tag:blogger.com,1999:blog-2277215496195926573.post3439698883236022026..comments2024-01-01T07:41:51.347-08:00Comments on RALPHONOMICS: Interest rate adjustments are nonsense.Ralph Musgravehttp://www.blogger.com/profile/09443857766263185665noreply@blogger.comBlogger3125tag:blogger.com,1999:blog-2277215496195926573.post-31227398051005022932015-12-19T09:07:59.688-08:002015-12-19T09:07:59.688-08:00Erikdesonville,
I’ve no objections to the Taylor ...Erikdesonville,<br /><br />I’ve no objections to the Taylor rule assuming the existing set up, i.e. assuming the split of responsibilities as between central bank and treasury that pertains in most countries. My point is more fundamental, i.e. to challenge the existing set up. That is I’m saying the funtions of central bank and treasury should be merged.<br /><br />And that’s not an original suggestion. Keynes suggested the same in the early 1930s, as did Milton Friedman in a 1948 paper (link below). At least that’s what Friedman EFFECTIVELY said in his paper. He may have made the same point more explicitly elsewhere – I don’t know.<br /><br />See para starting “Under the proposal…” here:<br /><br />http://0055d26.netsolhost.com/friedman/pdfs/aea/AEA-AER.06.01.1948.pdf<br /><br />The only difference between my proposal and Friedman’s is that Friedman argued for the same small increase in the monetary base every year, whereas I’m saying VARY that increase according to circumstances. <br />Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.comtag:blogger.com,1999:blog-2277215496195926573.post-46273048506845447412015-12-19T07:35:57.240-08:002015-12-19T07:35:57.240-08:00Ralph> By way of celebrating the recent rise in...Ralph> By way of celebrating the recent rise in interest rates in the US, let's run thru the litany of false logic behind interest rate adjustments.<br /><br />It should be noted that the Fed is responsible for monetary policy (such as setting the Fed rate), and has no say on fiscal policy (gov't spending and taxation). The policy makers at the Fed use the tools they're allowed to use according to their mandate (which is double: to support US job growth while also keeping US inflation close to target in the medium term).<br /><br />Within this context of setting central bank interest rate, today's macroeconomists often refer to "the Taylor rule" as the formula that the Fed (and other central banks) are assumed to use or ought to use (as countercyclical policy, in order to keep the economy on track close to its output potential while avoiding bubbles).<br /><br />Here is a very instructive discussion by previous Fed chairman Ben Bernanke:<br />"The Taylor Rule: A benchmark for monetary policy?"<br />http://www.brookings.edu/blogs/ben-bernanke/posts/2015/04/28-taylor-rule-monetary-policy<br /><br />Bernanke> The Taylor rule is a valuable descriptive device. However, John has argued that his rule should prescribe as well as describe—that is, he believes that it (or a similar rule) should be a benchmark for monetary policy. Starting from that premise, John has been quite critical of the Fed's policies of the past dozen years or so. He repeated some of his criticisms at a recent IMF conference in which we both participated. In short, John believes that the Fed has not followed the prescriptions of the Taylor rule sufficiently closely, and that this supposed failure has led to very poor policy outcomes. In this post I will explain why I disagree with a number of John's claims.<br /><br />Then he argues several points: (1) historic Fed behaviour (analysed a posteriori) differs somewhat from the "original" Taylor rule, it's better described by a "modified" Taylor rule (as explicitly given by Bernanke), (2) the claims of bad policy don't stand scrutiny under this modified rule, (3) going on "auto-pilot" by applying the formula blindly isn't possible and wouldn't be wise, since the estimation of the input parameters is difficult and subject to good judgment.<br />erikdesonvillehttps://www.blogger.com/profile/03768276748717698836noreply@blogger.comtag:blogger.com,1999:blog-2277215496195926573.post-60891018668013351742015-12-19T03:08:40.419-08:002015-12-19T03:08:40.419-08:00Thanks Ralph,I am totally convinced by these argum...Thanks Ralph,I am totally convinced by these arguments against the current system of government borrowing to pay its way.The evolution of this practice has become so well accepted through the ages no one in power today seems to possess the faculties to be able to challenge its continues use.<br />It seems to me that the reason is that it is of most benefit to those dealing in the Sovereign bond markets.In other words it is job creation scheme for the City and a safe income stream for hedge and pension funds.Where is the ordinary persons slice of the pie here?The state is looking after the wrong people.Anonymoushttps://www.blogger.com/profile/14758456556310738132noreply@blogger.com