4 ms·
(2004) and talking about the risk free overnight rate. "Deficit spending will result in net central bank reserve credits in the aggregate banking system, whic
by jnordwick 9y ago
(2004) and talking about the risk free overnight rate.
"Deficit spending will result in net central
bank reserve credits in the aggregate banking system, which will drive the short-term
overnight inter-bank lending rate to zero."
Also, we now pay interest on reserve balances which goes against one of the paper's assumptions.
- jganetsk 9y agoThe paper mentions that: "While government security sales may be used to drain the excess reserves to maintain some positive overnight rate, or the central bank may pay interest on reserve balances, absent such government intervention the base rate of interest is zero. In other words, the natural rate of interest is zero."
- jnordwick 9y agoThat's what I'm saying. The paper was written in a time before interest payments on reserve balances, and it explicitly says that is one of the requirements for the paper to hold. We now pay interest on reserves, but I'm not sure what that entire policy is or how it works.
- jganetsk 9y agoThe paper still holds. It is saying that the natural rate of interest, i.e. the "base case", is zero. It mentions interest on reserves and bond issuance to drain reserves both as ways to "move away from the base case". It claims that, regardless of mechanism, we should justify our actions to move away from the base case. It also claims that the base case is a good policy for a variety of reasons.
- bubbleRefuge 9y agoI know Mosler and he was a proponent of paying interest on reserves. Doing so avoids the complexity of having to execute Fed interest rate policy using treasuries.