tag:blogger.com,1999:blog-8897997766931633186.post782931793257564708..comments2024-02-14T03:21:37.506-05:00Comments on Monetary Freedom: Interest Rate Targeting and Finanical InstabilityBill Woolseyhttp://www.blogger.com/profile/06330232724290161369noreply@blogger.comBlogger2125tag:blogger.com,1999:blog-8897997766931633186.post-47367919688843738702014-04-26T11:23:35.031-04:002014-04-26T11:23:35.031-04:00You write: "If short term interest rates spi...You write: "If short term interest rates spike, this is costly to financial institutions. Keeping short term rates fixed avoids those problems. Of course, keeping short term interest rates fixed is a recipe for inflationary disaster, and impossible." These sentences seem oddly one-sided. Yes, if short term rates rise sharply, that will hurt those who are used to borrowing short to finance their long-term activities. But what if short term rates *fall* sharply? And while keeping short term rates fixed might produce inflationary disaster, might it not just as likely produce *deflationary* disaster?<br /><br />Further: "Those short on money may sell off short term assets they hold for his very purpose or perhaps borrow--effectively issuing and selling new money market instruments." Maybe, but aren't there other possibilities? Those who want to hold more money may sell off long term financial assets, or non-financial assets; or they may cut back on their usual purchases of long term or non-financial assets. Why focus on the possible sale of short term financial assets? Furthermore, an increase in the desire to hold money, when the supply of money is inflexible, should produce deflation. This will in itself tend to lower interest rates, countering the tendency you mention for the prices of short term debt instruments to fall. (I don't think there is a general answer to the question which tendency will be stronger.)<br />Philohttps://www.blogger.com/profile/02814125172453918700noreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-71341631917345922752014-04-16T10:02:06.510-04:002014-04-16T10:02:06.510-04:00May I get some clarification on:
"An excess ...May I get some clarification on:<br /><br />"An excess demand occurs when the existing quantity of money is less than the demand to hold it. Those short on money may sell off short term assets they hold for his very purpose or perhaps borrow--effectively issuing and selling new money market instruments. This will tend to cause money market rates to rise"<br /><br />I'm thinking of the process as:<br /><br />- people start to value money (cash + deposits) more than other financial assets (and final goods) at current prices.<br />- the value of money will need to rise compared to those other assets and goods<br />- if final goods prices are sticky then it is assets that will need to do the adjusting<br />- their price will fall and their interest rate rise<br /><br />My question is: Why does this cause the money market rate to rise as well ? After the above adjustment process the qty of broad money is still the same as before (assuming other things equal and no CB interventions). The interest rate on money will still be set by the demand and supply for loans. Its not clear why a change in the demand to hold money (if "money" includes bank deposits) should cause this to change. The increased demand for money will be reflected in an increased differential between the interest on money and that on other assets that will keep their demand and supply aligned.<br /><br /><br />In fact intuitively I would have said that an increase in the demand to hold money would have led to a decrease in interest rates as banks now have more deposits to lend out. And this decrease would also help establish the correct differential between the interest on money and other assets.Rob Rawlingsnoreply@blogger.com