Economics Dictionary of ArgumentsHome
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| Interest rates: Interest rates represent the cost of borrowing money or the return on invested funds over a specified time, usually expressed as a percentage. They influence borrowing and saving decisions, impacting economic activities like loans, mortgages, and savings accounts, set by central banks or influenced by market forces like supply and demand. See also Central Bank, Economy, Supply, Demand, Markets._____________Annotation: The above characterizations of concepts are neither definitions nor exhausting presentations of problems related to them. Instead, they are intended to give a short introduction to the contributions below. – Lexicon of Arguments. | |||
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Anna Stansbury on Interest Rates - Dictionary of Arguments
Summers I 1 Interest rates/Inflation targeting/secular stagnation/central bank/Summers/Stansbury: Conventional policy discussions are rooted in the (by now old) New Keynesian tradition of viewing macroeconomic problems as a reflection of frictions that slow convergence to a classical market-clearing equilibrium. The idea is that the combination of low inflation, a declining neutral real interest rate, and an effective lower bound on nominal interest rates may preclude the restoration of full employment. According to this view, anything that can be done to reduce real interest rates is constructive, and with sufficient interest-rate flexibility, secular stagnation can be overcome. With the immediate problem being excessive real rates, looking first to central banks and monetary policies for a solution is natural. The near-universal tendency among central bankers has been to interpret the coincidence of very low real interest rates and nonaccelerating inflation as evidence that the neutral real interest rate has declined and to use conventional monetary policy frameworks with an altered neutral real rate. The share of interest-sensitive durable-goods sectors in GDP has decreased. The importance of target saving effects has grown as interest rates have fallen, while the negative effect of reductions in interest rates on disposable income has increased as government debts have risen. Declining interest rates in the current environment undermine financial intermediaries’ capital position and hence their lending capacity. To take the most ominous case first, with interest-rate reductions having both positive and negative effects on demand, it may be that there is no real interest rate consistent with full resource utilization. Even if interest-rate cuts at all points proximately increase demand, there are substantial grounds for concern if this effect is weak. From a macro perspective, low interest rates promote leverage and asset bubbles by reducing borrowing costs and discount factors, and encouraging investors to reach for yield. Almost every account of the 2008 financial crisis assigns at least some role to the consequences of the very low interest rates that prevailed in the early 2000s. From a micro perspective, low rates undermine financial intermediaries’ health by reducing their profitability, impede the efficient allocation of capital by enabling even the weakest firms to meet debt-service obligations, and may also inhibit competition by favoring incumbent firms. These considerations suggest that reducing interest rates may not be merely insufficient, but actually counterproductive, as a response to secular stagnation. (…) the role of particular frictions and rigidities in underpinning economic fluctuations should be de-emphasized relative to a more fundamental lack of aggregate demand. If reducing rates will be insufficient or counterproductive, central bankers’ ingenuity in loosening monetary policy in an environment of secular stagnation is exactly what is not needed. What is needed are admissions of impotence, in order to spur efforts by governments to promote demand through fiscal policies and other means. ((s) For interest policy see also >Neo-Fisher Effect/Uribe.) Summers, Lawrence H. & Anna Stansbury: Whither Central Banking?, in: Project Syndicate (23/08/19), URL: https://www.project-syndicate.org/commentary/central-bankers-in-jackson-hole-should-admit-impotence-by-lawrence-h-summers-and-anna-stansbury-2-2019-08_____________Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments The note [Concept/Author], [Author1]Vs[Author2] or [Author]Vs[term] resp. "problem:"/"solution:", "old:"/"new:" and "thesis:" is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition. |
Stansbury, Anna Summers I Lawrence H. Summers Anna Stansbury Whither Central Banking?, in: Project Syndicate (23/08/19), URL: https://www.project-syndicate.org/commentary/central-bankers-in-jackson-hole-should-admit-impotence-by-lawrence-h-summers-and-anna-stansbury-2-2019-08 23.08. 2019 |
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