Sunday, 25 November 2018

Permanent zero interest rates.

The idea that the central bank base rate should be kept permanently at zero is very much an MMT idea. At least the two co-founders of MMT, Warren Mosler and Bill Mitchell both advocated the idea. Mosler’s exposition of the idea (co-authored by Matthew Forstater) is in a paper entitled “The Natural Rate of Interest is Zero”.

Bill Mitchell’s exposition is in an article entitled “There is no need to issue public debt”.

The idea that interest rates should be kept permanently at zero comes to the same thing as saying that neither government nor central bank should borrow anything: i.e. the only liability they should issue should be zero interest yielding base money.

I found Mosler and Forstater’s paper unnecessarily complicated – or perhaps it’s just me being stupid. Mitchell’s is more common sense and contains numerous good points. Mitchell criticises some of the defective arguments put for government borrowing, but he does not deal with all of those defective arguments.

Milton Friedman also advocated a zero government borrowing regime in a paper entitled “A monetary and fiscal framework for economic stability” (American economic review). But he does not go into much detail.

In short, I think the above three articles leave room for a bit of improvement, so I’ve just turned out my own attempt to argue for a permanent zero interest rate. That’s in a paper entitled “The arguments for a permanent zero interest rate.”


  1. Nice paper- thanks for sharing it. What do you think of the argument that the government borrowing is less likely to cause inflation than just creating the money for the spending would be? I know you covered part of that in the section on the impossibility of time travel, but it still seems to me to be the best reason (if it were true) that the government might borrow.

    I know Bill Mitchell says it does not reduce the likelihood of the government spending causing inflation, at least the way the bond market is currently structured, but wonder if you can change that structure so that the borrowing actually does limit potential demand.

    1. Obviously creating and spending $X has a bigger stimulatory and perhaps also inflationary effect than borrowing and spending $X. But that’s simply because borrowing $X considered in isolation has a demand reducing effect. That is, if the state (i.e. government and central bank) borrow $X and do nothing with that money, then the effect is to cut demand.

      But what’s the point in doing something that cuts demand when the object of the exercise is to RAISE demand? As I always say, it’s a bit like throwing dirt over your car before washing it. So I don’t think the “borrowing is less inflationary” is much of an argument.

    2. Thanks Ralph. I agree it does 'seem' obvious that government borrowing would be less stimulatory than just creating the money, but I've been wrong about things I thought were obvious in the past. And Mitchell is pretty clear that he does not consider government deficit spending associated with debt issuance to be less inflationary than that same spending without issuing bonds would be.

      And occasionally at least, the government does have to try to cut rather than raise private sector demand when the real resources are needed for (hopefully) the public purpose. I mean isn't that kind of what the Fed is trying to do every time it raises its interest rate?

  2. I really like that Bill Mitchell article.Loved this barb at the private sector demanding a publically funded safe asset ...

    "It is ironic that these arguments are inconsistent with rhetoric forthcoming from the same financial sector interests in general about the urgency for less government intervention, more privatisation, more general welfare cutbacks, and the deregulation of markets in general, including various utilities and labour markets."

    He really lays into the need for national debt ,something I regard partly as as a job creation scheme for the financial sector as well as protecting the investment of the already wealthly.

    1. Yes: Bill is good at barbed comments. I like his style. As you may have noticed, my own style is not 100% diplomatic 100% of the time to put it mildly...:-)


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