Interest rates, income distribution and the monetary policy transmissions mechanism under endogenous money: what have we learned 30 years on from Horizontalists and Verticalists?

Abstract

This paper suggests that the near-optimal setting of the real policy rate of interest (the real overnight rate in Basil Moore's home country of Canada) is zero. This will achieve as close an approximation as possible to a fair distribution of income in a particular sense. It will also promote financial stability, inflation stability, high growth, full employment and higher real wages.

The methodology for assessing interest-rate policy rules: a reply

“…In correspondence, and in exchanges of draft papers and notes, etc., Watts has also made a more general critique of 'incomplete' models of the inflationary process by which, as I understand it, is meant precisely exercises of the sort undertaken in Smithin (2016a) and Smithin (2020), with relatively few equations or just a single equation. The point seems to be not only that a single mathematical exercise in itself is insufficient to decide the key questions of political economy (which is unobjectionable, and with which I fully concur), but also that even when one or more such exercises adds to the case against the policy that is favoured, the results should be discounted if not part of a complete and fully specified macroeconomic model.…”

“…As I recall, the various problems with adaptive expectations were widely discussed in the mainstream macroeconomics literature of the time, including the argument that an adaptive expectations mechanism is an arbitrary addition to the theoretical model, which generates neither the same expectation of inflation generated by the model itself nor those actually held by a consensus of the agents in any historical setting. 7 On this same topic, however, I think that I would now readily concede that my treatment of the question of expectations in Smithin (2020) was confusing and misleading. This is therefore yet another instance in which I am quite sure that Watts's commentary will have the effect of improving the quality of the debate in future.…”

“…I am most grateful to the editors of the European Journal of Economics and Economic Policies for allowing me the opportunity to reply to Martin Watts's 'The methodology for assessing interest-rate policy rules: some comments' (Watts 2021), which is essentially a critique of my 'Interest rates, income distribution, and the monetary policy transmissions mechanism' (Smithin 2020). The latter paper was published in the November 2020 memorial issue of EJEEP in honour of the late Professor Basil J. Moore, a respected pioneer in the post-Keynesian theory of endogenous money and 'horizontalism'.…”

Stability and Instability in the “Alternative Monetary Model” (AMM)

“…The purpose of this note is to elaborate the argument about stability in the context of a fully specified macroeconomic model, a closed economy version of Smithin's (Smithin, 2013(Smithin, , 2018(Smithin, , 2022) "alternative monetary model" (AMM). This will clarify some of the issues raised in the exchange between Smithin (Smithin, 2020(Smithin, , 2021(Smithin, , 2022, Watts (Watts, 2021), and Watts & Pantelopolous (Watts & Pantelopolous, 2022).…”

“…John Smithin (e.g., Smithin, 2020, 2022, 2023, always a supporter of a real interest rule of some kind (Smithin, 1994), has recently argued that the "near-optimal" setting of the real policy rate of interest (in a closed economy, or in a regime which has either a flexible exchange rate or a "fixed-but-adjustable" exchange rate) is actually zero. As explained by Smithin (Smithin, 2020(Smithin, , 2021 this is known as a "zero real policy rate" or ZRPR. Moreover, that this is preferable to a policy of setting the nominal policy rate at zero, which is usually referred to as a zero interest rate policy or ZIRP 1 .…”