Question

Explain the economic logic that underpins the “new consensus” macroeconomic model’s policy of nominal interest rate targeting and further explain how this argument is a resurrection of the Monetarists’ argument about the ineffectiveness of monetary policy in the long run.

Answer 1

Nominal interest rate's main target is to stimulate growth by lowring the interest rates or make them near zero or even negative because when any country's central bank lower the interest rate its main target is to stimulate growth by lowring lending interest rates and due to low lending inteterest rate demand for loans gets increased and it expend the economy becaue increased demand for loan increases the production, increases the income in the hands of labour force, increased demand for goods and services and so it boosts the economy overall.

Nominal interest rates/near zero or negative interest rates targets the depist rates to also come down and make deposit rates near to zero and this directly affects the lending interest rates because lending rates depends upon the deposit rates because deposits are the main source of funding for loans/lending and this overall increases the demand for loans and so it increases the production, income of labour force and also increase the number of labour force in an economy and increases demand and supply for goods and services and in overall it expends the economy.

Long run- But in long run this policy does not affect deposit rates as well as lending rates because in long run nominal interest rates/lnear zero /negative interest rates does not affect deposit rates and lending rates after a certain period of time/ or after some rate cuts and deposit rates become unresponsive of lowering/near zero/negative interest rates and so lending rates also does net get affected by this because lending rates are dependent upon deposit rates because deposits are the source of funds lending/loans and in turn in the long run lending interest rates get increased and due to this an economy does not expend and nominal interest rates does not affect the lending rates and so in the long run
it does not boost/expend an economy and it is also worth noting that deposit rates and lending rates remains above zero and deposir rates becomes unresponsive of nominal interest rates and lending rates even can get increased.

Conclusion- In the long run nominal interest rates does not expend or boost any economy rather deposit rates become unresponsive to them after some rate cuts and lending rates also remains above zero level and even can get increased and so it does not boost economy in the long run.