Funding the PSBR and Monetary Growth

Abstract

As discussed in Chapter 6, the authorities maintain an important degree of control over short term interest rates. Their desire to do this rests on the belief that movements in interest rates have an important influence on the behaviour of the monetary aggregates, the exchange rate and the performance of the real economy. With the monetary aggregates at the centre of economic and financial policies, it is perhaps the first linkage which has been considered of prime importance in recent years. The link between interest rates and the behaviour of narrower monetary aggregates may, in some circumstances, be quite clear: a rise in the rate of interest on bank time deposits may, for example, lead to switching into these from noninterest bearing deposits, thus leading to slower growth of nib M1. Similarly, a rise in interest rates may induce switching into interest bearing deposits from cash, thus facilitating control of MO.