Central bankers are openly struggling to understand why their low interest rate regime of the past decade has not brought vigorous renewed growth to their economies. This new paper
Reconsidering Monetary Policy: An Empirical Examination of the Relationship Between Interest Rates and Nominal GDP Growth in the U.S., U.K., Germany and Japan should give food for what rational thought might exist in the high monetary echelons of power. After all, if there is a startling mismatch between the practical outcomes of your policies derived from your theories then maybe, just maybe, you are relying on baseless assumptions?
Werner and Lee have taken great pains to examine the received classical economics wisdom that 'lower [interest] rates stimulate growth and vice versa' .
They say there is a paucity of empirical evidence to back up this belief in the level of interest rates determining economic growth. After examining half a century of data across four major economies involving 'varieties of capitalism' they conclude that the theory that low interest rates cause economic growth is rejected in 6 out of 8 cases and rejected in 8 out of 8 cases when 2 years of leads and lags were considered. However the alternative hypothesis that economic growth determines interest rates, is supported in 8 out of 8 cases. '..long-term and short-term interest rates follow the trend of nominal GDP, in the same direction, in all countries examined'.
This has huge implications for public policy. The authors suggest that the policy makers drop the theory of price of money (interest rates) and that it be replaced by the quantity of money theory. Thus:
The question is: How such a radical and necessary change Werner and Lee propose could begin to be managed? To take one obvious point: millions have low interest mortgages and the raising of interest rates would threaten the financial stability of many households. Additionally with increasing costs of mortgages reducing available funding, dropping house prices would leave many lenders uncovered by the equity in the property. Safeguards would be needed. There would probably have to be a mandatory fixing of interest rates for existing mortgages for some years. But as central bankers have created this particular property boom with the low interest rate policy they should get along with government and work together to solve it, given the new insights of this paper.
The paper shakes one part of the house of cards that is our economy. As The Free Lunch - Fairness with Freedom points out, our society is built on unfairness. Our treatment of land, houses, banking and monopoly powers have embedded poverty for many and wealth for a few. Werner and Lee have painstakingly delivered truth as it is and not as it is taught in countless economics schools and universities. Who from the world economics establishment will grasp the implications? Which wise politicians could unite us all - losers and winners - to take a fairer course in the future and redirect us all towards the common good?
posted by Charles Bazlinton. Author The Free Lunch - Fairness with Freedom
Reconsidering Monetary Policy: An Empirical Examination of the Relationship Between Interest Rates and Nominal GDP Growth in the U.S., U.K., Germany and Japan should give food for what rational thought might exist in the high monetary echelons of power. After all, if there is a startling mismatch between the practical outcomes of your policies derived from your theories then maybe, just maybe, you are relying on baseless assumptions?
Werner and Lee have taken great pains to examine the received classical economics wisdom that 'lower [interest] rates stimulate growth and vice versa' .
They say there is a paucity of empirical evidence to back up this belief in the level of interest rates determining economic growth. After examining half a century of data across four major economies involving 'varieties of capitalism' they conclude that the theory that low interest rates cause economic growth is rejected in 6 out of 8 cases and rejected in 8 out of 8 cases when 2 years of leads and lags were considered. However the alternative hypothesis that economic growth determines interest rates, is supported in 8 out of 8 cases. '..long-term and short-term interest rates follow the trend of nominal GDP, in the same direction, in all countries examined'.
This has huge implications for public policy. The authors suggest that the policy makers drop the theory of price of money (interest rates) and that it be replaced by the quantity of money theory. Thus:
- the quantity of credit (the source of the money supply) should be the key driver
- the raising of short term rates, to encourage banks to lend due to future higher rate expectations
- the large scale central bank purchases of bonds should stop - they should be sold instead (which would raise interest rates)
- the bank sector be structured to deliver credit creation for productive purposes
- the backing of fiscal policy with monetary policy by ceasing the issue of government bonds but instead, borrowing from banks
- that 'green quantitative credit guidance ' becomes a policy to ensure that sustainable projects are encouraged through central bank 'window guidance' or through a decentralised local banking system
The question is: How such a radical and necessary change Werner and Lee propose could begin to be managed? To take one obvious point: millions have low interest mortgages and the raising of interest rates would threaten the financial stability of many households. Additionally with increasing costs of mortgages reducing available funding, dropping house prices would leave many lenders uncovered by the equity in the property. Safeguards would be needed. There would probably have to be a mandatory fixing of interest rates for existing mortgages for some years. But as central bankers have created this particular property boom with the low interest rate policy they should get along with government and work together to solve it, given the new insights of this paper.
The paper shakes one part of the house of cards that is our economy. As The Free Lunch - Fairness with Freedom points out, our society is built on unfairness. Our treatment of land, houses, banking and monopoly powers have embedded poverty for many and wealth for a few. Werner and Lee have painstakingly delivered truth as it is and not as it is taught in countless economics schools and universities. Who from the world economics establishment will grasp the implications? Which wise politicians could unite us all - losers and winners - to take a fairer course in the future and redirect us all towards the common good?
posted by Charles Bazlinton. Author The Free Lunch - Fairness with Freedom
No comments:
Post a Comment