Banking fragility and money
Another day, another LSE lecture . This one features David Miles from the Bank of England and is chaired by Charles Goodhart. It's on monetary policy and banking fragility. There are two aspects of this problem that are particularly important. The first is transmission mechanisms – an important aspect of monetary macroeconomics. Simple monetary models highlight that there is a relationship between the amount of money in the economy and the amount of economic output (consumption, investment or both). From this we can infer that printing money may increase GDP. Slightly more sophisticated theories give a causal explanation of how this can happen. The central bank prints money and uses it to buy bonds. More money (and fewer bonds) mean that the price of bonds rises – this is simple supply and demand. The price of bonds is the inverse of the interest rate (that is, if a bond pays £50 per year interest and it costs £1000, interest is 5%. If the bond price goes up to £2000, it sti...