Hi peter:
of course i do not like to use the term "government borrows" since it implies govt is like a household--but that is a quibble about semantics, so long as we both understand what we mean. govt spends by crediting bank accounts, not by "borrowing" back its own HPM. As we agree, a govt deficit means more bank accounts are credited than are debited (by tax payments). So net HPM has been created. this places downward pressure on overnight interest rates. but as you say, let us ignore that for a moment. then bond sales mean that some interest-earning assets are substituted for the non-interest-earning HPM. All things equal, that ought to INCREASE AggD, maybe not immediately, but as the interest is paid by govt (income and wealth effects). Yes, as i've said, there can be an exception in wartime (etc) if govt convinces people to engage in patriotic saving.
Returning to the impact on interest rates from net HPM injections, that should be downward, right? hence, govt deficits place DOWNWARD presure on rates (opposite from orthodoxy). the bond sales then drain the excess HPM and hence allow the central bank to hit rate targets. No reason why this has to be done. CB could simply allow the excess HPM to drive overnight rate to zero (Japan). Or it can pay targeted overnight rate on reserves (Oz, Canada).
bill and warren have made strong arguments against sales of bonds to drain excess HPM. I, personally, have long advocated overnight rates set at, say, 1% permanently with no fine-tuning monkeying around by the CB. but i do not feel strongly about whether 0% is better or worse than 1%. bill and warren make good arguments i think for zero. i think anyone with a free mkt orientation has got to support 0%.
randy
-----Original Message-----
From: Peter Kriesler [mailto:P.Kriesler@unsw.edu.au]
Sent: Thu 2/6/2003 8:32 AM
To: she_forum@adam.itk.ntnu.no
Cc:
Subject: [HE] Re: Much ado about nothing? A light clicks!
OK, so what you are saying is that if the government borrows from the
private sector by selling bonds, then, if we rule out any interest rate
effect, there will be no change to the level of aggregate demand. I can
accept that. However, if that is the case, then what problem is there with
government borrowing? If the government increases expenditure, then, I
agree, "financing" is irrelevant. However, if it makes people happy, to
have an equivalent amount of borrowing and it has no impact, then what is
wrong with that?
Peter Kriesler
School of Economics
UNSW
Sydney 2052
http://economics.web.unsw.edu.au/people/pkriesler/
_______________________________________________
SHE_Forum mailing list
SHE_Forum@mail.itk.ntnu.no
http://www.itk.ntnu.no/mailman/listinfo/she_forum
Received on Fri Feb 7 09:18:59 2003
This archive was generated by hypermail 2.1.8 : 01-03-05 MET