A permanent zero interest rate would maximise GDP - (second edition).

by Musgrave, Ralph Stephen

Abstract (Summary)
About ten popular alleged reasons for government borrowing are examined and shown to be questionable if not totally invalid. If there are in fact no good reasons for government borrowing, that means that such borrowing as currently exists artificially raises interest rates. I.e. the abolition of such borrowing would amount in a sense to a permanent zero interest rate policy. Interest rates can be artificially adjusted by adjusting interest paid on reserves, but there is a flaw in that strategy and in all types of interest rate adjustment, which is that the market failure which causes recessions is not the failure of interest rates to fall, thus interest rate cuts are not an appropriate cure for recessions. The alternative cure is fiscal stimulus either in the form of having government and central bank borrow money and spend it, or print money and spend it. The former is ruled out if government borrowing makes no sense, which leaves print and spend. It is conceded that some government borrowing to fund public investments like infrastructure might makes sense, if advocates of that borrowing get their act together, but even if that is the case, that does not justify using relevant bonds to adjust interest rates: reason is that if there are solid reasons for that borrowing, it is illogical to then abandon those allegedly solid reasons come a recession, and print money so as to buy up relevant bonds. That amounts to funding public investments via tax or money printing, exactly what is advocated here. In contrast to artificial increases in interest rates, it is possible for central banks to artificially reduce them by buying commercial bonds. But that involves central banks taking commercial risks which is not what central banks were set up for. The conclusion is that there are few good arguments for tampering with interest rates: i.e. a permanent zero interest rate policy is best.
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Keywords:interest; government debt; base money; infrastructure


Date of Publication:06/25/2018

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