Maybe there is no zero lower bound on interest rates


Tim Worstall has a fantastic piece on Forbes which neatly lays out a lot of the monetary policy views I have been making the case for here on the blog. In it he:

  • Shows that many securities can hit yields below zero (such as, most recently, European governments' bonds), implying that the Keynesian 'Zero Lower Bound' argument that monetary policy is impotent when rates hit zero is false or irrelevant
  • Argues that we should favour monetary stabilisation of boom-bust because it allows us to have a small state, which we have other good reasons for favouring
  • We have a nice natural experiment showing that monetary policy works—and fiscal policy is unnecessary—the Eurozone vs. the UK and USA. The former has not done QE and it has slumped continually; the latter have done QE and had moderate recoveries

A standard part of the standard Keynesian economics of our day is that fiscal policy becomes necessary at the zero lower bound. However, this standard part of the standard theory rather falls apart if we find that there is in fact no zero lower bound to interest rates. The case for fiscal policy, for stimulus, may therefore be rather weaker than its proponents suggest. And the thing is, we do seem to have evidence that there is no zero lower bound. This comes in two different forms: one that unconventional monetary policy can take the place of fiscal even at that lower bound, the other that, well, zero doesn’t seem to be the lower bound.

I hope you don't mind a bit more of Tim, given that he already writes for us daily!