from Dirk Ehnts, Econoblog101
Monetary policy and the zero lower … oh, wait!
Warren Mosler spoke in Berlin last night. His talk was very impressive, questioning many “self-evident truths” that economists hold dear for just a little too long. Among his slides was a very good one showing approximately five years history for the 3-month London Interbank Offered Rate (LIBOR), based on the euro.
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This is the LIBOR (Euro), a market rate that is based on surveys from banks that are asked at which rates they would lend and borrow in the market. As you can see, the rate moved seemlessly from positive to negative in mid-2017. Zero lower bound? What is that supposed to mean?
Let me also point out Sweden’s repo rate below:
Again, the rate just went from positive to negative. Zero lower bound? What is that?
Of course, people talk about the zero lower bound a lot. But then, people talk about dragons, dwarfs and Hobbits as well. Economics seems to have a problem in that it is ruled to some extent by fairy tales that are very popular among economists but that the layperson does not understand because there seems to be no logic to it. Economics needs more debate and more common sense or it will be irrelevant to the real world. Fairy tales are nice, but you wouldn’t want the actor who played Gandalf to guide your economic policy.
Investment is not very sensitive to interest rates, anyway, so even if we can go negative without problems, there is still the problem that low and negative interest rates are very unlikely to increase private investment. Even working papers from the Federal Reserve Bank from five years ago say that.
Time to turn to fiscal policy perhaps?
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