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By how much should the Bank of England increase interest rates in a traditional monetarist economy

Discussion in 'off topic' started by lawrence001, Aug 3, 2022.

  1. lawrence001

    lawrence001 pfm Member

    Inflation is looking pretty grim and the outlook is getting worse with forecasts of RPI of 15% plus and talk of stagflation. So my question is IF we live in a traditional monetarist economy should the Bank increase rates and by how much, how quickly?

    If anyone wishes to argue that we don't live in a monetarist economy please discuss that on another thread, there are plenty to choose from. This is only to discuss what should happen in an economy that functions as described by traditional monetary economics with government spending paid for by taxation or the issuing of debt, future generations paying for the debt of the current, money printing causing higher inflation etc.
     
  2. matt j

    matt j pfm Member

    I think the best option is to do whatever favours the wealthiest in our society as that only seems right and fair.
     
  3. laughingboy

    laughingboy pfm Member

    Well, Milton Friedman famously said ‘Inflation is always and everywhere a monetary phenomenon, in the sense that it cannot occur without a more rapid increase in the quantity of money than in output.’

    But a moment’s thought will tell you that he is only telling half the story. Imagine a world where oil production stopped overnight. Demand for the oil that was in storage would go through the roof, demand for other fuels would rocket, and a whole chain of inflation would ripple through the economy. The resulting inflation would not be a result of an increase in the quantity of money; it would be the result of supply shocks. It’s still too much money chasing fewer goods, but it’s the fewer goods that are driving the inflation, not any increase in the quantity of money. If the causes aren’t monetary, why should the response be monetary?

    So, the answer to the interest rate question should depend upon a diagnosis of what is happening in the economy. Is it a supply shock or a rise in the quantity of money that is causing the inflation? Or is it a mixture of things? Why not, say, raise taxation, if money needs to be cancelled?

    Back in the real world, Friedman also said
    So, people who follow Friedman’s advice are going to whack up interest rates anyway (‘if it isn’t hurting, it isn’t working’), despite the fact that it will put firms and households under water.
     
  4. Weekender

    Weekender pfm Member

    Massive MMT Temptation.
     
    klfrs and TheDecameron like this.
  5. Woodface

    Woodface pfm Member

    Interest rates have been historically low for many, many years so a rise is inevitable. Inflation will work its way through the system & people will start buying less which may ease things a little. I can see rates going above 5% pretty quickly & a balanced economy should be able to cope with that.
     
  6. Joe Hutch

    Joe Hutch Mate of the bloke

    So, OK, if we accept (and I do) that raising interest rates to control inflation is a dumb idea, what approach should be adopted?
     
  7. TheDecameron

    TheDecameron Unicorns fart glitter.

    M3 or is it M2?
     
  8. Joe Hutch

    Joe Hutch Mate of the bloke

    Well, the M2's a bit crowded this time of year. M3 may be a better bet.
     
    Mike Reed and darrenyeats like this.
  9. lawrence001

    lawrence001 pfm Member

    Maybe in this economy a fiscal contraction if interest rate rises can't help keep inflation in check and there's a desire to reduce it (it as in inflation)?
     
  10. ks.234

    ks.234 pfm Member

    Within the confines of monetarism there isn’t one. As has already been explained by @laughingboy, monetarism only ever offers monetary solutions. If you way a different approach then you won’t find it within monetarism.
     
  11. lawrence001

    lawrence001 pfm Member

    An economy built around normal interest rates should but with years of QE and ultra low rates, and so much leveraged investment (real and financial) only profitable at these rates, I wouldn't call it balanced.
     
  12. lawrence001

    lawrence001 pfm Member

    So I guess raise rates then, but within the confines of monetarism by how much and how quickly is my question?
     
  13. ks.234

    ks.234 pfm Member

    Monetarism is not the answer. Raising interest rates will befit the already wealthy at the expense of the less well off. It isn’t the wealthy who will be in the front line of inflation
     
    Klassik likes this.
  14. Joe Hutch

    Joe Hutch Mate of the bloke

    Even I can see that monetarism isn't, and never has been, the right answer to anything.
     
    Covkxw and Super Bigote like this.
  15. ks.234

    ks.234 pfm Member

    Now we’re getting somewhere!
     
  16. lawrence001

    lawrence001 pfm Member

    Anyway, getting off topic so back to economies that function according to monetarist theory, if we don't increase rates sooner and faster, will inflation go out of control?
     
  17. lawrence001

    lawrence001 pfm Member

    But in this monetarist economy we need to increase rates if we want to control inflation so would the less well-off be better off with lower rates and higher inflation or higher rates and lower inflation (but higher unemployment)?
     
  18. ks.234

    ks.234 pfm Member

    Yes. Will if we increase rates as well.
     
  19. Joe Hutch

    Joe Hutch Mate of the bloke

    This is why monetarism is such a dumb concept. I think/hope it will finally be proven to be broken, and that not too much suffering will be needed before the penny finally drops.
     
  20. ks.234

    ks.234 pfm Member

    That is always the problem with monetarism, yes you can control inflation with monetary policy, but the consequences are austerity and unemployment. And if the last 50 years are anything to go by, you still get inflation anyway
     

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