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> So yes, with an interest rate target of essentially 0%, they can increase the amount of reserves out there, but this does not translate to more money in publi
by jvm 14y ago
> So yes, with an interest rate target of essentially 0%, they can increase the amount of reserves out there, but this does not translate to more money in public circulation.
Sorry just noticed this. This is a common misperception. They have been using QE to create more money in public circulation now that interest rates are 0, and there's nothing ineffectual about that.
To see why this is possible, just consider the question, could the Fed create inflation at the 0-lower-bound by saying they will print money until they get it? The answer is clearly yes. Actually the Bank of Switzerland did that recently to set a Euro peg.
- nhaehnle 14y agoI guess it depends on what you mean by public circulation. QE was certainly effective in raising the amount of reserves, since that is what it is by definition. But reserves are only ever held by banks. The amount of money held by the non-bank public has not been changed significantly by QE. As for targeting the money supply, you're right, they could do that, and in fact they did try it a few decades ago. The problem that was observed is that it created extreme volatility in the interest rate. The lesson learned from the experiment is that either the interest rate or the money supply has to be volatile, and there's general consensus that a volatile interest rate hurts the economy, whereas a volatile money supply has marginal effects at best.