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Philip Pilkington: Monetary Policy and Metaphysics – How Economists Try to Naturalise Terrible Policies and Disappear Into Their Own Theories
The problem with monetarism and interest rate targeting:




… The simple fact is that the era of interest rate targeting has been, well, something of a disaster. That this would have been the case would not have surprised the old Post-Keynesian economists. As Steve Randy Waldman has pointed out over at his excellent Interfluidity blog, the Polish economist Michal Kalecki predicted what would likely happen should central banks begin to rely on monetary policy as their primary tool of choice. In 1943 – yes, 1943! – Kalecki wrote:




The rate of interest or income tax [might be] reduced in a slump but not increased in the subsequent boom. In this case the boom will last longer, but it must end in a new slump: one reduction in the rate of interest or income tax does not, of course, eliminate the forces which cause cyclical fluctuations in a capitalist economy. In the new slump it will be necessary to reduce the rate of interest or income tax again and so on. Thus in the not too remote future, the rate of interest would have to be negative and income tax would have to be replaced by an income subsidy. The same would arise if it were attempted to maintain full employment by stimulating private investment: the rate of interest and income tax would have to be reduced continuously.




And after 1982 when interest rates began to be used to stimulate economic activity this is precisely what happened. Waldman provides us with this rather stark graph (above) in order to illustrate the confirmation of Kalecki’s thesis.




Read the whole piece →

Philip Pilkington: Monetary Policy and Metaphysics – How Economists Try to Naturalise Terrible Policies and Disappear Into Their Own Theories

The problem with monetarism and interest rate targeting:

… The simple fact is that the era of interest rate targeting has been, well, something of a disaster. That this would have been the case would not have surprised the old Post-Keynesian economists. As Steve Randy Waldman has pointed out over at his excellent Interfluidity blog, the Polish economist Michal Kalecki predicted what would likely happen should central banks begin to rely on monetary policy as their primary tool of choice. In 1943 – yes, 1943! – Kalecki wrote:

The rate of interest or income tax [might be] reduced in a slump but not increased in the subsequent boom. In this case the boom will last longer, but it must end in a new slump: one reduction in the rate of interest or income tax does not, of course, eliminate the forces which cause cyclical fluctuations in a capitalist economy. In the new slump it will be necessary to reduce the rate of interest or income tax again and so on. Thus in the not too remote future, the rate of interest would have to be negative and income tax would have to be replaced by an income subsidy. The same would arise if it were attempted to maintain full employment by stimulating private investment: the rate of interest and income tax would have to be reduced continuously.

And after 1982 when interest rates began to be used to stimulate economic activity this is precisely what happened. Waldman provides us with this rather stark graph (above) in order to illustrate the confirmation of Kalecki’s thesis.

Read the whole piece