Monday, January 19, 2009
Is zero interset policy powerless?
From FT Eco forum --it is an absurd idea. It is a cheap money and can provide a srong incentive to borrow and spend --why does this truth seem incngruent with current circumstances? --first, there is an imperfect linkage between the official reference rate and the range of borrowing rates (long term rates) --second, lending institions may not be in a position to carry out their normal intermediation. --with no rromfor further shifts in intereset rates, it removes a consraint on central bank operations so authorities can push out as much base money as they want to. --unconventioanl quantitative easing can buy long term tresury to address 1st issue and take undervalued assets to address second issue. --beyond moneytary policy, base money can fund expansionary fiscal policy.