ks.234
Half way to Infinity
It is undoubtedly broken, it’s primary purpose is to control inflation. It hasn’t done it
By how much should the Bank of England increase interest rates in a traditional monetarist economy
- Thread starter lawrence001
- Start date
Joe Hutch
Mate of the bloke
And it so obviously hasn't done it that its advocates will have to come up with some novel thinking before people are forced into poverty simply by having to heat their homes and feed their families. Not that politicians would care about that, but they might just selfishly want to avoid losing millions of votes.
ks.234
Half way to Infinity
People have voted for it for 50 years, why will they change? All they have to do is say there is no alternative, maxing out the nations credit card, sorry, just the way it is,
lawrence001
Basic Member
If you mean that the causes of inflation are external to the UK and the Bank's power to influence these through UK interest rates is low to zero then I see your point. In which case we could keep rates lower and just see it as a transitory phase?
ks.234
Half way to Infinity
But that is t controlling inflation in monetary terms as you’ve asked.
lawrence001
Basic Member
If the Bank has no control over the "wrong" type of inflation then they can't control inflation whatever, therefore if increasing rates will just harm the economy further should we just keep them where they are?
An alternative in this scenario could be like this: assume endogenous priced goods make up 50% of activity and the inflation rate is 20% then to keep total inflation at a 2% target we need to get domestically priced goods inflation down to -18% and hey presto we have inflation at the govt mandated level of 2%. Unfortunately the contraction in the economy to see domestically set prices fall by 18% is pretty massive. So what should the Bank do?
ks.234
Half way to Infinity
But you have already predicated everything on monetarist assumptions. Monetarism is built on false assumptions. I can say why monetarism is a failure, why it will fail to deal with the coming economic shock, how it created the last one and how it’s response to that was so abviously wrong that even economists like Krugman thought it wrong. But I can’t give you an answer to how monetarism will cope, because it won’t.
lawrence001
Basic Member
I can see there's no easy way out of what are multiple stresses arriving at once in a world already stretched by Covid and an addiction to easy money.
What I'm trying to get a feel for is what people think the best policy is to keep the damage to a minimum, either from members who subscribe to the traditional model of the economy speaking as a reality, or those who don't but are capable of imagining what should be done on a theoretical basis if the economy did work that way.
The only thing I don't want to hear is, the economy doesn't work that way, it works this way and so we should do this etc etc. There's been quite enough discussion about that and I see no need to add to the plentiful information for those who still want to hear more.
What I'm trying to get a feel for is what people think the best policy is to keep the damage to a minimum, either from members who subscribe to the traditional model of the economy speaking as a reality, or those who don't but are capable of imagining what should be done on a theoretical basis if the economy did work that way.
The only thing I don't want to hear is, the economy doesn't work that way, it works this way and so we should do this etc etc. There's been quite enough discussion about that and I see no need to add to the plentiful information for those who still want to hear more.
Super Bigote
pfm Member
The basis of your question is erroneous. We do not live in a 'traditional monetarist economy'. There is no such thing. Monetarism is a policy, not an economy. The correct question is how can monetarist policies reduce inflation and the answer is by having mass unemployment and a reduction in GDP.
Super Bigote
pfm Member
In other words, of the three goals of macroeconomics, one can be achieved at the cost of failing on the other two.
lawrence001
Basic Member
I'm not asking how inflation can be reduced, I'm asking if interest rates should go up and, if so, by how much. I can see some people arguing in the context I've placed the question that they will have no effect on inflation so there's no point, and others arguing that they may have an effect but the cost is too high to do it. And others again that once inflation is embedded it is harder to get rid of it, therefore it's worth going through short term pain for long term gain. Just interested in others' views about what policy would be best in this scenario.
Of course I'm not really treating it as an academic exersise in moneterism, I really mean what should central banks (specifically the UK) do given they accept this monetary framework. I could have framed it, say, in terms of MMT but then it really would be an academic exercise as none of the central banks subscribe to that and hence won't be doing whatever gets discussed. So if anyone wants to discuss that they can set a new thread up about the theoretical response of a central bank that subscribes to MMT, although I suspect it would just go round in the same circles previous ones have.
lawrence001
Basic Member
Another good point about those who have suffered from prolonged low interest rates, the savers. When I was young, savings were seen as good (allowing you to not have to fall back on the state as soon as you hit a bump in the road) and debt as bad (eg. the "never-never") and if you wanted something you should be patient and save up for it. Compare that to now where everyone expects to get what they want straight away and if they can't really afford it, so what others will just pay for it instead via the back door. And some inflation is seen as a positive as it reduces the burden on debtors allowing them to spend more and fuel growth.
Super Bigote
pfm Member
You were asking if interest rates should go up in order to reduce inflation.
This was the start of your OP:
So of course you were asking how inflation can be reduced. Raising interest rates is one of three main tools that monetarist policies would use. This would make investment unattractive so there would be less activity in the economy. The other options are to decrease the money supply and to create a budget surplus. The goal of all three of these monetarist policies is to reduce inflation by increasing unemployment and reducing GDP.
That is monetarism 101.
Super Bigote
pfm Member
And the central bank does what the government tells them to do. This happens when the budget is approved in Parliament.
lawrence001
Basic Member
You said "The correct question is how can monetarist policies reduce inflation and the answer is by having mass unemployment and a reduction in GDP."
That is not the correct question. I created the thread therefore the correct question is whatever I want it to be. You may want it to be that and please feel free to create a thread asking that question if you wish.
As you quoted I said "So my question is IF we live in a traditional monetarist economy should the Bank increase rates and by how much, how quickly?". Where did I say "how can inflation be reduced"? I deliberately left open the option that inflation can't currently be reduced by increasing UK interest rates (eg as a result of the endogenous nature of the current inflation episode). There may be other means like running a fiscal surplus that others might have wanted to throw in to the discussion.
Equally it doesn't always follow that lower GDP has to mean higher unemployment. If workers accepted the same share of a smaller pie they could all continue to work. Alternatively they could insist on the same size portion but inevitably if the total pie is smaller that would mean someone won't get any pie.
Now if you consider the possibility that maybe the owners of capital should get a smaller share then maybe the workers could keep the same size pie and hence all stay in work without getting smaller slices. I'm not aware moneterism says that this is a bad thing (though most proponents of monetarIsm may think so but these two things shouldn't be conflated). So that's a possibility that could be discussed as well. Which ties in nicely with recent (somewhat controversial) comments by the Governor..
Super Bigote
pfm Member
Goodnight Lawrence.
lawrence001
Basic Member
Night!
TheDecameron
Unicorns fart glitter.
A more redundant financial product it’s hard to conceive of.
Sue Pertwee-Tyr
Accuphase all the way down
ISTM that raising interest rates will just add fuel to the fire. The cost of housing will rise, again, and economic activity will decline as people cut back to essentials only.
The main drivers are external shocks, energy costs being the most acute IMO, and if government needs to intervene, it should do so by capping the rise and using resource to cushion the impact. It could tell Ofgem to reduce the cap. Energy utilities would be at risk of going bust, and could be nationalised, or subsidised by the state. The right of energy companies to make a profit does not override the right of citizens to eat and keep themselves warm.
The main drivers are external shocks, energy costs being the most acute IMO, and if government needs to intervene, it should do so by capping the rise and using resource to cushion the impact. It could tell Ofgem to reduce the cap. Energy utilities would be at risk of going bust, and could be nationalised, or subsidised by the state. The right of energy companies to make a profit does not override the right of citizens to eat and keep themselves warm.