tag:blogger.com,1999:blog-8897997766931633186.post4587093619749147446..comments2024-02-14T03:21:37.506-05:00Comments on Monetary Freedom: Market Monetarism vs. new KeynesianBill Woolseyhttp://www.blogger.com/profile/06330232724290161369noreply@blogger.comBlogger2125tag:blogger.com,1999:blog-8897997766931633186.post-27061060657281295862014-01-07T07:50:22.378-05:002014-01-07T07:50:22.378-05:00I favor having the interest rate on reserves float...I favor having the interest rate on reserves float. For example, 50 basis points below the 3 month T-bill rate.<br /><br />While I agree that a central bank can stabilize short term interest rates, including the Federal Funds rate, I don't agree that it must "flap around like crazy" without such efforts. There have actually been economies without central banks.<br /><br />What happens is that without a central bank stabilizing short term interest rates, banks hold more reserves and release or accumulate them according to changes in short term interest rates. The change depends on the interest elasticity of the demand for reserves.<br /><br />Of course, if the interest rate on reserve floats, this doesn't work.<br /><br />Anyway, if there is a central bank, I favor having it adjust the quantity of reserves according to changes in the demand to hold reserves. If done perfectly, there would be no fluctuation of short term interest rates due to changes in the demand to hold them. On the other hand, interest rates could fluctuate with changes in the demand for credit. How much fluctuation that would require depends on the interest elasticity of expenditure. <br /><br />Of course, perfection is not an option, but a central bank should make no commitments about interest rates. <br /><br />I don't think there should be any commitment about base money either.<br /><br />The central bank should adjust base money to the demand to hold it and allow interest rates to adjust to keep saving and investment equal--spending on output equal to potential.<br /><br />The only nominal anchor should be keeping expected nominal GDP on target.<br /><br /><br /><br />Bill Woolseyhttps://www.blogger.com/profile/06330232724290161369noreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-65402293333711879232014-01-06T18:23:21.091-05:002014-01-06T18:23:21.091-05:00"We do not favor having the central bank &quo..."We do not favor having the central bank "set" any interest rate or especially to make commitments as to what those interest rates will be in the future."<br /><br />The way I see it, it's impossible for a central bank as issuer of reserves not to set a few interest rates. For instance, if it chooses not to pay interest on reserves, it has set IOR = 0. Or it can choose to set IOR > 0. Either way, it's gotta set a rate.<br /><br />There's also the rental rate on reserves, the fed funds rate. If the Fed chooses not to set the fed funds rate at some fixed amount for a period of time, then it'll flap around like crazy. JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.com