03
Oct
2014
Can the Central Bank Control Interest Rates?
I argue yes, within limits. The weird thing is that I think everybody in this dispute agrees on the caveats, we just summarize the reality in totally opposite ways (i.e. “yes” vs. “no”).
-That’s how it is in a lot of economic debates (e.g., MMT, Great Debt, Endogenous Money). But sometimes our definitions can have consequences on tangible questions (e.g., does QE have an inflationary effect?).
“In any event, in the spirit of fairness I give you this “wonkish” piece in which Krugman first praises Bernanke to the hilt, then argues that the guy is impotent–thus capturing the tension in one spot. “
In that post, there isn’t any contradiction in terms of Krugman’s economic theory. Krugman thinks the Fed has the power to control the federal funds rate and create new reserves. The problem for Krugman is that in his
New Keynesian reasoning, in order for monetary policy to work (under the loanable funds model), you need to make interest rates negative to clear the loanable funds market, since the natural rate is below zero.
So Bernanke is impotent *in that respect*, but not in his ability to control the federal funds rate or create new reserves
I don’t see what the “tension” is.
I’d say there is a very real tension between models which call for negative interest rates and the reality of time preference.