The "Discipline and Punish" View of Interest Rates

A blog about business and economics.
Aug. 1 2012 4:24 PM

The "Discipline and Punish" View of Interest Rates

Here's Philipp Rösler, Vice-Chancellor of Germany and Economy Minister, offering the clearest account yet of how European monetary policy has gone so far off the rails:

“If you take away the interest rate pressure on individual states, you also take away the pressure for them to reform.”
Advertisement

The view here is that because countries ought to pursue good pro-growth structural policies, central banks ought to create unfavorable monetary conditions as a way of pressuring countries to pursue structural reforms.

There are many problems with this approach, but perhaps the most basic is that it will mix up the signal and noise in the policy dynamic. If monetary policy tries at all times to deliver appropriate monetary conditions, then we know that structural reforms are either working or failing because the situation will either improve or not. But if the central bank makes its delivery of appropriate monetary conditions contingent on legislatures adopting sound structural policies, then all we really know about structural reforms is whether or not they're the ones the central bank happens to think will work. You're eliminating the real-world test and substituting the bank staff's judgment.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

TODAY IN SLATE

Frame Game

Hard Knocks

I was hit by a teacher in an East Texas public school. It taught me nothing.

Chief Justice John Roberts Says $1,000 Can’t Buy Influence in Congress. Looks Like He’s Wrong.

After This Merger, One Company Could Control One-Third of the Planet's Beer Sales

Hidden Messages in Corporate Logos

If You’re Outraged by the NFL, Follow This Satirical Blowhard on Twitter

Sports Nut

Giving Up on Goodell

How the NFL lost the trust of its most loyal reporters.

How Can We Investigate Potential Dangers of Fracking Without Being Alarmist?

My Year as an Abortion Doula       

  News & Politics
Politics
Sept. 16 2014 11:25 AM The GOP’s Phantom Menace The Republican Party’s new agenda is trying to solve problems that don’t exist.
  Business
Business Insider
Sept. 16 2014 10:17 AM How Jack Ma Founded Alibaba
  Life
Atlas Obscura
Sept. 16 2014 8:00 AM The Wall Street Bombing: Low-Tech Terrorism in Prohibition-era New York
  Double X
The XX Factor
Sept. 15 2014 3:31 PM My Year As an Abortion Doula
  Slate Plus
Tv Club
Sept. 15 2014 11:38 AM The Slate Doctor Who Podcast: Episode 4  A spoiler-filled discussion of "Listen."
  Arts
Brow Beat
Sept. 16 2014 11:40 AM How to Put Things in Your Fridge
  Technology
Future Tense
Sept. 16 2014 7:36 AM The Inspiration Drought Why our science fiction needs new dreams.
  Health & Science
Bad Astronomy
Sept. 16 2014 7:30 AM A Galaxy of Tatooines
  Sports
Sports Nut
Sept. 15 2014 9:05 PM Giving Up on Goodell How the NFL lost the trust of its most loyal reporters.