Re: Much ado about nothing?

Warren wrote:
Whoops, I read this too quickly last time I responded.
Govt. borrowing, which means supporting a risk free
interest rate above 0, doesn't reduce demand unless it
somehow increases the desire to net save of the
non govt. sector. The real question then is whether
higher interest rates cool demand. Bill has thought
that in Australia the answer may be yes, due to
current structural considerations. In the case of
the US and Japan I think the evidence is clear that
lower rates don't result in higher demand and higher
rates don't lower demand.

I agree with Warren that most evidence, both theoretical and empirical,
support the idea that effective demand is not very interest elastic. I do
not see why there is a problem with the idea that government borrowing
reduces demand. People save in the form of assets. If they buy government
debt, then this will reduce their demand for other assets, and hence
reduces aggregate demand.
Received on Tue Feb 4 05:59:51 2003