5 ms·
The best interest rate policy is zero, which is the natural rate of interested in a floating exchange rate economy. Fiscal policy is the only tool through whic
by dools 3y ago
The best interest rate policy is zero, which is the natural rate of interested in a floating exchange rate economy.
Fiscal policy is the only tool through which equity can be managed. Monetary policy is pointless.
- JackFr 3y agoZero is the natural interest rate? That’s ludicrous. A dollar today is always going to be worth more than a dollar tomorrow.
- ebb_earl_co 3y agoWhy is this the case about the worth of a dollar?
- satellite2 3y agoBecause you can invest it in the riskless asset and have a dollar and some interest tomorrow.
- ebb_earl_co 3y agoForgive my naïveté, but if it’s riskless, how are you getting interest from investing in it?
- ahepp 3y agoIsn’t that confusing cause and effect? You’re getting interest because they’re paying it to you. They wanted to borrow, and even if there’s no risk, you won’t lend it out for free.
- jaredhallen 3y agoOne might argue about the relative value of interest rates vs risk, but all lending incurs risk. Maybe very little, but non-zero.
- JackFr 3y agoBut as an academic exercise, you can stipulate risk free lending as axiomatic, and still see that a natural interest rate comes from different inter temporal marginal preference for money among entities in the economy. It’s only zero if everyone’s preference is identical.
- ahepp 3y agoNonetheless, I think you can derive a “time value of money” from the data?
- JackFr 3y agoIf I have 10 pounds of blueberries and you have 10 pounds of strawberries there will be a natural price for one in terms of the other based on our different marginal preferences for the two commodities. Think of a dollar today as one commodity and a dollar tomorrow as a separate and distinct one. There is a difference in our marginal preferences and that is where the interest rate comes from. Just as both of us can be made better off trading blueberries and strawberries without actually creating anything new, the difference in our inter temporal marginal preference will reward the lender with a return even in the absence of risk.
- ebb_earl_co 3y agoThank you for an example with fruit. I am not trying to be thick, but your last paragraph confuses me. My point of reference is, say, lending $1,000 to a sibling who will pay me back within 2 weeks when he gets his paycheck. I gave him $1,000 and he will return me $1,000 so when and how would interest arise here? What axiom am I missing that makes his debt increase? Is it a choice by me to demand it?
- elefanten 3y agoYou can buy stuff today with it vs. waiting til tomorrow. A dollar you own today has zero risk of not being delivered tomorrow. You can invest that dollar one day sooner. If there’s a general expectation of inflation, it exchanges for more today than tomorrow.
- dools 3y agoThe overnight cash rate is the interest rate I'm referring to. That's the interest rate central banks use monetary policy to set and defend.
- kazinator 3y agoIf the interest rate is zero, what is the incentive for lending money?
- dools 3y agoThe interest rate I'm referring to is the cash rate, ie. the rate at which banks lend to each other. That's the interest rate central banks set and defend using the sale and purchase of bonds on the secondary market. If they didn't prop it up, it would tend to zero because banks have so much liquidity.
- kazinator 3y agoWhy would a bank lend money to another bank for nothing, instead of the alternative course of action of not lending?
- dools 3y agoThe lowest recorded interbank lending rate in Australia was 0.03% https://tradingeconomics.com/australia/interbank-rate https://tradingeconomics.com/australia/interbank-rate If you're lending someone a billion dollars, and your labour cost for doing the lending is in the hundreds (maybe thousands?) of dollars, then interest rates quickly approach 0. Sure, no-one would do it for literally 0 dollars, but the rates at which banks lend to each other when there is a ZIRP policy at the central bank (including 0% paid on reserves) is negligible as far as the real economy is concerned. Like the "cost of capital" in that case for issuing a mortgage has nothing to do with the interbank lending rate.
- deleted 3y ago[deleted]