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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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Verified by complience

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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Top 50 Contributor
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I can't figure out what you are...

Anyway if I were put in charge of a central bank I'd slowly decrease expansions in the money supply until it stopped all together. Ending inflation is the only Austrian prescription and I think Autolykos' idea of just quitting would be disastrous if the above suggestion is the alternative.

At last those coming came and they never looked back With blinding stars in their eyes but all they saw was black...
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a) There's no such thing as "the" interest rate. This is your first problem.

b) The cost of borrowing (interest rates) goes up when there are fewer lenders and when there are more borrowers. Thus, in order for interest rates to go down, there needs to be a glut of lenders and a paucity of borrowers. Since you are the central bank, you could ask the government to subsidize lenders and tax borrowers.

Clayton -

http://voluntaryistreader.wordpress.com
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Clayton, he said he is "economics Minster", not the CB.

Deliberate grammatical errors is another reason I thought of a Nigerian scam.

The Voluntaryist Reader - read, comment, post your own.
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Thank you this explains it a little better.. we want to encourage the free market and so wouldn't consider increased public sector spending however the helicopter idea is a goer.

I will talk to the head of the airforce about this tomorrow.. exactly what height is recommend to fly the helicopters so to ensure an equal redistribution of wealth among the population? 

But I am still confused

Setting interest rates seems to involve buying or selling large amount of state bonds/

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

Still don't see any critical difference apart from the name.

 

 

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Top 25 Contributor
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Neodoxy:
I think Autolykos' idea of just quitting would be disastrous if the above suggestion is the alternative.

How so?

The keyboard is mightier than the gun.

Non parit potestas ipsius auctoritatem.

Voluntaryism Forum

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Top 50 Contributor
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Because there's an overwhelming probability that someone who did believe in central planning and credit expansion would come in and make this a reality than if the non-interventionist was in and refused to intervene. This would likely result in a less effective market, increases in government spending and power, and recession.

At last those coming came and they never looked back With blinding stars in their eyes but all they saw was black...
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Top 150 Contributor
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Stop fixing the interest rate and let the market set the rate no matter how high or low.

Legalize other currencies, foreign and domestic, as legal tender ie be allowed to pay taxes in multiple currencies.

Ending all banking and finance regulations.

Some of these might be outside the scope of your power, but you could at least work to encourage a move in this direction:

End all tariffs on imports and exports. Modernise the customs facilities and phase them out in to privately held security and voluntary inspection and handling.

Overhaul tax system by phasing in to a system where taxation is voluntary.

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I think the purpose of my post might have gotten a little lost... As interesting these ideas are for Nigera's economy, I am not interested in a 'thought experiment' at the moment.

I want to know how Interest rates are set in the real world..

My current understanding now is this: When the Governor of the bank of england (George Osbourne really) wants to increase the interest rate from 0.5% to 1% he will buy a number of Guilts with money 'borrowed' from treasury?

This decreases the money supply and so increases the value of the currency?

Or is it the other way around.. 

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This is how interest rates are determined

The government can move the downward sloping curve from right to left but in the long run this will change the demand curve in a way that is ultimately unpredictable.

At last those coming came and they never looked back With blinding stars in their eyes but all they saw was black...
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Top 10 Contributor
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Verified by complience

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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Top 75 Contributor
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start printing lots of money.

and brainwash people into ignoring the effects of inflation.

????

profit.

/troll

“Since people are concerned that ‘X’ will not be provided, ‘X’ will naturally be provided by those who are concerned by its absence."
"The sweetest of minds can harbor the harshest of men.”

http://voluntaryistreader.wordpress.org

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Ah now I think I'm beginning to understand.. so the action of QE and setting interest rates *are one and the same.. but the difference is the source of the money used (printed money instead of debt)

But I still need to know 'how' to do it..

My currencies interest rate is 10% and I want to drop it to 9%. 

How do I know how many bonds I need to buy to cause a 1% drop in the rate?

The schooling system in my country is not very good and I am worried we do not have enough skilled Mathematicians to work it out.

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The schooling system in my country is not very good and I am worried we do not have enough skilled Mathematicians to work it out.

Privatize the education, then wait for a few years.

The Voluntaryist Reader - read, comment, post your own.
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I understand that working out the yeild on bonds is extremely difficult.. as you have to work out the inflation rate within the repayment period and when a government buy its own bonds it also has to factor in the saving of coupon payments.

But it is for this reason I find it a very strange method to control a montery policy with, If I can't workout by how much the money supply has been effected by my actions.. how can the open market have any confidence in it either?

What if i attempt to charge 10% interest to private banks for borrowing from our central bank and they refuse on the grounds of overpricing?

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Not Ranked
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Points 475

I've been thinking about this some more and think we've all been confused.

The interest rate my central bank charges is not set through the purchase of government bonds, although the market value of the currency is linked to the change in the money supply this causes.

But the actual Interest rates are just an arbitory numbers - I can set to anything I like!

http://en.wikipedia.org/wiki/List_of_countries_by_central_bank_interest_rates

But what I don't understand is why I would want to charge an interest rate in the first place.

I want to lend money to ensure liquidity not make a profit,, im now more confused than ever.

I'm so going to get fired...

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