lunes, 27 de junio de 2016

Scott Sumner is wrong on Austrians and interest rate

Acording to the Market Monetarist Scott Sumner
Instead, the view that Bullard attributes to monetarists is actually the Keynesian/Austrian view. It’s Keynesians and Austrians who reason from a price change. They are the ones who insist that low interest rates are expansionary... That is, they assume that low rates are tight money, whereas Keynesians and Austrians tend to assume it’s easy money. It’s neither.
However, it is not true at all that Austrians base their judgement only on the (nominal) rate of interest in order to judge monetary policy.

Ludwig von Mises, certainly an Austrian, explicitly states in 1949 (49 years before Friedman) that you must not see only the rate nominal (arithmetical) of interest in order to acknowledge whether or not there is credit expansion:
It is the continuous increase in the supply of the fiduciary media that produces, feeds, and accelerates the boom. The state of the gross market rates of interest is only an outgrowth of this increase. If one wants to know whether or not there is credit expansion, one must look at the state of the supply of fiduciary media, not at the arithmetical state of interest rates.
And also Mises in 1955:
The interest rate may go up and up in a boom and yet it may still remain below the rate it should have attained under these conditions. A higher money rate of interest doesn't mean that the real, the pure or originary, rate of interest is higher. Nor does it mean that the policy of easy money has been abandoned.
Murray Rothbard, another hardcore Austrian, in 1962 was also very aware that a rising nominal interest is not at all a sign of credit restriction:
Similarly, credit expansion does not necessarily lower the interest rate below the rate previously recorded; it lowers the rate below what it would have been in the free market and thus creates distortion and malinvestment. Recorded interest rates in the boom will generally rise, in fact, because of the purchasing-power component in the market interest rate.
And in 1963 he states that it is possible that banks can lower interest rate and not to expand credit:
Mises points out (Human Action, p. 789n.) that if the banks simply lowered the interest charges on their loans without expanding their credit, they would be granting gifts to debtors, and would not be generating a business cycle.
Finally, Joseph Salerno, the greatest Austrian monetary theorist alive, in 2013 makes perfectly clear how keynesians fall in that error:
Unfortunately, both Keynesian and central bank orthodoxies of the 1960s focused on the nominal interest rate as an important indicator of the degree of ease or restraint of monetary policy, making no allowance for the effect of inflationary expectations on the nominal interest rate. Consequently, neither the new economists nor the monetary authorities believed that monetary policy was “unduly” expansionary because short-term nominal interest rates rose from 1961 to 1963. Indeed, the new economists were quite pleased with monetary policy during this period, an attitude typified in Seymour Harris’s observation that “the [Federal Reserve] board provided the country with a reasonably easy money policy ...”

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