by Just before the holidays I wrote an article for Newsweek arguing that the official basis for Federal Reserve policy was at risk of coming unwound due to the present uptick in inflation. My basic argument was that the Fed and other central banks act as if they have some ‘objective’ criteria for setting interest rates while in the real world they are constantly worrying about upsetting financial markets. This leads them to the Catch-22 position today: should they raise rates to fight inflation and risk a market crach? Or should they sit on their hands, allow markets to march ever higher and risk being blamed for inflation?The framework for understanding monetary policy in this way is laid out in an essay I published last year in the scientific journal Inference Review, entitled Monetary
Topics:
Mike Norman considers the following as important:
This could be interesting, too:
Matias Vernengo writes Elon Musk (& Vivek Ramaswamy) on hardship, because he knows so much about it
Lars Pålsson Syll writes Klas Eklunds ‘Vår ekonomi’ — lärobok med stora brister
New Economics Foundation writes We need more than a tax on the super rich to deliver climate and economic justice
Robert Vienneau writes Profits Not Explained By Merit, Increased Risk, Increased Ability To Compete, Etc.
Just before the holidays I wrote an article for Newsweek arguing that the official basis for Federal Reserve policy was at risk of coming unwound due to the present uptick in inflation. My basic argument was that the Fed and other central banks act as if they have some ‘objective’ criteria for setting interest rates while in the real world they are constantly worrying about upsetting financial markets. This leads them to the Catch-22 position today: should they raise rates to fight inflation and risk a market crach? Or should they sit on their hands, allow markets to march ever higher and risk being blamed for inflation?MacrocosmThe framework for understanding monetary policy in this way is laid out in an essay I published last year in the scientific journal Inference Review, entitled Monetary Faith. In it I argue that there is no solid relationship between the central bank interest rate and any real macroeconomic variable — say, savings or investment. Rather the central bank interest rate is watched, not by CEOs and entrepeneurs, but by financial markets participants — who, frankly, have turned the central bank interest rate into a cultic object of worship in the past 30 or so years.
So, back to the natural rate of interest. Firstly, I should say: I know that the Fed and other central banks do not set the rate of interest in line with estimates of the natural rate — the so-called ‘r*’. That said, the theoretical framework behind the r* is supposed to guide central bank policy. It is worth looking at what is going on with the r* today....
Natural Rate of Interest in Crisis