Σάββατο, 28 Μαΐου 2016

What would Keynes do?


26/5/2016

By Wofgang Munchau

Robert Skidelsky wonders what Keynes would make of unconventional monetary policies, and argues that he would consider negative rates and quantitative easing in the same vein as burying bottles of cash to dig them up again: better than nothing if the government cannot thing of anything else to do. He includes the following quote from The General Theory:

“For whilst an increase in the quantity of money may be expected ... to reduce the rate of interest, this will not happen if the liquidity-preferences of the public are increasing more than the quantity of money; and whilst a decline in the rate of interest may be expected ... to increase the volume of investment, this will not happen if [profit expectations] are falling faster than the rate of interest; and whilst an increase in the volume of investment may be expected ... to increase employment, this may not happen if the propensity to consume is falling off.”

The Keynesian insight is that the only way to ensure that new money put into circulation is actually spent is for the government to spend it. But overt monetary financing is taboo these days, even if it would be the only thing to get us out of secular stagnation.

Martin Wolf goes into more detail of the unintended side effects of unconventional policies: the difficulty to calibrate them as they fall outside tried and tested models; the risk of market distortions and asset bubbles; and political objections. But if, as Mario Draghi has said, negative rates are not the disease but a symptom of lack of investment demand, it is not clear that monetary policy is the best tool to address it. Fiscal policy should be used to manage demand. Wolf suggests that in Japan, for instance, the government might tax the massive retained earnings of non-financial corporations to encourage investment. Governments everywhere could increase their investment. But the problem is not only demand weakness, so structural reforms should be undertaken to improve the low productivity growth in the advanced economies.

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