Prolonged periods of stagnation can lead to a wave of bankruptcies, which will affect the central bank’s balance sheets. Lenders will also suffer from a fall in asset prices. In a deflationary market fixed-income bonds are the biggest winners. Therefore, in these deflationary spirals, companies start to make their stocks look like bonds. The risk for monetary authorities is that even small bouts of inflation can vastly change consumer psychology, changing demands for wages, spending habits. Whenthis happens it becomes hard for the central bank to lift inflation back to the target, Japan being a prime example.
Tutorial 4 Summary – Shortage of Safe AssetsWhat is the OLG Model of Money good for?This article is a critique on the argument that the OLG model is based in ‘wrong’ micro foundations. The author clearly supports the OLG model and talks about how the lack of double coincidence of wants does not explain monetary exchange in it’s entirety and you not only need a lack of trust, but a lack of record keeping as well. He discusses briefly how Wicksell’s triangle is basically a short duration of the OLG model. Evil is the Root of all MoneyThe author sums up this article by saying a lack of double coincidence of wants is not necessary to explain monetary exchange, a lack of commitment is necessary to explain monetary exchange. Basically without trust some medium of exchange is needed to transfer goods and a lack of double coincidence of wants isn’t enough to produce monetary exchange.Understanding the Global Turmoil: It’s the General Equilibrium, StupidThe article starts of by saying financial volatility is remerging and this is due to a shortage in safe assets. These AAA assets need to be expanded. The author suggests government sin safe-asset producing countries to produce a lot more of them. With another alternative being letting the private sector create AAA assets and the government absorbing the part of the risk the private sector cannot.Both of these methods are being undertaken but the author thinks the public-private approach is a much sounder medium-term strategy. He believes that public sector is good for producing macro-AAA assets and the public-private sector is good for producing micro-AAA assets.Why is Euro Inflation so low?This article relates the deflation in Europe to a safe asset shortage as aforementioned. It’s called a safety trap, a strong demand for precautionary balancesthat cannot be satisfied under prevailing economic and financial conditions. The resulting disequilibrium having negative effects on the economy. The demand for safe assets is bound to increase to meet new regulatory and market requirements. Due to the Eurozone crisis a large portion of the government debt lost its safe assetsstatus which only further produces the need for more.