Economic Independence
The author’s viewpoint in the article “The e-monetary theory,” Duong Ngotran, considers creating a model of general equilibrium where the economic world is cashless to create a balance in the federal funds rate and the inflation. This is because the output and inflation are usually lower than their steady-state levels for a long time. He goes ahead and conducts research using his model, where he discusses the use of negative interest rates and extended liquidity operations to stimulate economic activity. This is the unconventional monetary policy. He finds out that as long as the federal funds rate is driven towards the lower bound, the inflation in a short time increases. If the bank uses the unconventional monetary policy, the economy will suffer a significant decline in its activity, and reduction of the general level of prices in the economy would be unpleasant within a specified period in the future where at least one input is fixed while others are variable. These are the unconventional monetary policy results, and it’s challenging to escape from the deflation trap since the inflation doesn’t hit the central bank’s target in the time expected since the bank is torn between the increase or stagnation of the rates. The author proceeds to compare the inflation and federal fund rate, and the results are just magical as he finds out that the supply of money declines over time, and the deflation comes up. To inject cash into the economy, the central bank can devise a program that would be efficient at coping with the circumstance above. An enormous surplus reserve in the banking system would be a synthesis of the large scale asset purchase program. The author then identifies that his model is in the neo-Keynesian theory and believes that the economy can restore itself and stresses the supply of money, demand, and interest in the monetary policy whenever the central bank makes adjustments of the interbank rates. The instance on the supply of money, an increase to its level, and federal fund rate reduction can normalize the curve. He focuses mainly on the money role in the economy and its medium of exchange. His model also follows an approach on the cash in advance under the money demand. He doesn’t concentrate on currency as the most liquid asset should be MDs. So as to estimate the money demand function, he uses both income and consumption. In the economic environment, there are factors that affect inflation and deflation rate. Some are time and demographics. In the economy, two types of electronic money can be used. These are the ZMDs and the reserve. Banks use the reserve to the central bank. These are funds that are kept in the bank in case there may be a large withdrawal amount of money. These funds cannot be issued to other institutions except for banks only and the government. A gross interest rate is paid by the central bank and is used to settle the transactions among the respective beneficiaries.
The zero maturity deposits, ZMDs, are paid for interests by the banks. The money is used among banks and non-bank private sectors together with the household, who are the owners of the wholesale and retail businesses. The insurance of these funds is by the central bank. Both of this electronic money in our economy have the same account unit.
I agree with the author on his model to bring the economy to a balance. Since there are many ways that can be used to achieve recovery in the marketplace. Having an economy where liquid money is used Is one of the pilot programs a bank should have. This means that there would be an economy where 99% of the currency is cashless. This is a simple way to keep track of how an economy is fairing and to know its state. It can be remedied upon a note of a decline by conventional monetary policies. Tools in unconventional fiscal policies can be used when the economy is at stake. These tools, which are; negative interest rates and long term security purchases, can help restore the economy to a functional state but are highly unadvisable. In order to gain money, more money has to be spent, and the central bank can inject money into the economy so as to allow for an increase in the cash flow. It can also create a demand for payment where there can result in inflation in the long run. Reducing the amount of cash the economy can have a significant effect on the economic recovery, and this may help it to recover on its own, neo-Keynesians concept. Allowing the economy to have a self-healing process provides for the achievements of the article, which shows how economies can fight for themselves at this time of dire needs. A case in point is during this pandemic that has really hit hard on the global economies. Measures such a those suggested by the article should get adopted.
The article can be found from the Economics e-journal vol 14 of May 7th, 2020.