Wednesday, September 5, 2012

Nick Rowe on NGDP and Interest Rates, Theory Edition

Enlightening new post over at Worthwhile Canadian Initiative that clarifies how to think about monetary policy in a non-interest rate paradigm. Check it out here:

This is my favorite excerpt:

"If in that alternate history we had thought nominal interest rates were too near zero, and we wanted to loosen monetary policy, and we wanted to cause nominal interest rates to increase above zero, the central bank would just start raising the price of gold. It would be obvious to everyone. Raising the price of gold is how central banks loosen monetary policy. There's nothing special about the price of gold, of course. Except history. But the price of gold does have the right units, because it's got $ in the units. There's no $ sign in the units for an interest rate. And what central banks really really ultimately do is determine the value of that $ unit."

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