Very good!
One suggestion, in caps:

In reality, BECAUSE AN OVERDRAFT AT A CENTRAL BANK *IS* A LOAN FROM THAT CENTRAL BANK, central banks have no option other than supplying the amount of reserves banks require to settle payments through standard operations, bilateral lending, or intra-day overdrafts.

Yet, it can unilaterally set the interest rate on reserves borrowing and reserves holding.

Revising the quantity theory of money in a financial balance approach

26 Responses

  1. And the other obvious point is that if a central bank is considered competent to set an interest rate for an *entire economy*, why is it consider unable to set an interest rate and a credit limit for a mere government?

    Doing the latter has a simple benefit – the central bank can offer a different interest rate to private sector savers than it is ‘charging’ the government for its money. And that allows it to break the pro-cyclical interest rate effect if it wants to.

    Then you can play political budgetary games between Parliament, the Treasury and Central Bank but it doesn’t automatically turn into a savings windfall for the private sector.

    1. @Neil Wilson,

      “why is it consider unable to set an interest rate and a credit limit for a mere government?”

      Interest rates for sectors are not average additive to the interest rate for the whole economy. Setting the latter is a much more simpler task than the former. By doing the latter CBs are freed from discussions about the distribution of income in the economy. And this comes from the stated apolitical (technocratic) nature of central banks. As long as we stick to the CB independence such topics will be out of discussion.

      And honestly I’d like to stick to CB independence and keep them away from politics rather than allow unelected technocrats participate in discussions of sectoral income distribution.

      1. @Sergei,

        “And honestly I’d like to stick to CB independence and keep them away from politics rather than allow unelected technocrats participate in discussions of sectoral income distribution.”

        There is no such thing as central bank independence. It is a creature of the state and should be under obvious control of its elected representatives.

        Because if it isn’t then it is under the control of somebody who isn’t elected and can’t be replaced by the people.

      2. @Neil Wilson,

        “It is a creature of the state”

        Yes, and may be it is for good or?

        There are 3 commonly recognized branches of power in every state which are independent of each other and some of which are also outside of control of its elected representatives. But this somehow does not cause problems.

        Is it only central bank independence which causes so many troubles in this world?

      3. “Neil, we are only talking about operational independence. Please stop confusing topics.”

        Not really much to debate then is there. Systems are always run by people. They don’t exist in a perfect theoretical bubble.

      4. @Neil Wilson,

        Yes, that is why I am strongly against central bank being involved into “political budgetary games”. There is a lot of value of being technocratic and independent and a lot of harm in political games of power. Of which central bank clearly has a lot for reasons you clearly appreciate.

      5. @Neil Wilson,

        “Yes, that is why I am strongly against central bank being involved into “political budgetary games”.”

        They already are. That’s why they bail out banks, not people.

        As I said they don’t exist in a theoretical bubble. They are run by people. Who are lobbied by other people.

        They are not at all independent. They serve the group that controls them.

        One of the things I admire about the US system is that they realise and admit that their senior judges have political views and group affiliations.

        It’s a pity they don’t have the same view of their senior bankers

      6. @Neil Wilson,

        “That’s why they bail out banks, not people.”

        Sure, cutting rates to zero surely does not help UK people with their mortgages. I got your point.

      1. @MamMoTh,

        It doesn’t, because it is only really one – the interest curve the private sector gets.

        The rest is just shuffling liabilities internally intra-group within the government sector as an internal control function.

  2. Very good! I like the non-confrontational approach of it. Should be persuasive.

    One thing, though. The analysis of the Great Recession, and the inadequacy of lower interest rates to increase GDP, because of a lack of demand for loans (not a lack of supply of loans) is right on. But what about the next expansion, and the effect of higher interest rates in suppressing the demand for loans? It seems to me that high interest rates have been, in past expansions, quite effective in causing the next recession. While pushing on a string is ineffective, can it not be effective to pull on it? Isn’t this something that economists also need to pay attention to?

    Of course, the expansion is also accompanied by reduced deficits, and it is hard to separate the effects of interest rates from the effects of changing fiscal balances. MMT would prescribe a JG/ELR and continued low interest rates. How can the central bank be convinced not to raise rates as they have always done in the past?

    1. @John O’Connell,

      QE as practiced by the Fed, BOJ & BOE is a roach motel that once they have gone in to they can never exit. I can’t help thinking that the Fed will never reverse repo their Tsy holdings acquired via QE1, 2&3 nor the MBS and Agency debt because to do so would trigger the mother of all bond market sell offs. All the bonds bought at high premium prices would have to be sold back at deep discounts which would wipe out the Fed’s capital. I think it more likely that they will allow their holdings to simply mature and run off. In this way the debt will in effect be erased and what will be left will be the reserves created by QE asset purchases.

  3. strange : I am from GENOA but I did’nt know this meeting 🙂

    if Central Banks from 2007 until now (and for some future years) would’nt expand World Monetary Base, now we would be like 1929. Friedman said in 1929 tight monetary policy worsen macroeconomics cycle, and I agre with this thesis.

    Central Banks have no choiche, people of street dosen’t understand, but also majority of economist & financial mass media does’nt understand 🙁

      1. @WARREN MOSLER,

        Hi Mosler

        Global War of QE => Flexible “A” Devaluate => “B” make QE => Flexible “A” Apreciate => Illimitated Circle => “Global” (NOT Single) Money “on long run” Expand & inflate even with Internal Output Gap through Global Commodity Market..


        PS: thanks for pdf of Mafin

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