Wednesday, September 5, 2018

Brian Romanchuk — Japan And The Costs Of Bond Yield Control

The dangers of distorting free market interest rates is one of the bits of market folklore that keeps getting passed around. There is actually not a whole lot of data to defend this view; it is best viewed as faith-based reasoning. This topic is particularly interesting in the case of Japan. I am somewhat agnostic on this issue; I do not see particular risks from manipulating the yield curve in the current environment, yet I can see some plausible dangers.
This article was triggered by the article "Bank of Japan once again shows who calls the shots," by Bill Mitchell, one of the leading Modern Monetary Theory (MMT) economists. In addition, I had a discussion about this topic with someone doing some research awhile ago. Rather than re-hash Professor Mitchell's points from the MMT perspective, I will put on my "generic market analyst" hat and give a description of the issue from a more theory-agnostic perspective....
Bond Economics
Japan And The Costs Of Bond Yield Control
Brian Romanchuk

1 comment:

Ralph Musgrave said...

I left this comment after the article:

The basic reason for disapproval of "distorting free market interest rates" is surely the one set out in introductory economics text books, namely that GDP is maximised where prices (including the price of borrowed money) are at free market rates. GDP is maximised where the price of apples, steel and everything else are at free market prices, unless there is a clear social reason for taxing or subsidising something.