The best cure for "easy money" is easier monetary policy

Nick Rowe

"First off, there's a massive implicit fallacy of composition in that sort of reasoning. If you cut interest rates for one individual that individual will respond by borrowing more and spending more. But that is not how monetary policy works for an economy as a whole. Because one person's spending is another person's income. So if people spend $100 more per month then people earn $100 more income per month, so they don't need to borrow anything more in order to spend more. And it's even less true in an open economy, if a cut in interest rates causes exchange rate depreciation so foreigners spend more on Canadian goods, so Canadian net borrowing from abroad actually falls, as net exports increase.

Second off, low equilibrium interest rates are a symptom of weak demand for goods and low expected inflation. When people and firms fear continuing recession, desired investment will be low ("who will buy the extra goods we produce?"), and desired saving will be high ("what if I can't get a job?"), for any given real interest rate. So the equilibrium real interest rate will actually be lower when people and firms fear a continuing recession than when they don't. (The IS curve slopes the "wrong" way, in other words. Or the IS curve shifts left if people fear continuing recession because of overly tight monetary policy, if you prefer to think of it that way instead.)"