Author information:
István Ábel: Budapest Business School, Professor. E-mail: abel.istvan@uni-bge.hu
Máté Lóga: Magyar Nemzeti Bank, Head of Department. E-mail: logam@mnb.hu
Gyula Nagy: Budapest Business School, College Professor. E-mail: drnagy.gyula@uni-bge.hu
Árpád Vadkerti: Magyar Nemzeti Bank, Professional Secretary. E-mail: vadkertia@mnb.hu
Abstract:
The central bank practice which emerged in the period following the financial crisis called into question numerous elements of interest rate considerations. In this paper we present a new theoretical framework that dispenses with the concept of real interest altogether, as a vague and unnecessary category both in policy judgements and business decisions. This approach breaks with the traditional theory of economics. Traditional macroeconomics places its argumentation in the context of real analysis, which hinders the understanding of economic processes. Schumpeter and subsequently, Keynes took a stand against this approach and, rebuffing the real approach, turned to monetary analysis as early as a century ago. In the framework of the classical theory of economics, they describe monetary policy as an adjustment to the natural rate of interest. In this article we propose a different approach. Describing the role of fiat money, the endogenous money theory puts the lending activity of commercial banks into the focus of money creation. This concept also put central bank monetary policy in a new framework. According to this approach, central banks assume an exclusive role in determining the interest rates, but the central significance of the interest rate policy weakens. Once we recognise the crucial role of commercial banks in money creation, the role and function of the central bank changes. The central bank no longer controls money creation solely by shaping the interest rate policy, but also by way of the micro and macroprudential regulation of lending.
Cite as (APA):
Ábel, I., Lóga, M., Nagy, G., & Vadkerti, Á. (2019). Lifting the Veil on Interest. Financial and Economic Review, 18(3), 29–51. https://doi.org/10.33893/FER.18.3.2951
Column:
Study
Journal of Economic Literature (JEL) codes:
E43, E52, E31
Keywords:
macroeconomics, economic policy, monetary policy, interest
References:
Ábel, I. – Lehmann, K. – Tapaszti, A. (2016): The controversial treatment of money and banks in macroeconomics. Financial and Economic Review, 15(2): 33–58. https://en-hitelintezetiszemle.mnb.hu/letoltes/istvan-abel-kristof-lehmann-attila-tapaszti-en.pdf
Appelt, K. (2016): Keynes’ Theory of Interest Rate: A Critical Approach. Theory, Methodology, Practice, 12(1): 3–8. https://doi.org/10.18096/TMP.2016.01.01
Bindseil, U. (2004): Monetary Policy Implementation. Oxford: Oxford University Press.
Bindseil, U. – König, P.J. (2013): Basil J. Moore’s Horizontalists and Verticalists: An appraisal 25 years later. Review of Keynesian Economics, 1(4): 383–390. https://doi.org/10.4337/roke.2013.04.01
Blinder, A.S. (1997): A core of macroeconomic beliefs. Challenge, 40(4): 36–44. https://doi.org/10.1080/05775132.1997.11471984
Chick, V. – Tily, G. (2014): Whatever happened to Keynes’s monetary theory? Cambridge Journal of Economics, 38(3): 681–699. https://doi.org/10.1093/cje/beu011
Cohen, J.D. – Ericson, K.M. – Laibson, D. – White, J.M. (2016): Measuring Time Preferences. National Bureau of Economic Research Working Paper 22455. https://doi.org/10.3386/w22455
Davidson, P. (1986): A Post Keynesian view of theories and causes for high real interest rates. Thames Papers In: Political Economy, Spring. Reprinted in Davidson, L. (ed.): The Collected Writings of Paul Davidson, vol. 1. New York: New York University Press, 1991.
Eichner, A.S. (1987): The Macrodynamics of Advanced Market Economies. Armonk, N. Y.: M. E. Sharpe.
Fisher, I. (1907): The Rate of Interest. New York: Macmillan.
Fisher, I. (1930): Theory of Interest, as determined by Impatience to Spend Income and Opportunity to Invest it. New York: Macmillan.
Fisher, I. (1933): The Debt Deflation Theory of Great Depressions. Econometrica, 1(4): 337–357. https://doi.org/10.2307/1907327
Foley, D.K. (1975): On Two Specifications of Asset Equilibrium in Macroeconomic Models. Journal of Political Economy, 83(2): 303–324. https://doi.org/10.1086/260324
Harrod, R. (1971): Discussion paper. In: Clayton, G. – Gilbert, J.C. – Sedgwick, R. (eds.): Monetary Theory and Monetary Policy in the 1970s. Oxford: Oxford University Press.
Hicks, J.R. (1937): Mr Keynes and the “Classics”: A Suggested Interpretation. Econometrica, 5(2): 147–159. https://doi.org/10.2307/1907242
Keynes, J.M. (1930): A Treatise on Money. MacMillan & Company, London, UK.
Keynes, J.M. (1937a): Alternative Theories of the Rate of Interest. The Economic Journal, 47(186): 241–252. https://doi.org/10.2307/2225525
Keynes, J.M. (1937b): The “Ex-Ante” Theory of the Rate of Interest. The Economic Journal, 47(188): 663–669. https://doi.org/10.2307/2225323
Keynes, J.M. (1965): A foglalkoztatás, a kamat és a pénz általános elmélete (The General Theory of Employment, Interest and Money). Közgazdasági és Jogi Könyvkiadó, Budapest.
Kollarik, A. – Szalai, Z. (2017): The 2008–2009 crisis and the new international economic environment. In: Lehmann, K. – Palotai, D. – Virág, B. (ed.): The Hungarian Way – Targeted Central Bank Policy. Magyar Nemzeti Bank, Budapest, pp. 27–71.
Lavoie, M. (2004): The New Consensus on Monetary Policy Seen from a Post-Keynesian Perspective. In: Lavoie, M. – Seccarecia, M. (eds.): Central Banking in the Modern World: Alternative Perspectives. Cheltenham: Edward Elgar, pp. 15–34.
Lavoie, M. (2014): Post-Keynesian Economics. New Foundations. Edward Elgar. Cheltenham, UK, Northampton, MA, USA.
Li, B. – Xiong, W. – Chen, L. – Wang, Y. (2017): The impact of the liquidity coverage ratio on money creation: A stock-flow based dynamic approach. Economic Modelling. 67(December): 193–202. https://doi.org/10.1016/j.econmod.2016.12.016
McCallum, B.T. (2001): Monetary policy analysis in models without money. Federal Reserve Bank of St. Louis Review, 83(4): 145–159. https://doi.org/10.20955/r.83.145-160
McGrattan, E.R. – Prescott, E.C. (2001): The Stock Market Crash of 1929: Irving Fisher Was Right. NBER Working Paper No. w8622. https://doi.org/10.3386/w8622
Moore, B. (1988): Horizontalists and Verticalists: The Macroeconomics of Credit Money. Cambridge University Press, Cambridge.
Moore, B. (2010): We are all Horizontalists now! Interview. European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, 7(1): 7–11. https://doi.org/10.4337/ejeep.2010.01.01
Ohlin, B. – Robertson, D.H. – Hawtrey, R.G. (1937): Alternative Theories of the Rate of Interest: Three Rejoinders. The Economic Journal, 47(187): 423–443. https://doi.org/10.2307/2225356
Palley, T.I. (2006): A Post-Keynesian framework for monetary policy: why interest rate operating procedures are not enough. In: Gnos, C. – Rochon, L.-P. (2006): Post-Keynesian Principles of Economic Policy. Edward Elgar, Cheltenham, pp. 78–98.
Pilkington, P. (2014): Endogenous Money and the Natural Rate of Interest: The Reemergence of Liquidity Preference and Animal Spirits in the Post-Keynesian Theory of Capital Markets. The Levy Economics Institute of Bard College, Working Paper No. 817. https://doi.org/10.2139/ssrn.2509361
Rodrik, D. (2015): Economics rules: The rights and wrongs of the dismal science. WW Norton & Company.
Romer, D. (2000): Keynesian macroeconomics without the LM curve. Journal of Economic Perspective, 14(2): 149–169. https://doi.org/10.1257/jep.14.2.149
Shiller, R.J. (2011): Irving Fisher: Debt Deflation and Crises. Cowles Foundation Discussion Paper No. 1817.https://doi.org/10.2139/ssrn.1909810
Schumpeter, J. (1954): History of Economic Analysis. Allen Unwin, London.
Schumpeter, J.A. (1980): A gazdasági fejlődés elmélete. Vizsgálódás a vállalkozói profitról, a tőkéről, a hitelről, a kamatról és a konjunktúraciklusról (The Theory of Economic Development: An Inquiry into Profits, Capital, Credit, Interest and the Business Cycle). Közgazdasági és Jogi Könyvkiadó, Budapest.
Szakolczai, Gy. (2016): Keynes életútja és a Nemzetközi Valutaalaphoz vezető gondolatai (The life of Keynes and his role in establishing the International Monetary Fund). Közgazdasági Szemle (Economic Review), 63 (July–August): 838–857. https://doi.org/10.18414/KSZ.2016.7-8.838
Szalai, Z. (2015): Időpreferencia és Keynes kamatelmélete (Time preference and Keynes’s theory of interest). Magyar Nemzeti Bank, Monetary Strategy Department, manuscript.
Taylor, L. (2010): Maynard’s Revenge. The Collapse of Free Market Macroeconomics. Harvard University Press, Cambridge, MA.
Tily, G. (2007): Keynes Betrayed: The General Theory, the Rate of Interest and ‘Keynesian’ Economics. Palgrave Macmillan, London, New York. https://doi.org/10.1057/9780230801370
Tymoigne, E. (2006): Fisher’s Theory of Interest Rates and the Notion of Real: A Critique. The Levy Economics Institute of Bard College, Working Paper No. 483. https://doi.org/10.2139/ssrn.948755
Tymoigne, E. (2017): Money and banking Post 21: The Interest rate. http://neweconomicperspectives.org/money-banking. Downloaded: 24 May 2018.
Weeks, J. (1998): A neoklasszikus közgazdaságtan kritikája (A Critique of Neoclassical Macroeconomics). Aula Kiadó, Budapest.
Wray, L.R. (2004): When are Interest Rates Exogenous? SSRN. http://dx.doi.org/10.2139/ssrn.1010158.