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The global move into the zero interest rate and high debt trap

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  • Schnabl, Gunther

Abstract

The paper identifies based on the monetary overinvestment (malinvestment) theories by Wicksell (1898), Mises (1912) and Hayek (1929) monetary policy mistakes in large industrial countries issuing international currencies. It its argued that a benign neglect towards monetary policy reform in a world dominated by financial markets has led to a erosion of the allocation and signaling function of the interest rate, which has triggered an excessive rise of government debt and structural distortions in the world economy. The backlash of high government debt levels on monetary policy making is argued to lead to the hysteresis of low interest rates and high government debt levels. In this context, monetary reform is discussed with respect to the exit from low interest rates and high debt policies and a reform of the prevalent world monetary system. It is concluded that enhanced competition between dollar and euro as international currencies, which is refereed by East Asia, can be a promising approach towards a more stable world monetary system.

Suggested Citation

  • Schnabl, Gunther, 2013. "The global move into the zero interest rate and high debt trap," Working Papers 121, University of Leipzig, Faculty of Economics and Management Science.
    • Handle: RePEc:zbw:leiwps:121
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    File URL: https://www.econstor.eu/bitstream/10419/77948/1/755550668.pdf
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    References listed on IDEAS

    as
    1. Mathilde Maurel & Gunther Schnabl, 2012. "Keynesian and Austrian Perspectives on Crisis, Shock Adjustment, Exchange Rate Regime and (Long-Term) Growth," Open Economies Review, Springer, vol. 23(5), pages 847-868, November.
    2. Gunther Schnabl & Andreas Hoffmann, 2008. "Monetary Policy, Vagabonding Liquidity and Bursting Bubbles in New and Emerging Markets: An Overinvestment View," The World Economy, Wiley Blackwell, vol. 31(9), pages 1226-1252, September.
    3. Andreas Hoffmann & Gunther Schnabl, 2011. "National Monetary Policy, Internatinal Economic Instability and Feeback Effects - An Overinvestment View," Global Financial Markets Working Paper Series 19-2011, Friedrich-Schiller-University Jena.
    4. Axel Löffler & Gunther Schnabl & Franziska Schobert, 2013. "Limits of Monetary Policy Autonomy and Exchange Rate Flexibility by East Asian Central Banks," Global Financial Markets Working Paper Series 48-2013, Friedrich-Schiller-University Jena.
    5. Gunther Schnabl & Timo Wollmershäuser, 2013. "Fiscal Divergence and Current Account Imbalances in Europe," CESifo Working Paper Series 4108, CESifo.
    6. Ronald McKinnon & Gunther Schnabl, 2012. "China and Its Dollar Exchange Rate: A Worldwide Stabilising Influence?," The World Economy, Wiley Blackwell, vol. 35(6), pages 667-693, June.
    7. Ronald McKinnon & Gunther Schnabl, 2009. "The Case for Stabilizing China's Exchange Rate: Setting the Stage for Fiscal Expansion," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 17(1), pages 1-32, January.
    8. Roger W. Garrison, 2004. "Overconsumption and Forced Saving in the Mises-Hayek Theory of the Business Cycle," History of Political Economy, Duke University Press, vol. 36(2), pages 323-349, Summer.
    9. Andreas Hoffmann & Gunther Schnabl, 2011. "A Vicious Cycle of Manias, Crises and Asymmetric Policy Responses – An Overinvestment View," The World Economy, Wiley Blackwell, vol. 34(3), pages 382-403, March.
    10. repec:lmu:muenar:19832 is not listed on IDEAS
    11. Selgin, George & Lastrapes, William D. & White, Lawrence H., 2012. "Has the Fed been a failure?," Journal of Macroeconomics, Elsevier, vol. 34(3), pages 569-596.
    12. Schnabl, Gunther & Freitag, Stephan, 2010. "Reverse causality in global current accounts," Working Paper Series 1208, European Central Bank.
    13. Lawrence H. White, 2010. "The Rule of Law or the Rule of Central Bankers?," Cato Journal, Cato Journal, Cato Institute, vol. 30(3), pages 451-463, Fall.
    14. Paul De Grauwe, 2006. "Flaws in the Design of the Eurosystem?," International Finance, Wiley Blackwell, vol. 9(1), pages 137-144, May.
    15. George Selgin & Lawrence White, 2005. "Credible Currency: A Constitutional Perspective," Constitutional Political Economy, Springer, vol. 16(1), pages 71-83, January.
    16. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
    17. Gunther Schnabl, 2013. "The Macroeconomic Policy Challenges of Balance Sheet Recession: Lessons from Japan for the European Crisis," CESifo Working Paper Series 4249, CESifo.
    18. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-491, June.
    Full references (including those not matched with items on IDEAS)

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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Stop Preaching Emerging Countries, Blame Ben and VIX®
      by Shifting Wealth in ShiftingWealth on 2014-02-02 00:41:00

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    More about this item

    Keywords

    Economic Instability; Credit Cycles; Monetary Policy; Hayek; Mises; Monetary Policy Reform; Currency Competition;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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