Rajan wrote: > More than any other policy action, monetary policy suffers from the sense > that there is a free lunch to be had.
This, like so much of the stuff that economists assert, assumes that macro-economic scarcity prevails, so that increasing the production of one item must lead to falling production of other things (assuming the supplies of tangible and intangible resources to be given). But the situation where unemployment is extremely high is specifically a case where "free lunches" exist: increased aggregate demand ends the inefficient under-utilization of both labor-power and capital goods, allowing the production of more goods and services. It replaces the involuntary leisure of workers with them being able to work for a living. > Yet the [real? nominal?] interest rate is a price for > the savings that are transferred to spenders. To the extent that the Fed > manages to push this price down ... it taxes the producers > of savings and subsidizes the spenders of savings. Clearly, no government > considers pushing down the price of any real good an effective way to > stimulate the economy – any gain to consumers is a loss to producers, and > the loss typically will outweigh the gain if the market price is a fair one. > So why are savings different? The "producers" of savings are holding back the demand for goods and services. But if spending rises, that raises GDP and the incomes of the savers. That means that the savers have a _greater ability to save_ and are quite likely to do so. (Hasn't Rajan heard of the marginal propensity to save? or of income effects?) It's quite likely that the Fed can't lower short-run nominal interest rates down (since they're so close to zero) and that monetary policy is impotent at this point, but expansionary fiscal policy could be used to raise both consumption spending and private saving. BTW, the response of saving to changes in (real) interest rates is minimal, as far as I can see from the empirical literature. -- Jim Devine / "Reality is that which, when you stop believing in it, doesn't go away." -- Philip K. Dick _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
