<p>The graph is almost correct given the assumptions about what is happening but not quite. The proper graph should look more like this picture I made in LaTex using tikz:</p>
<p><a href="https://i.sstatic.net/dJit7.png" rel="nofollow noreferrer"><img src="https://i.sstatic.net/dJit7.png" alt="enter image description here" /></a></p>
<p>Where <span class="math-container">$^*$</span> denote the new state of things given your assumptions.</p>
<p>You are right that money demand shifts to the left and money supply to the right, but your graph missed an important fact that money demand at zero lower bound (ZLB) becomes flat. This is one of the reasons why monetary policy looses its potency around ZLB (see Blanchard et al. Macroeconomics a Eurpean Perspective pp. 96).</p>
<p><strong>Correction of some misconceptions:</strong></p>
<p>In your post you also have some misconceptions let me correct them:</p>
<blockquote>
<p>This is the tricky part, as money demand is not something we can directly observe in practice, though I tried my best to be objective/conservative.</p>
</blockquote>
<p>We actually can observe money demand at a given point in time (only the whole demand function is not directly observable). Furthermore, we actually even can, using econometric methods, properly estimate the money demand function.  See <a href="https://www.sciencedirect.com/science/article/pii/S026499931300059X?casa_token=DDQXe8oVJIMAAAAA:y-pEV39fC0yWHmSLw1RyUSgRBTJ8iKb-iw_tzYpToSSU6qotq-frNtQ9Esm2p8Z6SiHjUfTzDLI" rel="nofollow noreferrer">Jawadi &amp; Sousa (2013)</a> or <a href="https://link.springer.com/article/10.1007/s00181-008-0219-9" rel="nofollow noreferrer">Narayan, Narayan,  &amp; Mishra (2009)</a>, for examples of that. However, of course this cannot be done in real time but only retroactively as we collect enough data about given time period, so to do that for period covering entire COVID19 crisis this won't be possible until few years down the road.</p>
<blockquote>
<p>helicopter money offsets deflationary forces</p>
</blockquote>
<p>central banks are definitely trying to expand money supply right now but not via helicopter money. Helicopter money means central bank is directly sending money to households. This has not yet happen to my best knowledge (at least not in US, EU or UK), although there are economists calling for central banks to do so (like <a href="https://voxeu.org/article/helicopter-money-time-now" rel="nofollow noreferrer">Gali 2020</a> in his VOX<span class="math-container">$^{EU}$</span>CEPR post).</p>

CC BY-SA 4.0
2020-10-21T10:55:20.673Z
2020-10-21T13:56:54.443Z
2020-10-21T13:56:54.443Z
1muflon1
<p>I am trying to roughly sketch up supply / demand curves by parameterizing the major happenings in the money market in 2020. I intend to use this chart as the template:</p>
<p><a href="https://i.sstatic.net/F9wg6.png" rel="nofollow noreferrer"><img src="https://i.sstatic.net/F9wg6.png" alt="enter image description here" /></a></p>
<p>Below, I'll outline my thought process for each curve:</p>
<p><strong>Money supply</strong></p>
<ul>
<li>Interest rate targeted at zero</li>
<li>Fed balance sheet expands (a lot)</li>
</ul>
<p><strong>Graph implication:</strong> money demand curve(straight line) shifts to the right</p>
<p>This is the tricky part, as money demand is not something we can directly observe in practice, though I tried my best to be objective/conservative.</p>
<p><strong>Money demand</strong></p>
<ul>
<li><p>Unemployment spikes in April, then slowly stabilizes around 6% in 3Q20</p>
</li>
<li><p>Total income probably drops off a cliff for a few months and slowly revives with industries streamlining / automating / outsourcing, setting a lower total income floor than pre-pandemic times</p>
</li>
<li><p>Stimulus / helicopter money offsets deflationary forces</p>
</li>
<li><p>Risk-off sentiment during March's downturn drives defensive portfolio positioning, increasing demand for cash</p>
</li>
<li><p>BofA September poll: fund manager consensus that it's a new bull market, investors rotate out of cash/equivalents and into higher yielding assets, reducing demand for cash</p>
</li>
</ul>
<p><strong>Graph implication:</strong> Money demand undergoes a short-term shift to the right, but trends to a shift to the left from a likely permanent contraction in total income and the onset of a new bull market (admittedly not a slow bull)</p>
<p><strong>Conclusion:</strong> I realize there are multiple factors at play here, but I think it's reasonable to assert that, on balance, the demand curve shifts left and the supply curve shifts right.</p>
<p>And thus I present my rough sketch of the money market:</p>
<p><a href="https://i.sstatic.net/qddKv.png" rel="nofollow noreferrer"><img src="https://i.sstatic.net/qddKv.png" alt="enter image description here" /></a></p>
<h2>Question</h2>
<p>Is this parameterization consistent with mainstream economic analysis on the money market in 2020?</p>

<macroeconomics><money-supply>
Plotting money market equilibrium for 2020
Arash Howaida
# Plotting money market equilibrium for 2020

(Asked by: username_0 on 2020-10-21)

I am trying to roughly sketch up supply / demand curves by parameterizing the major happenings in the money market in 2020. I intend to use this chart as the template:

[![enter image description here](https://i.sstatic.net/F9wg6.png)](https://i.sstatic.net/F9wg6.png)

Below, I'll outline my thought process for each curve:

**Money supply**

* Interest rate targeted at zero
* Fed balance sheet expands (a lot)

**Graph implication:** money demand curve(straight line) shifts to the right

This is the tricky part, as money demand is not something we can directly observe in practice, though I tried my best to be objective/conservative.

**Money demand**

* Unemployment spikes in April, then slowly stabilizes around 6% in 3Q20
* Total income probably drops off a cliff for a few months and slowly revives with industries streamlining / automating / outsourcing, setting a lower total income floor than pre-pandemic times
* Stimulus / helicopter money offsets deflationary forces
* Risk-off sentiment during March's downturn drives defensive portfolio positioning, increasing demand for cash
* BofA September poll: fund manager consensus that it's a new bull market, investors rotate out of cash/equivalents and into higher yielding assets, reducing demand for cash

**Graph implication:** Money demand undergoes a short-term shift to the right, but trends to a shift to the left from a likely permanent contraction in total income and the onset of a new bull market (admittedly not a slow bull)

**Conclusion:** I realize there are multiple factors at play here, but I think it's reasonable to assert that, on balance, the demand curve shifts left and the supply curve shifts right.

And thus I present my rough sketch of the money market:

[![enter image description here](https://i.sstatic.net/qddKv.png)](https://i.sstatic.net/qddKv.png)

## Question

Is this parameterization consistent with mainstream economic analysis on the money market in 2020?

**Tags:** macroeconomics, money-supply

---

## 1 answers

### Answer by username_1 on 2020-10-21. Score: 2 | Accepted answer

The graph is almost correct given the assumptions about what is happening but not quite. The proper graph should look more like this picture I made in LaTex using tikz:

[![enter image description here](https://i.sstatic.net/dJit7.png)](https://i.sstatic.net/dJit7.png)

Where $^\*$ denote the new state of things given your assumptions.

You are right that money demand shifts to the left and money supply to the right, but your graph missed an important fact that money demand at zero lower bound (ZLB) becomes flat. This is one of the reasons why monetary policy looses its potency around ZLB (see Blanchard et al. Macroeconomics a Eurpean Perspective pp. 96).

**Correction of some misconceptions:**

In your post you also have some misconceptions let me correct them:

> This is the tricky part, as money demand is not something we can directly observe in practice, though I tried my best to be objective/conservative.

We actually can observe money demand at a given point in time (only the whole demand function is not directly observable). Furthermore, we actually even can, using econometric methods, properly estimate the money demand function. See [Jawadi & Sousa (2013)](https://www.sciencedirect.com/science/article/pii/S026499931300059X?casa_token=DDQXe8oVJIMAAAAA:y-pEV39fC0yWHmSLw1RyUSgRBTJ8iKb-iw_tzYpToSSU6qotq-frNtQ9Esm2p8Z6SiHjUfTzDLI) or [Narayan, Narayan, & Mishra (2009)](https://link.springer.com/article/10.1007/s00181-008-0219-9), for examples of that. However, of course this cannot be done in real time but only retroactively as we collect enough data about given time period, so to do that for period covering entire COVID19 crisis this won't be possible until few years down the road.

> helicopter money offsets deflationary forces

central banks are definitely trying to expand money supply right now but not via helicopter money. Helicopter money means central bank is directly sending money to households. This has not yet happen to my best knowledge (at least not in US, EU or UK), although there are economists calling for central banks to do so (like [Gali 2020](https://voxeu.org/article/helicopter-money-time-now) in his VOX$^{EU}$CEPR post).


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