Friday, 30 October 2015

No such thing as the natural rate of interest?

According to Steve Keen there is no such thing as the natural rate of interest. As he puts it “it is a fantasy: there is no such thing.”

What: so if I shop around for a loan I’ll find the rates offered jump around all over the place between plus 50% pa and minus 20% - or something?

My guess is that I’ll find every bank I apply to will make a roughly similar offer, and far as I’m concerned, that’s the natural rate as of 2015, or at least something quite close to the natural rate.

To be more accurate, my definition of the natural rate of interest on a near zero risk loan (or any other level of risk you care to choose) is the rate that prevails at a particular point in time assuming government is not artificially interfering with the rate.

Of course what constitutes “artificial interference” is a tricky question. Certainly I’d classify borrowing so as to fund CURRENT spending as opposed to capital spending as a form of artificial interference.

As to whether governments ought to borrow so as to fund CAPITAL spending, that’s more debatable. But assuming it can be demonstrated that GDP is maximised by having government borrow so as to fund capital spending (or not), and assuming government complies with that “demonstration”, then the prevailing rate of interest for a loan of any given level of risk is the “natural rate”.

Can’t see the problem IN PRINCIPLE with that “natural rate” idea. As to actually quantifying it, that's tricky because of the above difficult argument about whether and how much government ought to borrow, plus of course government is a very large borrower.

1 comment:

  1. Steve Keen makes no mention of where the concept of the Natural rate of Interest came from. He doesn't mention Knut Wicksell creating the concept, the Austrian schools development of it or Keynes use of it in his Treatise on Money.


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