4 ms·

> which drives creation of reserves by the central bank. Not the other way around. How is it that the Federal Reserve added more than $4 Trillion of M2 currenc

> which drives creation of reserves by the central bank. Not the other way around. How is it that the Federal Reserve added more than $4 Trillion of M2 currency since the pandemic started? [1] Was it responding to the "increased" credit demand from shut down businesses that see no light at the end of the lockdown tunnel? [1] https://fred.stlouisfed.org/series/M2SL https://fred.stlouisfed.org/series/M2SL

RobertoG 6y ago
1. The Federal Reserve have to add reserves to the system when there is demand from the economy in order to keep the interest rate that they want. Otherwise, the interest rate would go up because the offer and demand dynamics between the private banks. 2. If there is not demand from the economy for credit, adding reserves to the system will push the interest rate very low (that's happening now). If there is not demand from the economy those reserves will not be lend, ergo, they will not be inflationary (they could affect other financial assets prizes though). 3. Apart from keeping the interest rate where they want, adding reserves to the system will happen when the fed buy assets from the banks (they are payed with reserves). One of those assets are government bonds. So, the Central Banks can finance without limit (other than inflation) fiscal expansion from the treasury. This money, used to finance government spending, will be spend in the economy. So, it's the fiscal policy what will be inflationary, not the number of reserves per se.
- lottin 6y ago
  To clarify, you're talking about nominal interest rates. Central banks have little or no control over real interest rates.
  - RobertoG 6y ago
    The difference between nominal and real interest rate is inflation and the main mandate of Central Banks is the control of inflation. So, I don't think it's accurate to say they have no control.
    - lottin 6y ago
      Central banks control inflation by setting nominal rates. These two rates are not independent. Setting real interest rates would require the ability to control both nominal rates and the inflation rate independently from one another.
      - RobertoG 6y ago
        I think we agree on everything.

RobertoG 6y ago

1. The Federal Reserve have to add reserves to the system when there is demand from the economy in order to keep the interest rate that they want. Otherwise, the interest rate would go up because the offer and demand dynamics between the private banks. 2. If there is not demand from the economy for credit, adding reserves to the system will push the interest rate very low (that's happening now). If there is not demand from the economy those reserves will not be lend, ergo, they will not be inflationary (they could affect other financial assets prizes though). 3. Apart from keeping the interest rate where they want, adding reserves to the system will happen when the fed buy assets from the banks (they are payed with reserves). One of those assets are government bonds. So, the Central Banks can finance without limit (other than inflation) fiscal expansion from the treasury. This money, used to finance government spending, will be spend in the economy. So, it's the fiscal policy what will be inflationary, not the number of reserves per se.

lottin 6y ago
To clarify, you're talking about nominal interest rates. Central banks have little or no control over real interest rates.
- RobertoG 6y ago
  The difference between nominal and real interest rate is inflation and the main mandate of Central Banks is the control of inflation. So, I don't think it's accurate to say they have no control.
  - lottin 6y ago
    Central banks control inflation by setting nominal rates. These two rates are not independent. Setting real interest rates would require the ability to control both nominal rates and the inflation rate independently from one another.
    - RobertoG 6y ago
      I think we agree on everything.