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Miles Kimball has a new post entitled:

Unfortunately, there doesn’t seem to be a post, just a title. So I’ll provide the post.

1. Tight money does not raise interest rates, at least over the relevant time frame for welfare considerations. Interest rates in the eurozone today (0.5%) are almost certainly lower than they would have been had the ECB not adopted a tight money policy in 2011, raising rates from 0.75% to 1.25%. That policy drove the eurozone deeper into recession, pushing rates even lower. The same thing happened in America in 1937-40. That’s right, low rates can reflect tight money. Even low real rates. The low real rates in America today partly reflect the recent recession, which was caused by ultra-tight monetary policy in 2008-09.

2. Savers might also be helped by a lower rate of inflation. In practice, savers are hurt more by the drop in RGDP (and real interest rates) associated with tight money, than they are helped by the lower inflation. Economics is not a zero sum game. A smaller pie hurts both savers and borrowers.

3. Tight money hurts saving nations in other ways. For instance, the ECB policy that caused eurozone NGDP to grow by 2.7% over the past 5 years (instead of the normal 22%), has dramatically worsened the sovereign debt crisis. As a result of this crisis, savers and taxpayers in high saving countries like Germany will suffer enormous losses.

4. Thus the central bank should not help virtuous savers, nor should it try to help non-virtuous savers. But the tax authorities should help both groups, by eliminating all taxes on investment income.

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This entry was posted on June 10th, 2013 and is filed under Misc., Monetary Theory. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response or Trackback from your own site.



