JP Hochbaum
DP Veteran
- Joined
- Feb 7, 2012
- Messages
- 4,456
- Reaction score
- 2,549
- Gender
- Male
- Political Leaning
- Independent
"The overnight lending rate is the most important benchmark interest rate for many other important rates, including banks’ prime rates, mortgage rates, and consumer loan rates, and therefore
the fed funds rate serves as the ‘base rate’ of interest in the economy. In a state money system with flexible exchange rates running a budget deficit in other
words, under the ‘normal’ conditions or operations of the specified institutional context without government intervention either to pay interest on reserves to offer securities to drain excess reserves to actively support a nonzero, positive interest rate, the natural or normal rate of interest of such a system is zero."
http://www.cfeps.org/pubs/wp-pdf/WP37-MoslerForstater.pdf Page 10 near the bottom.
"We also know that budget deficits add to bank reserves and create system-wide reserve surpluses. The excess reserves then stimulate competition in the interbank market between banks who are seeking better returns than the support rate offered by the central bank. Up until recently this support rate in countries such as Japan and the USA was zero. In Australia it has been 25 basis points below the cash rate although there is no theoretical reason for that setting.
It makes much better sense not to offer a support rate at all. In that situation, net public spending will drive the overnight interest rate to zero because the interbank competition cannot eliminate the system-wide surplus (all their transactions net to zero – no net financial assets are destroyed)."
The natural rate of interest is zero! | Bill Mitchell – billy blog
the fed funds rate serves as the ‘base rate’ of interest in the economy. In a state money system with flexible exchange rates running a budget deficit in other
words, under the ‘normal’ conditions or operations of the specified institutional context without government intervention either to pay interest on reserves to offer securities to drain excess reserves to actively support a nonzero, positive interest rate, the natural or normal rate of interest of such a system is zero."
http://www.cfeps.org/pubs/wp-pdf/WP37-MoslerForstater.pdf Page 10 near the bottom.
"We also know that budget deficits add to bank reserves and create system-wide reserve surpluses. The excess reserves then stimulate competition in the interbank market between banks who are seeking better returns than the support rate offered by the central bank. Up until recently this support rate in countries such as Japan and the USA was zero. In Australia it has been 25 basis points below the cash rate although there is no theoretical reason for that setting.
It makes much better sense not to offer a support rate at all. In that situation, net public spending will drive the overnight interest rate to zero because the interbank competition cannot eliminate the system-wide surplus (all their transactions net to zero – no net financial assets are destroyed)."
The natural rate of interest is zero! | Bill Mitchell – billy blog