Wednesday, November 20, 2013

Dirk Ehnts — Paul Krugman still thinks in terms of loanable funds


Krugman thinks that demand for loans drives LT rates up and also that the Fed sets the ST rate.

Really?


Blue line is debt (demand for loans) and the red line the FFR.

Hmmm.

econoblog101
Paul Krugman still thinks in terms of loanable funds
Dirk Ehnts | Berlin School for Economics and Law

4 comments:

y said...

“Nevertheless, to argue that demand for loans influenced interest rates is utterly incompatible with the idea of short-term rates set by the central bank”

I don’t think that’s what Krugman is saying in the quote above.

“Without all that increase in household debt, interest rates would presumably have to have been considerably lower – maybe negative. In other words, you can argue that our economy has been trying to get into the liquidity trap for a number of years, and that it only avoided the trap for a while thanks to successive bubbles.”

What I think he means is that the short-term rate set by the central bank would have had to be lower in order to generate the required level of private investment and saving for the economy to attain ‘full employment’ with low inflation, if it hadn’t been for the asset-price debt bubbles.

Tom Hickey said...

I no longer follow Krugman so I wont jump into the fray. But usually what people mean in this case is that even though the Fed sets the ST rate and LT rates are based on expectations of forward ST rates, market forces determine how the Fed determines the ST rate.

So, in effect, the market determines the rate, even though the Fed sets the nominal rate specifically. That is, the Fed tries to set the nominal rate equal to "the natural rate" as determined by actual economic variables and it’s the actual variables that determine the demand for money. This in turn determines liquidity preference, how much money is saved and therefore how much banks have to lend out. So the interest rate is directly related to saving rate. The Fed just accommodates this, or if it makes a mistake, economic distortion results due to the mismatch.

That's pretty much the neoclassical view in which money is a neutral veil, as I understand it. So, in this view, you can have loanable funds and the central banking setting the base rate.

Paul Krugman vs. MMT: The Great Debate by John Carney (3 Apr 2012)

I haven't heard anything about Krugman rejecting loanable funds or admitting that banks are special.

Tom Hickey said...

The Monetary Production Economy and Fiduciary Media

Matt Franko said...

"you can argue that our economy has been trying to get into the liquidity trap for a number of years"

you can argue that THE DRAWBRIDGE HAS BEEN TRYING TO RAISE ITSELF for a number of years...

you can argue that THE AIRPLANE HAS BEEN TRYING TO TAKE OFF SUCCESSFULLY for a number of years...

you can argue that THE SATELLITE HAS BEEN TRYING TO ORBIT for a number of years...

you can argue that THE ANTI-BIOTICS HAVE BEEN TRYING TO HELP KILL THE PATHOGENS for a number of years...

you can argue that THE TEETH HAVE BEEN TRYING TO GET THEIR CAVITIES FILLED for a number of years...

you can argue that THE BUILDING HAS BEEN TRYING TO CONSTRUCT ITSELF for a number of years...

http://en.wikipedia.org/wiki/Teleology

M-O-R-O-N-S!