Asymmetric information

Asymmetric information reflects a view among New Keynesian economists that allows for incomplete markets on account of the fact that principal and agent do not possess the same degree of information about a particular event or state. This perceived infor- mational asymmetry weighs heavily on the New Keynesian credit-channel theory of the monetary policy transmission mechanism, based on the loanable funds view of the rate of interest, whereby the real rate of interest acts as a price-rationing device to equilibrate the supply and demand for loanable funds. New Keynesians acknowledge that the real rate of interest may not perform this equilibrating function when the demand for loanable funds rises beyond certain levels. Lenders may withhold credit to otherwise creditworthy borrowers rather than offering loans at higher rates of interest even if these borrowers would be willing to pay those higher rates. Money neutrality is violated as the predicted link between changes in high-powered money and the money stock is upset. Output and employment are then less than their full-employment counterparts.

Asset price inflation

Asset price inflation is a rise in the price of an asset that does not reflect a relative change in the price of that asset. It is not a term that is currently widely used or carefully defined, although one sees it in print at various times (Schwartz, 2002; Piazzesi and Schneider, 2009). To formally define asset price inflation, one must define both inflation and asset, neither of which is easy or unambiguous.

In earlier times (pre-1930s), inflation was defined as an increase in the money supply (Bryan, 1997). At that time, in the definition, it was noted that such increases were often accompanied by increases in prices, but the determining factor of inflation was increases in the money supply. As long as the money supply was the numéraire, and was thought of as a physical asset (primarily gold), that served as a reasonable definition. Inflation was the inverse of the price of gold; that is, a fall in the price of gold relative to prices of other things that people bought (both assets and goods).

As money became thought of as separate from gold, that definition of inflation no longer remained clear-cut, but the convention of defining inflation in terms of an increase in the money supply remained. A problem remained, however, as it was unclear what the money supply was: there were many alternative definitions of money, and there was no compelling reason to use one over the other, and thus there was no unambiguous defini- tion of inflation. At that point, inflation started to be defined in terms of an increase in the price of produced goods, not in terms of an increase in the quantity of money.

Asset management

Asset management is the investment of financial assets by a third party. Financial assets under management (AUM) are categorized according to asset classes: equities, bonds and alternatives such as property, currency and commodities. Equities represent an own- ership interest in another corporation, including a share of the profits as a dividend and a claim in the event of bankruptcy. Bonds represent an obligation to repay a loan and, normally, a coupon. Alternatives include a wide range of tradeable assets where the asset manager expects to earn a profit.

There are two main investment strategies: active and passive management. Under active management, there is often greater flexibility in the investment mandate. Passive management or index-tracking funds are more closely aligned to a benchmark, which usually reflects the market capitalization of a broad set of constituent assets in a sector or country. Passive management took off after the 1970s and had a 13 per cent share at the end of 2005 (Pastor and Stambaugh, 2012, p. 759). Both active and passive strate- gies encompass a variety of investment objectives such as yield or growth maximization, tax avoidance and socially responsible investment. Funds are also segregated by asset class, country and industry sector. Lastly, funds often incorporate derivatives such that a Brazilian equity fund might be denominated in US dollars.

Asset-based reserve requirements

Asset-based reserve requirements (ABRRs) are regulatory-framework policy proposals requiring financial institutions (FIs) to keep central bank reserves against their diverse asset class holdings. Conceptually, ABRRs are set by the monetary (or regulatory) authority and vary depending on the risk perceptions associated with each asset class. Technically a tax on financial intermediation, ABRRs are most effective if applied system-wide for all FIs.

Given their flexibility, ABRRs have a strong policy appeal in times of financial dis- tress or excessive growth in any particular asset class (for instance, subprime mortgages). Properly structured, ABRRs should help contain asset price inflation with strong micro- economic and macroeconomic potential.

Palley (2000, 2003, 2004, 2007) has popularized ABRRs most vocally, with addi- tional analysis provided by D'Arista (2009), although there has been some criticism (see for instance Toporowski, 2007). Methodologically, ABRRs imply a directly opposite regulation of FIs' central bank reserves. With ABRRs, the FIs hold non-interest-bearing deposits with the monetary authority as reserves based on the FIs' asset holdings. This differs from liability-based reserve requirements (LBRRs) which are common today with a typical deposit-driven required reserve ratio.

Therefore, for FIs, the ABRRs structure results in a real cost of forgone potential earn- ings on a particular asset (mortgage loans, equity holdings, and so on) owing to higher reserve requirements. FIs are then forced to reallocate larger funds to comply with the regulation. Facing lower returns, FIs are expected to reduce their holdings of the riskier asset and diversify into other asset categories with perhaps lower reserve requirements.

Amsterdamse Wisselbank

Amsterdam was the first northern European city to establish its own bank in 1609: the Amsterdamse Wisselbank (henceforth, AWB), named after "wissel" ("bill of exchange"). The aim was to stabilize and gain control over the currency.

The AWB's founding year coincided with a 1609-21 truce in the 80-year war of the emerging Republic of the Seven United Netherlands with Spain. It marked the begin- ning of the Republic's "Golden Century" of trade, exploration, military power, science, incipient industrialization, income growth and political organization. In 1609 the seven member provinces of the new Republic were still largely autonomous, each with the right to issue its own currency. Holland's expanding trade required a stable currency, but at the same time it had made the Republic's money popular in the Baltics and other Dutch export destinations (Van Dillen, 1928). With a continuous outflow of its own strong coins, about 40 domestic mints and free inflow of foreign coins, altogether there were about 800 different currencies in use in the Republic, alongside the official money of account, the guilder (or florin) (French, 2006).

Financial transactions in the Dutch Republic of the 1600s were dominated by so-called cashiers, who issued cheques and certificates of deposit. There was continuous with- drawal of good coins from circulation, and the time-consuming and uncertain exchange of cashier certificates for coins (depending on coin stocks) (Van Velden, 1933). In sum, the Republic had no reliable currency, no efficient financial system, and no control over its domestic payment and credit system or over its monetary relations with other countries.