S.C. Tsiang, prophet

Or should I have called this post "zero nominal rates of interest"?

The JSTOR link is here.  In 1969 Tsiang wrote that if the Fed pays interest on reserves, or nominal interest rates in loan markets approach zero, money (if you can still call it that) dominates all investment assets.  The only equilibrium involves the government holding all of the economy’s real capital.  In other words, Milton Friedman’s old recipe for an optimum quantity of money can never be realized in anything resembling a decentralized economy.

Here is Jeff Hummel’s post on paying interest on reserves.  Here is today’s headline on the Fed and the federal funds rate.  Note that for Chiang, either zero nominal interest rates or interest on reserves was enough to cause the problem; did he imagine we might someday have both?



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