Posted by: Dirk | November 25, 2011

Skidelsky on quantitative easing in the UK

OK, Robert Skidelsky is the official biographer of John Maynard Keynes, and it will not come as a surprise that he (and Felix Martin) in an article in the FT are attacking the British government for its policy of quantitative easing + austerity. Since the government runs austerity policies, QE is expected to pick up the slack. However, the article confirms my thoughts on the QE ideas of Paul Krugman some weeks ago:

The most terrifying thing to emerge from the Bank of England’s reports is that the Bank embarked on its experiment without any macro-economic model specifying how money was to be transmitted to income. In other words, QE was launched on a wing and prayer.

Skidelsky and Martin report that the March 2009 QE did push the yield on government bonds down, and it slightly lowered the interest rate for investment grade companies (by 0.7%), however it failed to provide lower interest rates for the rest and it failed to kickstart lending as well (it fell by 12%).

Math exercise for the week-end: assume an investment project which costs 1,000,000 pounds sterling. It takes one year to build and will produce 1,000 units of good A annually. Assume that demand for your product is zero. At which level of the (real) interest rate would you go ahead with the investment project and start borrowing?

constraints: the nominal interest rate must be above zero, and inflation is assumed to be constant.


  1. Okay, Dirk, is this a trick question?

    If I can’t sell any product and the real intersest rate is positive, why would I borrow any money? Even if the cost of production is zero, why would I spend anything to make a product I couldn’t sell?

    I guess I may have just summarized your point? Or will I be embarassed when you post part 2 of this math exercise that gives your solution?

  2. John, you are right. There is no way to make money, at least not with production. At a very high inflation rate it might be worth investing anyway, if the value of the factors of production is increasing in money terms in an inflationary environment.

    I think now that what I had in mind then was inspired by what Keynes (1924) wrote in his Tract, ch. 1 (The Consequences to Society of Changes in the Value of Money), part I (as affecting Distribution) and II (as affecting Production).

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