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On not “running out of ammo”: Monetary Policy as Farmland Price Policy

Summary:
Imagine a central bank that pegs the price of farmland. It announces it will buy or sell unlimited amounts of farmland for ,000 per hectare. So "one dollar" doesn't mean some number of ounces of gold; it means "one square meter of farmland". So the central bank owns farmland, which it rents out to farmers at market rents. It uses those rents to pay for paper and ink and economists' salaries, and gives the rest to the government which owns the central bank. Or it could have a crawling peg, so the price of farmland always appreciates at 2% per year (or whatever). That central bank policy would influence interest rates. Because if land is expected to yield a (say) 1% rental return, plus 2% appreciation, land will yield a total nominal return of 3%. And lenders will compare the interest

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Imagine a central bank that pegs the price of farmland. It announces it will buy or sell unlimited amounts of farmland for $10,000 per hectare. So "one dollar" doesn't mean some number of ounces of gold; it means "one square meter of farmland".

So the central bank owns farmland, which it rents out to farmers at market rents. It uses those rents to pay for paper and ink and economists' salaries, and gives the rest to the government which owns the central bank.

Or it could have a crawling peg, so the price of farmland always appreciates at 2% per year (or whatever).

That central bank policy would influence interest rates. Because if land is expected to yield a (say) 1% rental return, plus 2% appreciation, land will yield a total nominal return of 3%. And lenders will compare the interest rates they earn by lending money to the 3% they could expect to earn by buying land instead. By setting a crawling peg that crawls at 3% instead of 2%, the nominal rate of return on land would rise from 3% to 4% (if the rental return stays the same), and nominal interest rates would rise too. But the central bank would not set any market rate of interest.

Or it could have an adjustable crawling peg. If CPI inflation were too low, and the bank wanted it higher, it could raise land price inflation. If CPI inflation were too high, and the bank wanted it lower, it could reduce land price inflation. Just like Irving Fisher's Compensated Dollar Plan, only with farmland replacing gold.

Could this central bank ever "run out of ammo", and find itself unable to create inflation? Is there any parallel to the alleged Zero Lower Bound constraint for central banks that set a rate of interest?

No.

Yes, the central bank could run out of farmland to buy. If everyone prefers owning currency to owning any farmland. But in that case the central bank can simply announce a new crawling peg that crawls faster than the old one, so farmland appreciates more quickly, so people will be more willing to own land instead of currency.

Plus it could reduce the risk of that happening, for a given crawling peg for farmland, by buying other assets too, so there's more currency in public hands for any given amount of farmland in public hands. But in the last resort, when it runs out of any suitable assets to buy, it could simply make the crawling peg crawl faster.

Loosening monetary policy, by making the crawling peg crawl faster, causes higher nominal rates of return on owning land, and so higher nominal interest rates. Nominal interest rates that are too low mean monetary policy that is too tight.

Central banks (unless they run out of paper and ink) simply cannot "run out of ammo" to create inflation. The idea that they can "run out of ammo" is a fallacy that comes from the Neo-Wicksellian heresy of thinking of monetary policy as interest rate policy.

We don't need no stinking fiscal policy to create inflation.

Yes of course farmland is heterogeneous, so implementing this particular policy has some practical difficulties. So what; it's a thought-experiment, just to show how monetary policy works. Use an index of farmland prices, or crawling peg the stock market total return index instead. Monetary policy is not interest rate policy.

Conflict of interest declaration: I own some farmland.

Update: heading off canoeing tomorrow. May be slow responding to comments.

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