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started a New Job & need your help

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complience posted on Tue, Dec 4 2012 4:00 AM

I have just taken over as economics Minster for a small unknown failed European state and to be honest im out of my depth - I'm hoping the community at mises.org can help me with setting up a basic fiscal and monetary policy.

We have strong ties to the UK (the queen is shown on our money) and I would like to base our setup on their model. The first problem I need to deal with is our high interest rates, but how do I actually go about dropping interest rates from 10% to 9% or 100 bases points?

Currently I really want to gain a good understanding of how interest rates are set in the real world and compare this to other economic stimulus options such as QE later.

Thank you for any help the Mises.org community can give my beleaguered nation

(first post - go easy on me)

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QE seems to involve buying or selling large amounts of state bonds/

A central bank implements quantitative easing by buying financial assets from commercial banks and other private institutions with newly created money in order to inject a pre-determined quantity of money into the economy. This is distinguished from the more usual policy of buying or selling government bonds to keep market interest rates at a specified target value.

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Nigeria is not a European country ;)

The Voluntaryist Reader - read, comment, post your own.
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...

this cant be serious... can it? how did you get the job if you arent qualified for it?

you arent going to get any advice on monetary policy or lowering interest rates other than not doing anything.

the best monetary policy is no policy.

The best interest rate is the natural rate.

 

If you want to give advice on how to achieve lower interest rates you need the population to save more.  More money saved = lower rates, less money in the system = higher rates.

 

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where did you get nigeria from?  

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The overall tone and improbability of the message reminded me of http://en.wikipedia.org/wiki/Nigerian_scam.

Also, Nigeria used to be a colony of GB, and a part of the Commonwealth.

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lol true.  or it could be bernanke trolling!

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Maybe it is Bernanke, trying to get some sound advice.

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Alan Maclean

thats what im guessing your name is.

 

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yes yes. this is exactly what the old head of finance said before he left...

But how do I get the people to save more and at the same time reduce the amount of money in the system?

How do they do it in Europe?

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Sounds like a homework assignment to me...

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Kikis said that? 

 

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There's no pat-down answer as to how to decrease interest rates (I don't think, but it's been a while since I took Macro). The most likely answer is that you will need some complex model to tell you how much money you should infuse into the system. Your best bet is incremental buying of government bonds while you carefully watch the interest rates.

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This is what is confusing me most about my new job.. other countries seem very confident in setting their interest rates.. up half % here.. down a couple there and the market always quickly agrees and follows.

Yes I could buy government bonds to effect the money supply.. but this is not a directly linked and how would I accurately measure this to within 0.1 of a percent?

Also what you've suggested sounds almost exactly the same as qualitative easing?

What the differenced between the two methods?

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This is what is confusing me most about my new job.. other countries seem very confident in setting their interest rates.. up half % here.. down a couple there and the market always quickly agrees and follows.

That's the idea of open market operations - the market responds to a higher amount of money.

Yes I could buy government bonds to effect the money supply.. but this is not a directly linked and how would I accurately measure this to within 0.1 of a percent?

You can't measure it that accurately. Even current money masters need to wait and see what happens.

Also, it is directly linked - you are adding more money to the system by buying bonds.

Also what you've suggested sounds almost exactly the same as qualitative easing?

Oh, we're not suggesting these. Here we generally think that government messing with the money supply is a bad idea. We're saying that if you want to decrease interest rates, you could buy up bonds. Or use QE. You could also just print money and drop it through helicopters. Or you could mandate forced saving.

For QE, see http://en.wikipedia.org/wiki/Quantitative_easing

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I'll give you the same answer Mises gave when asked what he would do if he were czar of the economy: resign.

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