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Higgins & Klitgaard: Japan’s Experience with Yield Curve Control—Noted

Summary:
For reasons that have never been clear to me, central banks have hitherto always focused on influencing interest rates at the short end of the yield curve. I understand why you would do so in a financial crisis: in a financial crisis it is the stringency of short term money that is the key problem. But when central banking moves out from dealing with dire and immediate crises into the business of making Say’s Law generally true in practice even though it is false in theory—the business of matching the propensity to save with the animal spirits of enterprisers—the short run opportunity cost of immediate cash money is no longer a key or even an especially interesting financial economic quantity to manage. Yet central banks have consistently, historically, and traditionally focused on

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For reasons that have never been clear to me, central banks have hitherto always focused on influencing interest rates at the short end of the yield curve. I understand why you would do so in a financial crisis: in a financial crisis it is the stringency of short term money that is the key problem. But when central banking moves out from dealing with dire and immediate crises into the business of making Say’s Law generally true in practice even though it is false in theory—the business of matching the propensity to save with the animal spirits of enterprisers—the short run opportunity cost of immediate cash money is no longer a key or even an especially interesting financial economic quantity to manage. Yet central banks have consistently, historically, and traditionally focused on managing it. Now, finally, the Bank of Japan has been experimenting with alternatives. And they look very promising indeed:

Matthew Higgins & Thomas Klitgaard: Japan’s Experience with Yield Curve Control https://libertystreeteconomics.newyorkfed.org/2020/06/japans-experience-with-yield-curve-control.html: ‘Any central bank considering a move to implement its own version of YCC... has many questions to ponder.... For Japan... YCC has had one clear benefit. Under the new policy, the BoJ has been able to exert fairly close control over the term structure of interest rates without resorting to large-scale interventions in the JGB market. Investors accept that the Bank can buy whatever quantity of JGBs is needed to keep yields from rising and, as a result, it has not had to buy many at all... .#macro #monetarypolicy #2020-07-10

Bradford DeLong
J. Bradford DeLong is Professor of Economics at the University of California at Berkeley and a research associate at the National Bureau of Economic Research. He was Deputy Assistant US Treasury Secretary during the Clinton Administration, where he was heavily involved in budget and trade negotiations. His role in designing the bailout of Mexico during the 1994 peso crisis placed him at the forefront of Latin America’s transformation into a region of open economies, and cemented his stature as a leading voice in economic-policy debates.

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