"Over the last twelve months the reversal of QE appears to have
injected cash into the US banking system. If spent, this $115 billion should provide a stimulus for the US economy, the reverse of the dire predictions on which the "taper tantrum" was founded."
I presume that what is providing a stimulus to the economy is deficit spending financed, of course, with the issuance of more bonds which do seem at first impression to be long dated bonds as the Fed is currently paying 2.2 percent on all types of reserves. ( For the financial institutions to be willing to convert their reserves into bonds, they must be obtaining returns above 2.2% ). See bellow.
What all this means is that in the IS-LM model the IS curve is shifting to the right leading to an higher GDP, which in turn requires the point of equilibrium to be moving also to the right and ipso fact causing an higher demand for money (the extra 115 billion).
The hyperinflation is no where to be seen because nominal GDP is still not yet above the installed productive capacity of the economy.
You may say that that is because imports have been operating as a safety valve, an unsustainable position in the long run unless investment shoots off. But that is another matter.
Change in Fiscal policy (G):
- The government can either increase government spending (shifting IS right) or decrease government spending (shifting IS left).
- The government can also increase taxes which lowers consumer spending (shifting IS left) or decrease taxes which increases consumer spending (shifting IS right).
In the graph bellow Y is GDP and LM the curve representing liquidity preference and demand for money. Clearly that when the IS (investment savings) curve moves from IS to ISi the point of equilibrium moves from Y to Yi and the demand for liquidity preference and money raises to compensate for the need for extra money (more transactions). The 115 billion will be in principle that extra money required by an higher GDP.
|
Interest Rates on Reserve Balances for October 3, 2018Last Updated: October 2, 2018 at 4:30 p.m., Eastern Time |
Rates(percent) |
EffectiveDate |
| 1 |
Rate on Required Reserves (IORR rate) |
2.20 |
9/27/2018 |
| 2 |
Rate on Excess Reserves (IOER rate) |
2.20 |
9/27/2018 |
