Tuesday, May 16, 2017

A better r*

The Chicago Booth Review published here a much cleaned up and nicely formatted version of my earlier blog post on r*.  If you missed the original and you're curious about r* issues, or just curious what the heck r* is anyway, this version is better.

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2 comments:

  1. Ralph MusgraveMay 17, 2017 at 12:24 PM

    Eric Lonergan argued (link below) that the R* is nonsense. I agree.

    https://www.episodeblog.com/2016/09/14/there-is-no-equilibrium-real-rate/

    Re a permanent zero rate, MMTers tend to be keen on that. Warren Mosler supports the idea. I tried to set out the argument for a permanent zero rate in 200 words here:

    https://twitter.com/RalphMus/status/864764070972596224

    As for using interest rates to adjust demand, that strikes me as flawed. First, given a recession, there is no prima facie reason to assume the problem is inadequate lending and investment, rather than an inadequacy in some other element of AD. Second, interest rate adjustments do not work all that quickly: up to a year according to one Bank of England article. I set out further flaws in Part III (sections 10 & 11) here:

    https://mpra.ub.uni-muenchen.de/78896/1/MPRA_paper_78896.pdf

    ReplyDelete
  2. FRestlyMay 17, 2017 at 7:13 PM

    John,

    Just a note. U. S federal debt outstanding is $20 trillion and growing. At a nominal 4% short term interest rate, that equates to over $800 billion in interest payments per year.

    For comparison:

    https://www.bea.gov/iTable/iTable.cfm?reqid=12&step=1#reqid=12&step=3&isuri=1&1203=2025
    Social Security: $916 billion
    Medicare: $680 billion

    https://www.bea.gov/iTable/iTable.cfm?reqid=12&step=1#reqid=12&step=3&isuri=1&1203=2027
    Medicaid: $379 billion

    https://www.bea.gov/newsreleases/national/gdp/2017/pdf/gdp1q17_adv.pdf
    National Defense: $732 billion

    ReplyDelete

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