[jurassic]

It’s not a great situation. What we’re seeing is that the fed can’t raise rates to fight inflation without further eroding the balance sheet of big institutions holding large amounts of low yield bonds. So they’re kinda stuck. Hello stagflation.

[stephen_g]

Raising rates never really reduced inflation anyway… In the 70s Volcker shock, when the oil crisis eased the inflation came down of its own accord, and would have with or without the rate hikes (and the money supply was expanding when the inflation started coming down, which was the exact opposite of their theory - they were trying to reduce the money supply with their rate rises, which they thought would reduce inflation, but they were never able to hit their money supply targets anyway). The Volcker era should be remembered as nothing but a failure.

We saw this problem at the opposite end too - central banks around the world were trying for more than a decade to stimulate economies by dropping rates, many even to the point of taking them negative - and inflation remained stubbornly below the target…

So dropping rates hasn’t worked to stimulate, raising rates hasn’t worked to slow inflation… Why persist with the charade that adjusting rates is an effective policy?

[pas]

why do you think it's not effective just because it's not perfect?

the US central bank has a dual mandate, price stability and close to full employment. having just one it could be much more aggressive.

[stephen_g]

Because it's never proven to be effective in either direction! (Neither stimulating the economy by dropping rates, nor controlling inflation by raising them)

[pas]

What would you consider a strong enough proof?

I mean there's Milton Friedman's 2005 paper [1] that provides a visual argument. Then I'd recommend reading this interview [2] with an empirical macroeconomist, and I think it's pretty clear that nowadays any serious economic argument has to be data driven [3] with a corresponding statistical treatment. (At worst low-complexity simulated data. And in the linked paper they are basically using a regression model to estimate the treatment effect. And on page 23 of the document [26 in PDF pages] you can see the "interest rate to GDP and inflation" response curves, and then later they present an absurd amount of additional graphs too.)

Aaand of course the picture that seems to present itself is that "it's not that simple". In this [4] 2022 paper the argument is that it makes sense to consider low- and high-inflation states, because their behavior seems to be significantly different, hence it's important to apply different monetary interventions. (The many graphs paper has a whole chapter on state dependence.) That said, on page 61 they also include a response curve that might interest you on empirical effectiveness of interest rate based monetary policy.

[1] https://www.aeaweb.org/articles?id=10.1257/08953300577519678...

[2] https://noahpinion.substack.com/p/interview-emi-nakamura-mac...

[3] https://www.frbsf.org/wp-content/uploads/sites/4/wp2017-02.p...

[4] https://www.imf.org/en/Publications/fandd/issues/2023/03/POV...