Market monetarists emphasize that interest rates are an unreliable guide to the stance of monetary policy. Monetary stimulus can lower rates via the liquidity effect, but it can also raise rates via the expected inflation and income effects. Here’s the Financial Times:
BoJ deflation war begets curious results
Japanese companies that borrow money from Mizuho Corporate Bank, one of the country’s largest lenders, received a small but unpleasant surprise this week when the bank decided to raise the rate of interest it charges on some of its loans.
The move, which was mimicked by two smaller lenders, Shinsei and Aozora, sat oddly because it came just a few days after Japan’s monetary authorities announced a dramatic effort to make money cheaper and more abundant.
In its most assertive attempt yet to stimulate the economy and end years of corrosive price declines, the Bank of Japan is doubling the amount of money in circulation by sharply increasing purchases of government bonds and other assets.
The central bank’s new policy, which it began to implement on Monday, should have pushed the cost of borrowing down, not up, from what are already historically low levels. Mizuho’s decision to increase its long-term prime lending rate, by 0.05 percentage point to 1.2 per cent, reflectedgyrations in Japanese bond markets that have followed the BoJ’s announcement.
Don’t trust the media. Don’t trust the old monetarists, the new and old Keynesians, the RBCers, the Austrians, the MMTers, or the new classicals. Only the market monetarists offer a model that allows you to make sense of what’s going on in the world.
PS. Not all non-market monetarists are wrong about interest rates, but they are all wrong about something. Maybe it’s the importance of demand shocks, maybe it’s the fiscal multiplier, or the effectiveness of monetary policy at the zero bound. Or whether QE will create high inflation.