Dear peter and beth
1. I think peter is still arguing that govt bond sales will reduce AggD? In orthodox presentations, taxes and bond sales are presented as alternative ways to "finance" govt spending. We all (mostly?) seem to agree that is false--sovereign govts spend by crediting bank accts. Taxes clearly reduce non-govt AggIncome and Wealth, hence, I think we'll all agree they reduce AggD (the degree to which they do so, of course, depends on the MPC of those taxed). But why would bond sales reduce AggD? All else equal, they merely change the form of wealth, from non-earning HPM to earning Bonds. If anything, that should increase AggD (all else equal)? I think Peter has in mind a highly unusual situation in which the bond sales encourage people to reduce consumption (for example, out of patriotic duty). But normally--and as keynes argued--saving involves 2 decisions. the first is to save (not consume). the second is over the form in which the saving is to be held (liquid assets, or illiquid). keynes argues that interest rat
es have little impact on the first decision (and self-reflection as well as empirical studies, and Keynesian theory--which argues the effect would be opposite to that supposed-- would all bear that out. interest rates do have an impact on the second decision. If peter's argument is based on the difference between a zero base rate (as in japan) or a positive base rate then it is not really the bond sales that lower AggD, but the belief that higher interest rate targets do so (and we can have higher interest rates without any bond sales at all, as Bill has been explaining). (I agree with Warren that the effect of higher interest rates on AggD is indeterminant until we have much more info about debt distribution and institutional factors and conventions--i suspect that higher rates in Japan and maybe the US would actually stimulate demand, at least some of the time).
2. Beth, the JG and ELR are designed such that as the economy approaches full emp, the govt deficit stops expanding (hence, net HPM creation by govt falls). It is simply impossible for such a program to drive the economy beyond full emp and cause "true inflation". every person hired up by the private sector means one fewer (at least) in the JG program. This does not mean that prices won't begin rising before full emp, but again, as keynes argued, no one has a legitimate interest in maintaining unemployment merely to keep prices from rising.
randy
-----Original Message-----
From: Peter Kriesler [mailto:P.Kriesler@unsw.edu.au]
Sent: Mon 2/3/2003 11:58 PM
To: she_forum@adam.itk.ntnu.no
Cc:
Subject: [HE] 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.
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Received on Tue Feb 4 09:09:31 2003
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