I have just taken over as economics Minster for a small unknown failed European state and to be honest im out of my depth - I’m hoping the community at mises.org can help me with setting up a basic fiscal and monetary policy.
We have strong ties to the UK (the queen is shown on our money) and I would like to base our setup on their model. The first problem I need to deal with is our high interest rates, but how do I actually go about dropping interest rates from 10% to 9% or 100 bases points?
Currently I really want to gain a good understanding of how interest rates are set in the real world and compare this to other economic stimulus options such as QE later.
Thank you for any help the Mises.org community can give my beleaguered nation
this cant be serious… can it? how did you get the job if you arent qualified for it?
you arent going to get any advice on monetary policy or lowering interest rates other than not doing anything.
the best monetary policy is no policy.
The best interest rate is the natural rate.
If you want to give advice on how to achieve lower interest rates you need the population to save more. More money saved = lower rates, less money in the system = higher rates.
There’s no pat-down answer as to how to decrease interest rates (I don’t think, but it’s been a while since I took Macro). The most likely answer is that you will need some complex model to tell you how much money you should infuse into the system. Your best bet is incremental buying of government bonds while you carefully watch the interest rates.
This is what is confusing me most about my new job.. other countries seem very confident in setting their interest rates.. up half % here.. down a couple there and the market always quickly agrees and follows.
Yes I could buy government bonds to effect the money supply.. but this is not a directly linked and how would I accurately measure this to within 0.1 of a percent?
Also what you’ve suggested sounds almost exactly the same as qualitative easing?
This is what is confusing me most about my new job.. other countries seem very confident in setting their interest rates.. up half % here.. down a couple there and the market always quickly agrees and follows.
That’s the idea of open market operations - the market responds to a higher amount of money.
Yes I could buy government bonds to effect the money supply.. but this is not a directly linked and how would I accurately measure this to within 0.1 of a percent?
You can’t measure it that accurately. Even current money masters need to wait and see what happens.
Also, it is directly linked - you are adding more money to the system by buying bonds.
Also what you’ve suggested sounds almost exactly the same as qualitative easing?
Oh, we’re not suggesting these. Here we generally think that government messing with the money supply is a bad idea. We’re saying that if you want to decrease interest rates, you could buy up bonds. Or use QE. You could also just print money and drop it through helicopters. Or you could mandate forced saving.
Anyway if I were put in charge of a central bank I’d slowly decrease expansions in the money supply until it stopped all together. Ending inflation is the only Austrian prescription and I think Autolykos’ idea of just quitting would be disastrous if the above suggestion is the alternative.
a) There’s no such thing as “the” interest rate. This is your first problem.
b) The cost of borrowing (interest rates) goes up when there are fewer lenders and when there are more borrowers. Thus, in order for interest rates to go down, there needs to be a glut of lenders and a paucity of borrowers. Since you are the central bank, you could ask the government to subsidize lenders and tax borrowers.
Thank you this explains it a little better.. we want to encourage the free market and so wouldn’t consider increased public sector spending however the helicopter idea is a goer.
I will talk to the head of the airforce about this tomorrow.. exactly what height is recommend to fly the helicopters so to ensure an equal redistribution of wealth among the population?
But I am still confused
Setting interest rates seems to involve buying or selling large amount of state bonds/
QE seems to involve buying or selling large amounts of state bonds/
Still don’t see any critical difference apart from the name.
