Rising prices are not a long-run UK economy risk

Significance There is little risk that inflation will return to heights seen in the 1980s as the authorities have the tools to control high inflation. However, their effective deployment depends on cooperation between the BoE and Her Majesty's Treasury (HM Treasury -- the finance ministry). Impacts The long-run demographic forces that kept real interest rates low in the past will continue to keep them low in the future. Low real rates and little risk of high inflation mean nominal rates will also remain low. Moderate inflation in the range 0-5% can be expected over the next decade. A dose of moderate inflation will be useful for the UK economy as it will ease the relative price adjustments needed during the recovery.

Dynamic inefficiency and fiscal interventions in an economy with land and transaction costs

The paper contributes to the discussion on whether real interest rates below real growth rates can be taken as evidence of dynamic inefficiency so that some fiscal intervention may be called for. A seemingly killing objection points to land, a non-produced durable asset in positive supply, as a reason why dynamic inefficiency can be ruled out. If real interest rates were expected to be below real growth rates forever, the value of land would be unbounded, which is incompatible with equilibrium. The paper shows that this objection is not robust to the presence of an arbitrarily small per-unit-of-value transaction cost. The paper also specifies fiscal interventions that provide for Pareto improvements even though they involve a resource cost. For the debate about public debt policy, the land argument is a red herring because it is incompatible with the presence of fiat money and debt denominated in units of fiat money.

The ZIRP trap – The institutionalization of negative real interest rates

This paper analyzes the consequences of the monetary policies enact-ed by Western central banks from 2008 on and the possibilities to end these policies. Zero interest rate policies (ZIRP) actually impaired the recovery that was underway by subsidizing a distorted structure of production. The over­ indebtedness of Western economies was artificially propped up thus delaying recovery. We also show how ZIRP fosters moral hazard, the development of new bubbles and breeds unintended consequences that destabilize the finan­ cial system. ZIRP adversely influences entrepreneurship and culture by discour­ aging hard work and prudent investment. In today´s central bank world, ZIRP implies the institutionalization of negative real interest rates. It harms traditional entrepreneurial virtues, complicates long-term planning, politicizes society and erodes the foundations of capitalism. Exiting ZIRP is politically costly. We analyze the exit options that remain for policy makers, including financial repression, high inflation, default, capital levies, bail-ins and currency reforms, and evaluate them from a free-market perspective. Keywords: ZIRP, unconventional monetary policy, overindebtedness, exit op­ tions, negative real interest rates. JEL Classification: E14, E31, E32, E52 Resumen: Este artículo analiza las consecuencias de las políticas monetarias de los bancos centrales a partir de 2008 y la posibilidad de salir de estas políticas extraordinarias. ZIRP impidió la recuperación subvencionando una estructura productiva distorsionada. El sobreendeudamento de las economías occidentales se mantuvo y alargo artificialmente retrasando la recuperación. Mostramos también que ZIRP causa riesgo moral, el desarrollo de nuevas bur-bujas y consecuencias no intencionadas que desestabilizan el sistema financie-ro. ZIRP afecta negativamente a la función empresarial y a la cultura. Desincen-tiva el trabajo y la inversión prudente. En el mundo actual de bancos centrales, ZIRP implica la institucionalización de tipos de interés reales negativos. Daña las virtudes empresariales tradicionales, complica la planificación a largo pla-zo, politiza la sociedad y mina las bases del capitalismo. La salida de ZIRP es políticamente costosa. Analizamos las opciones de salida que les quedan a los políticos incluyendo la represión financiera, una inflación elevada, el incumplimiento en los pagos, los impuestos sobre el capital, bail-ins y reformas monetarias que son evaluadas desde una perspectiva liberal. Palabras clave: política de tipo de interés cero (ZIRP), política monetaria no convencional, sobreendeudamiento, opciones de salida, tipos de interés reales negativos. Clasificación JEL: E14, E31, E32, E52.