tag:blogger.com,1999:blog-8897997766931633186.post5292051474149765303..comments2024-02-14T03:21:37.506-05:00Comments on Monetary Freedom: Targeting Interest RatesBill Woolseyhttp://www.blogger.com/profile/06330232724290161369noreply@blogger.comBlogger3125tag:blogger.com,1999:blog-8897997766931633186.post-52005566572954221072013-04-02T17:32:43.188-04:002013-04-02T17:32:43.188-04:00“Some of those short on money can rapidly solve th...“Some of those short on money can rapidly solve their problem by selling bonds that are traded on organized exchanges. . . . Further, some households or firms short on money may not own any bonds. They might restrict their expenditures out of current receipts to build up their money holdings.” Or they might sell other assets: stocks, real estate, artworks, stamp collections, etc., etc. <br /><br />Why, then, do you focus on *bonds*? Is there some theoretical or empirical reason to think that *selling bonds* will be the first or the predominant recourse of most people who find themselves holding less money than they wish?Philonoreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-11631562582306521542013-04-01T08:09:10.330-04:002013-04-01T08:09:10.330-04:00My casual impression is that large, sophisticated ...My casual impression is that large, sophisticated banks don't care much about interest rates in general. They make money on credit risk, and mostly hedge their interest rate risk. Since taking interest rate risk doesn't require any brains, it's better done by investors rather than by banks.<br /><br />Banks do dislike interest rates close to 0%, because they are very reluctant to lower deposit rates below 0%, so low rates directly subtract from profits.<br />Maxnoreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-17860463400123457792013-03-31T09:13:13.646-04:002013-03-31T09:13:13.646-04:00"From the perspective of the special interest..."From the perspective of the special interest of bankers, then, the goal should be to keep interest rates stable, subject to the constraint that inflation, and more importantly, inflation expectations, not increase. "<br /><br /><br />Because the equilibrium size of the commercial banking industry is largest in the NGDPLT environment, NGDPLT is better for such industry than interest rate targeting.<br /><br />With a free entry, any special advantage from stable interest rates is competed away. Monetary environment does affect the optimal size of the industry, but the lobbying incentive does not exist for any individual firm except in the very short term.<br /><br />While some obscure trading strategies may benefit from low interest rate volatility, I believe that stable NGDP level target provides the environment where debt finance works best, just like regular employment contract work best under such environment. NGDP level targeting would increase the demand for debt-related financial intermediation services, higher interest rate volatility notwithstanding. Because any extra profits would be competed away, for any individual firm it makes sense to lobby for a firm-specific advantage (such as bailout), and lobbying for NGDPLT is not as advantageous.<br /><br />FOMC has used interest rate target smoothing too much in September-October 2008, this has led to huge losses for commercial banks.123http://themoneydemand.blogspot.com/noreply@blogger.com