Dear Mainstream Macroeconomists: Do you broadly agree or disagree with the statements made below? Take poll below. https://twitter.com/rohangrey/status/1288141059533369344

Poll.

I suspect that many might disagree. If so, why? Is it b/c these statements are inconsistent with neoclassical theory? No. See, e.g., https://files.stlouisfed.org/files/htdocs/publications/review/2015-09-08/a-model-of-u-s-monetary-policy-before-and-after-the-great-recession.pdf

And in case you don't like OLG models, consider this instead https://research.stlouisfed.org/wp/more/2018-002
published here https://www.sciencedirect.com/journal/journal-of-economic-dynamics-and-control/vol/89/suppl/C

In those models, the nominal interest rate on government "paper" is determined by "monetary policy." Currency is zero-interest paper. Reserves, bills, notes and bonds are generally interest-bearing paper. But the interest rate on all these objects could be set to zero.

But wouldn't that cause inflation? According to models above, effect of lowering R depends on whether FP is "Ricardian" or "Non-Ricardian." In former case, FP adjusts primary surplus (PS) to finance interest expense. In latter, PS stays fixed and FP adjusts inflation rate.

With Ricardian FP, lower R causes jump in P-level (so, temporary inflation only). With Non-Ricardian FP, lower R leads to *lower* long-run inflation, since total deficit is lower (b/c of lower interest expense).

So, does this mean govt should set R = 0 on all its paper? Not necessarily. An interest rate rule could still be useful for stabilization policy (depending on what shocks are hitting the economy). Other tools could be used as well, of course.

Want to add that the models above make clear that there are economic limits to how much govt can finance by printing paper (there are limits to seigniorage revenue). See also: http://andolfatto.blogspot.com/2019/05/is-us-budget-deficit-sustainable.html

Finally, models also make clear that monetary policy alone cannot determine the *long-run* rate of inflation. Increasing R can *at best* just cause *temporary* decline in inflation (along with recession). Unless, of course, MP induces change in FP (which has happened in past).