4 thoughts on “Monetary policy: overrated”

  1. Posted 05/03/2015 at 13:38 | Permalink

    I am a layman and in no way an expert. I have spent 10 years casually reading up on Austrian Business Cycle theory – Roger Garrison, Joseph Salerno, Hans Seinholz, Philip Baggus, Murray Rothbard and various second hand interpretations of Hayek and Mises – and this gets posted. I should have spent those years in the pub or any number of local nightclubs!

    Does this mean then that over the last 6/7 years governments could have left central bank rates at 5%, 6% or whatever % and there would have been no difference in investment levels (even if they eventually proved artificial and unsustainable)? And that Major’s decision to jack interest rates up to circa 15% during the early 90’s in the midsts of the UK’s ERM crisis had no impact on investment levels and didn’t virtually crucify large swathes of SME’s across the country? Regulations etc.., no doubt have a role to play but surely if the money supply stays constant then there is a natural limit to how much lendings can grow and so the possibility of a bubble becomes less remote. One can have gallons of business confidence and a dearth of regulation but they can only have an impact if the funding is available. Significant boosts in investment – such that lay us open to unstable booms, bubbles and subsequent recession – can only come about through excessive funding (i.e., lax monetary policy). One can open the gates to a field and knock a few holes in the walls but the amount of cows that come in is limited by how many there are outside it. At least I think that analogy works …

  2. Posted 05/03/2015 at 14:20 | Permalink

    Undergoing the same crisis as the poster above. Would definitely appreciate an Austrian school critique of that study.

  3. Posted 05/03/2015 at 16:24 | Permalink

    The two comments to my post ask excellent questions. First, I agree that the results of this MIT lead research are surprising and more reseach is certainly needed to verify the findings in a diffrent setting such as the UK. Second, the findings indicate that businesses are not economically optimal “machines” that respond blindly with expected rational behaviour to administrative commands. In fact, the report’s authors highlight that executive decision-makers’ judgement may be coloured by an optimism bias which may lead them to overshoot their capex exactly at the wrong time when the economy is overheating hence ignoring the signalling of a tightening credit environment. The reverse is probably true in a prolonged economic downturn. I see some fundamental Austrian thinking in these finadings. Finally, the report does not deny the link between investment and interest rates. However, the research data shows that the link between these two is much weaker than what has been assumed in the past.

  4. Posted 11/03/2015 at 11:42 | Permalink

    I believe that the Austrian Business Cycle Theory remains as strong as before given these findings. The interest rate represented in the ABCT is one given by time preference. This is the same with the Wicksellian rate if one treats Wicksellian rate as the i/r in the market that would be given if there would be no intermediation of money. The unsustainable boom in Garrisons’ intuitive diagrammatic scheme is given by the Wicksellian difference as to make it easier to understand. Wicksell rate as defined before is given in the sense that “C + I = constant” given the resources available. Suppose you fix the i/r at the Wicksellian rate and throw money out on the market. C + I is no longer constant and is increasing even though you have the same interest rate. This creates malinvestment, overinvestment and overconsumption. This accommodates the ABCT in my perspective.

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