by Contrary to what we were taught in the graduate schools of half-a-century ago (the heyday of monetarism), monetary policy now typically means setting or influencing the interest rate that commercial banks pay on loans of central bank base money in the overnight market — the policy rate. What I mean by the ‘real’ policy rate is the nominal policy rate (the actual percentage rate quoted) less the currently observed rate of inflation. Such a zero real policy rate (ZRPR) will achieve as close an approximation as possible to a fair distribution of income, in a particular sense. It also promotes inflation stability, financial stability, higher growth, full employment, and higher real wages. It is a ‘good thing’ from many points of view. The sense in which a ZPRP is ‘fair’ is that rentiers
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Contrary to what we were taught in the graduate schools of half-a-century ago (the heyday of monetarism), monetary policy now typically means setting or influencing the interest rate that commercial banks pay on loans of central bank base money in the overnight market — the policy rate. What I mean by the ‘real’ policy rate is the nominal policy rate (the actual percentage rate quoted) less the currently observed rate of inflation. Such a zero real policy rate (ZRPR) will achieve as close an approximation as possible to a fair distribution of income, in a particular sense. It also promotes inflation stability, financial stability, higher growth, full employment, and higher real wages. It is a ‘good thing’ from many points of view. The sense in which a ZPRP is ‘fair’ is that rentiers (whose income arises solely from interest payments on existing wealth) do not share in the income generated by current productive activity. Nonetheless, the real value of existing financial capital is preserved. Such a policy also has the virtues of transparency and simplicity.Sort of interesting.A ZRPR is different thing than the zero-interest rate policy (ZIRP) favoured by advocates of ‘modern money theory’ (MMT), which is that the nominal policy rate should be zero — or what Rochon and Setterfield called the Kansas City rule. Both are examples of a ‘parking it’ approach to interest rates, but there are two main reasons for preferring a ZRPR to ZIRP....
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John Smithin, Executive Co-Director, Secretary and Treasurer, Aurora Philosophy Institute and Emeritus Professor of Economics in the Department of Economics and the Schulich School of Business, York University, Toronto, Canada