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

[Super Bigote]

One thing is for certain; if mortgage rates rise sufficiently to trigger a house price crash, they will pile in on her. Which, I guess, is precisely why Truss won't allow that to happen, and has already talked about bring the BofE back under Government control.

That's exactly it. Any independence is granted and removed by the government. Not only that, the supposed independence is a sham as senior member's of the Treasury Department sit in BoE meetings that select the interest rate etc.

 

[Seeker_UK]

senior member's of the Treasury Department sit in BoE meetings that select the interest rate etc.

According to the bios of the members of the MPC, none are at the Treasury. Who are you thinking of?
https://www.bankofengland.co.uk/about/people/monetary-policy-committee

 

[Sue Pertwee-Tyr]

I'm not sure central bank independence is a necessity under *MT anyway; provided the government has sovereign independence over its currency it doesn't matter so much whether the economic strings are pulled by the Bank, or the Treasury.

 

[ks.234]

I think the specific point about independence being an illusion was made as MMT theory relies on the govt having control of the money supply. If the money supply was set truly independently of the govt I don't think the assumptions that MMT rely on would work.

What are these “assumptions that MMT rely on” ?

 

[ks.234]

I'm not sure central bank independence is a necessity under *MT anyway; provided the government has sovereign independence over its currency it doesn't matter so much whether the economic strings are pulled by the Bank, or the Treasury.

MMT does not have a policy view on the independence of the BoE, though MMT economists do note that the BoE is an arm of Government, any ‘independence’ is just to do with setting interest rates.

 

[ks.234]

So you are rejecting a view of the economy which provides the basis for full employment, prosperity and low inflation based upon an issue that you 'don't know how all that works' and instead prefer to talk about a system which uses unemployment, poverty, despair, alcoholism, depression etc etc to keep inflation down that demonstrably does not work

FIFY

 

[Joe Hutch]

According to the bios of the members of the MPC, none are at the Treasury. Who are you thinking of?
https://www.bankofengland.co.uk/about/people/monetary-policy-committee

If you look at the MPC meeting minutes, you will see that:

'James Benford was present as the Treasury representative on 27 April and Clare Lombardelli was present as the Treasury representative on 29 April and 4 May.'

So the Treasury reps are 'in attendance', to use Govt jargon. From my own experience, they would therefore be able to provide advice and information, but would not be allowed to vote on any decisions.

 

[lawrence001]

I'm not sure central bank independence is a necessity under *MT anyway; provided the government has sovereign independence over its currency it doesn't matter so much whether the economic strings are pulled by the Bank, or the Treasury.

I'm referring to the Bank having independence from the government over setting the quantity of money in the economy and the govt being a taker of that quantity. Is that not how they claim the system works? (That's a rhetorical question on this thread but happy to find out more on another thread.)

 

[lawrence001]

A monetarist would recommend things like soup kitchen's, food banks, perhaps using state schools and gyms for a small amount of communal warmth on cold nights, a minuscule UBI etc until the workers reduce their wage demands so that they would become employable again.

I would have thought a monetarist economist (that I'm talking about as interest rate setters) would look more at macro variables and not get involved in micro management of where the unemployed would get their food. That's more the remit of monetarist politicians. Agree they definitely would get involved in the wage bargain issue though as that's of primary concern to their inflation forecasts.

 

[Seeker_UK]

So the Treasury reps are 'in attendance', to use Govt jargon. From my own experience, they would therefore be able to provide advice and information, but would not be allowed to vote on any decisions.

Yes, that is exactly what it means. No decision making powers in that committee at all.

 

[lawrence001]

What are these “assumptions that MMT rely on” ?

That the govt when setting tax and spending can also choose the level of the money supply. I could be wrong on that but that's how I read the numerous threads on this issue.

 

[Sue Pertwee-Tyr]

That the govt when setting tax and spending can also choose the level of the money supply. I could be wrong on that but that's how I read the numerous threads on this issue.

Well, can't it? Doesn't it do that anyway?

 

[lawrence001]

One of the problems with monetarism is that it presumes that everything is a demand problem and the demand it sees as a problem is workers demanding a living wage.

There are a number of options that will address inflation along with other blights on our economy such as an NHS in crisis, but monetarism does not allow them.

I'm not sure it does see workers demanding a living wage as the problem it just looks at aggregate demand and seeks to reduce it. It's tools may be rather crude and so the result is the poorer suffer more but I don't think they seek to do that, rather than regard it as collateral damage.

The one reason they might account for it is marginal propensity to consume however. If you want to maximise the impact of your policy, you want to reduce the demand of people who spend a higher proportion of their income and save less which tends to be the poor. I think the issue here is that they look at economics as "positive" rather than "normative" ie they dont consider the morality of their policy, just the effectiveness, within the framework of their accepted model of the economy.

I'm actually interested in other options to address inflation, just not those espoused by MMT as there are lots of threads covering that already.

 

[ks.234]

That the govt when setting tax and spending can also choose the level of the money supply. I could be wrong on that but that's how I read the numerous threads on this issue.

Yes, sorry, but I think you might have got a few things in the wrong order.

All that MMT ‘says’ is that our Government is the currency issuer and cannot therefore run out of the thing it is issuing

Spending is what Government chooses to spend what it issues on.

Tax is what happens after spending and is no more than a drain of excess.

To try to bring things back to Monetarism, when it comes to spending, monetarism is ideologically opposed to spending on public services. The mechanism it uses to restrict spending on public services is to tell the lie about the role of tax and therefore shift the cost of spending on public services back onto the public.

 

[Richard Lines]

At a time when an Electorate are either smarting or worried the financial pain is coming then they are looking to their government for solutions.

That is the same government that has overseen the current situation.

The "Electorate", or at least some sections, shouldn't have allowed itself to get into the mess it has gotten itself in to and I certainly don't want to have to pay for the "bail outs" for those who have not exercised sufficient self-control.

Regards

Richard

 

[lawrence001]

So you are rejecting a view of the economy which provides the basis for full employment, prosperity and low inflation based upon an issue that you 'don't know how all that works' and instead prefer to talk about a system which uses unemployment, poverty, despair, alcoholism, depression etc etc to keep inflation down.

I'm not rejecting it or accepting it, I'm trying to discuss what the MPC should do given its view of how the economy works, how they should balance the pros and cons of interest rate rises in a very difficult situation. Assuming they don't suddenly all see the light and embrace MMT as a model of the economy.

 

[Colin L]

Attitude to economics policy as a function of Belgian beer consumed

 

[Sue Pertwee-Tyr]

I'm actually interested in other options to address inflation, just not those espoused by MMT as there are lots of threads covering that already.

It seems to me that if the causes of inflation are external to the economy (as now), then the other options boil down to mitigation rather than addressing. And that mitigation then implies government intervention by subsidy or injection of funds in some form or other.

 

[Joe Hutch]

I think that the more frugal amongst us should be allowed to determine each case on its merits. All family budgets to be made available for scrutiny, with points deducted for more than one holiday a year, fancy coffees, avocado on toast, Netflix subscriptions, more than one car, expensive trainers etc etc. The most profligate families would receive no help at all, and would be forced to pick fruit at minimum wage levels until their credit card debts are paid off in full. If all else fails, deportation to Hull.

Gets my vote.

 

[lawrence001]

That supposes that the tax burden is greater than the increased cost burden. In the case of energy, I'm not sure it is, at the moment. Nor perhaps for other raw material supplies which have ramped up dramatically in price of late - building materials being one example.

But supposing for a moment that yes, you could offset the input cost rises by reducing taxation. That implies, in a monetarist economy, that either taxes rise elsewhere (ie PAYE) which again suppresses the economy; or cuts to services. Inevitably that means the services used most by the same people who are hardest hit by the inflation in fuel and food costs.

But in a real sense, tax cuts are just another form of government subsidy, such as I suggested upthread. Just a more ideologically palatable one than, you know, actual subsidy.

There's also the "issue more gilts" option, to be paid off in the future when the economy is prosperous again. I think that's the direction of travel at the moment.