Re: Self-correcting economic systems

[Basil Moore <bjm@xxxxxxxxxxxxxxxx>]

William
When I say real rate I mean the real short term rate that the CB controls
or if you prefer sets or administers. In the US it would be the ff rate.
But other ST wholesale market rates follow this closely, due to bank
arbitrage. Of course other rates follow with variable and sometimes
substantial margins for liquidity and risk.
My point is that the government should first bring the real ST rate down to
zero, which puts all other rates at their floor (non zero) levels.
Only then, if private animal spirits are asleep, should the gov. follow
deficit spending on capital account, or what Keynes called the
"socialization of investment". Expansionary fiscal policy should come after
monetary policy has been carried "a outrance", i.e. to the limits. This is
simply because private spending dominates public spending on incentive and
so efficiency grounds.

I don't think we would have any disagreement on this??
Basil


At 12:00 PM 3/15/01 -0800, you wrote:
> Basil,
>
> Following up on your point about interest rates vis a vis AD, I'd
> like to understand better what you mean in the following:
>
> >Monetary policy dominates fiscal policy on stabilization grounds. One
> should
> >not advocate deficit spending by government until real interest rates have
> >been reduced to zero.
>
> I assume you are talking here about a particular short term
> interest rate, because the "real interest rate" can hardly refer
> to the whole spectrum of interest rates over maturity and
> credit-worthiness.
>
> We know of course that short-term rates are keyed off the Fed
> funds rate, the only rate the Fed directly influences.  However
> that rate only applies to the interbank lending market.  Banks
> set the corporate prime rate typically about 300 basis points
> higher.  Lesser quality commercial lending rates range up to
> perhaps 600 basis points higher.  Unsecured consumer loan rates,
> including credit card rates, can range up to 1500 basis points
> higher.
>
> With such an array of interest rates, each affecting different
> sectors of the economy, I find it difficult to follow the logic
> that says the real interest rate should be set to zero.  Which
> rate counts and why?  Also what is the problem with government
> deficit spending when the real rate is not zero?
>
> William