Saturday, February 13, 2021

Lars P. Syll — MMT basics

Good summary of the loanable funds theory and why it is wrong.

Lars P. Syll’s Blog
MMT basics
Lars P. Syll | Professor, Malmo University


Ralph Musgrave said...

I left a comment on Lars Syll's blog as follows.

The first five paras of Lars Syll’s article (with a blue background and authored by Stephanie Kelton) argue that increased government borrowing and spending does not raise interest rates because that borrowing leads to a INCREASE in so called “scare financial resources” not a reduction therein. Ergo, so the argument goes, there is no reason for interest rates to rise.

That is not true if the economy is at or near capacity. I.e. if government spends more without raising taxes, the central bank will have to raise interest rates to counteract the extra demand stemming from that government spending.

Before accusing Stephanie Kelton of making a mistake there I really need to see the preceding and subsequent paragraphs, so as to see the full context of her above five paras. But I can’t do that right now because of Kindle problems.

William Vickrey in the final para of Lars Syll’s article alludes to the point that extra govt spending WILL NOT be inflationary and thus no interest rate hike is needed if, as he puts it, “….there are plenty of idle resources lying around.”

Ahmed Fares said...

Monetary policy is a blunt-policy tool with uncertain impacts. It operates through relative unknown interest rate impacts, which first have to work through shifts in non-government sector behaviour, which then manifest as shifts in spending.

The time lags in these shifts are unknown as are the impacts.

For example, it is often assumed that lower interest rates will stimulate business investment, on the basis that lower costs of finance will render marginal projects, that under higher rates were not profitable enough, now profitable.

However, as we have seen in the aftermath of the GFC, borrowing volumes remain relative low despite nearly a decade of low to zero interest rates.

Why? Because investment decisions are based on a range of factors, of which the cost of funds is just one. A firm will not invest, no matter how low the funding costs go, if they do not think they can sell the extra output that the increased productive capacity would produce.

That is just one example of why monetary policy is not a very effective counter-stabilisation policy tool.
—Bill Mitchell

source: The effectiveness and primacy of fiscal policy – Part 1

Also, see this:

Monetary policy is largely ineffective

Matt Franko said...

“in the aftermath of the GFC, borrowing volumes remain relative low “

QE, QE1, QE2, and QE3 depressed LR and retarded increase in loans and leases in bank credit...

Look at ‘borrowing volumes’ and economic growth post asset purchases then in the period when Fed was reducing reserves at depositories...

Matt Franko said...

MMT does not understand bank regulations...l

Matt Franko said...

Not properly trained..