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The E-Monetary Theory

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  • Duong Ngotran

Abstract

Using the Smolyak grid, we solve a DSGE model where there are two types of money: reserves (e-money that banks deposit at the central bank) and zero maturity deposits (e-money that is issued by banks). Transactions between bankers are settled by reserves, while other ones are settled by zero maturity deposits. Our model, featuring only one housing demand shock, can match some key facts in the Great Recession: (i) the investment falls sharply, (ii) the excess reserves skyrocket but the money multiplier plummets, (iii) the household debt declines, (iv) the long duration of the interbank rate at the lower bound - the interest rate paid on reserves, (v) the sharp deflation then back to inflation immediately after the central bank conducts quantitative easing. Due to the maturity mismatch between deposits and loans, we find that the large scale asset purchase program is very effective in the short run but creates deflation and lower outputs in the long run. After a period of time since conducting quantitative easing, a recommended policy is to slowly raise the interest rate paid on reserves even if the central bank does not see the inflation signal.

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  • Duong Ngotran, 2016. "The E-Monetary Theory," 2016 Papers png175, Job Market Papers.
    • Handle: RePEc:jmp:jm2016:png175
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    Cited by:

    1. Ngotran, Duong, 2016. "The E-Monetary Theory," MPRA Paper 77206, University Library of Munich, Germany, revised 25 Feb 2017.
    2. Ngotran, Duong, 2019. "The e-monetary theory," Economics Discussion Papers 2019-49, Kiel Institute for the World Economy (IfW Kiel).
    3. Ngotran, Duong, 2017. "Interest on reserves and monetary policy of targeting both interest rate and money supply," MPRA Paper 81579, University Library of Munich, Germany.
    4. Marcelo A. T. Aragão, 2021. "A Few Things You Wanted to Know about the Economics of CBDCs, but were Afraid to Model: a survey of what we can learn from who has done," Working Papers Series 554, Central Bank of Brazil, Research Department.
    5. Ngotran, Duong, 2020. "The e-monetary theory," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 14, pages 1-41.

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    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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