I listed NINE
reasons here why adjusting demand via fiscal policy is better than doing it via
monetary policy.
But there is
one point I missed. And that is that if government issues debt on which it pays
interest – and in particular if it raises interest rates when inflation
looms - that just encourages foreigners
to buy up some of the debt. And getting indebted to foreigners is not a brilliant
idea, unless there is a particularly good reason for doing so. And in this
case, there just aren’t any “particularly good reasons”.
Moreover,
raising interest rates boosts the value of the relevant country’s currency
relative to other currencies, and that is a totally uncalled for, or irrelevant
side effect: it just messes up exporters and importers, and for no good reason.
Of course
cutting demand via fiscal adjustments ALSO boosts the currency because fewer imports are drawn
in. But there is no good reason for the ADDITIONAL currency boosting effect
that comes if demand is adjusted via interest rate changes.
Another point
is that if a country issues no interest paying debt and issues just currency
(as advocated by Milton Friedman and Warren Mosler) foreigners will doubt less
still stock up with a supply of the currency (particularly in the case of the
World’s premier currency: the US Dollar). That phenomenon is unavoidable. But
there is no need to exacerbate that phenomenon by paying interest to foreigners
who hold one’s currency.
Warren's key point here is that not issuing interest on government debt makes the currency harder to get - so it actually firms the price of the currency.
ReplyDeleteRaising interest rates shifts the balance towards asset speculators and away from traders.