the quantity of
reserves with respect to the demand for reserves must change
for there to be a change in the value of the reserves and
consequently the rental rate of those reserves. Because the
demand can change without any control by the FED, the
quantity of reserves can even decline while the FED funds
rate decreases. The net outcome is not dependent on any
particular level of reserves but, just like any other item
of supply, it depends only on the quantity supplied relative
to the demand.

> It must just change the supply
> price at which it makes reserves available to the banking system.

Change in the price [i.e. -- The value of the currency.] and
/ or the FED funds interest rate is an outcome of the FED's
action of adding or depleting reserves AND changes in the
market demand for reserves AND the market's perception of
the in[de]flation rate.

The market demand is not under the control of the FED.
However, because there is no practical limit to the FED's
ability to add or subtract reserves any change in market
demand is completely within the ability of the FED to
compensate for whatever change occurs. Such change may or
may not be "perceptible" as reflected in any particular
measure of reserves, base money or any other measure of
money supply but that does not change the order of cause and
effect.

> It is true that if it wishes to lower rates,it will inject nonborrowed
> reserves into the sytem. But the effect is primarily on the ff rate, not on
> the MS. it works through changing the supply price of reserves, not the
> quantity of reserves and money.

Yes, the supply price is affected by the availability of
reserves just as is the value of those reserves. But in
order to change the price the action taken by the FED is to
add to, deplete from or leave standing the quantity of
reserves available. Although the FED also sets the discount
rate that rate is trivial as to its effect on any other
interest rate or the value of the currency itself because
the FED and FDIC impose other, more meaningful, restrictions
on borrowers from the discount window. This is why the TOTAL
amount of reserves borrowed from the discount window is very
seldom even as much as the monthly CHANGE in reserves.

> Does this help?

No, because it is obviously wrong.

<<SNIP>>

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