India Should Rely on Lower Rates to Stimulate Growth, OECD Says


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India Should Rely on Lower Rates to Stimulate Growth, OECD Says

by Kartik Goyal

June 24 (Bloomberg) — India should cut interest rates
rather than boost government spending if further measures are
needed to stimulate growth, the Organization for Economic
Cooperation and Development said.

They need to read Bernanke’s 2004 paper which makes it clear lower interest rates are contractionary via the fiscal channel and need to be matched by fiscal expansion to overcome that effect.

Additionally, in today’s environment, lower rates hurt savers a lot more than the help borrowers. Rates for savers have fallen a lot more than rates for borrowers due to risk perceptions and implied capital costs as net interest margins for lenders have increased to over 4%. This also means reduced aggregate demand and begs additional fiscal measures to sustain GDP.

So while I strongly favor lower rates, I also recognize that one of the benefits of lower rates is that they allow reduced taxes or increased public expenditure to sustain output and employment at desired levels.


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ECB FILLED ALL BIDS IN 12-MONTH AUCTION AT 1% BENCHMARK RATE


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Now that the ECB has demonstrated how it can set term bank rates out to a year (and minimize the need for the interbank markets) the door is open to same for any maturity.

And it also paves the way for other CB’s to do the same as they inch closer to my long standing proposals.

Again, for CB’s it’s about price (interest rates), not quantity (size of operation, CB’s balance sheet, etc).

The effects on the economy are those of the resulting interest rates, and not the quantities involved in the CB’s operations.


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