TYPO: "SELL" should be "BUY", as this action is to match a Treasury Auction
If the only assets the central bank holds are central government bonds/bills [ERASE THIS SECTION BEFORE THIS COMMA, as it's the opposite case], it has to sell [BUY] $10 billion in old securities (or do repo transactions) to match the $10 billion in new issuance.
Would you agree that the risk-free rate of return on govt bonds sets a minimum required rate of return on investment? It makes intuitive sense, as why would one risk a productive investment for less return than a bond? This would apply directly to new or rolled-over borrowing, and, subject to changes in the discount rate, ultimately for any asset class. I ask because I suspect this is the mechanism by which interest rate increases have *caused* the “persistent” inflation in all western economies. The initial COVID pulse is gone, and goods & energy prices have seen some deflation since peak, yet now the RBA moans about inflation in “dentistry and haircuts” (not a joke). All western central banks have acted the same, so this “home grown” inflation appears to be global. But, this persistence has not occurred in China or Japan - where rates have not been jacked like the west.
PS any neoclassical who tries to tell me this is because something special about Japan or China will have their Wiener schnitzel deducted. Of course they are special - their central banks are not controlled by the capitalist class!
(Sorry about the slow reply, I missed the notification about comments.)
Government bond yields certainly act as a hurdle rate for private sector borrowing rates, although required equity hurdle rates are typically much higher and insensitive to the policy rate.
Although there is an argument that interest expenses are a cost of doing business and thus higher interest rates can raise inflation. the inflation spike pre-dated rate hikes. I am not following Australian data, but in North America, labour markets are tight, and wage growth has been unsurprisingly buoyant. I do not think the path of inflation post-2020 was too "surprising" once we got past the very hard to predict peak rate. The spike faded, but the tight labour market keeps inflation above its pre-pandemic 2% average.
TYPO: "SELL" should be "BUY", as this action is to match a Treasury Auction
If the only assets the central bank holds are central government bonds/bills [ERASE THIS SECTION BEFORE THIS COMMA, as it's the opposite case], it has to sell [BUY] $10 billion in old securities (or do repo transactions) to match the $10 billion in new issuance.
Thanks, Corrected. (I haven't been carefully monitoring the email account that gets my Substack notifications, so I was slow to see this.)
“paid for by wiener schnitzel,” LOL!!
Would you agree that the risk-free rate of return on govt bonds sets a minimum required rate of return on investment? It makes intuitive sense, as why would one risk a productive investment for less return than a bond? This would apply directly to new or rolled-over borrowing, and, subject to changes in the discount rate, ultimately for any asset class. I ask because I suspect this is the mechanism by which interest rate increases have *caused* the “persistent” inflation in all western economies. The initial COVID pulse is gone, and goods & energy prices have seen some deflation since peak, yet now the RBA moans about inflation in “dentistry and haircuts” (not a joke). All western central banks have acted the same, so this “home grown” inflation appears to be global. But, this persistence has not occurred in China or Japan - where rates have not been jacked like the west.
PS any neoclassical who tries to tell me this is because something special about Japan or China will have their Wiener schnitzel deducted. Of course they are special - their central banks are not controlled by the capitalist class!
(Sorry about the slow reply, I missed the notification about comments.)
Government bond yields certainly act as a hurdle rate for private sector borrowing rates, although required equity hurdle rates are typically much higher and insensitive to the policy rate.
Although there is an argument that interest expenses are a cost of doing business and thus higher interest rates can raise inflation. the inflation spike pre-dated rate hikes. I am not following Australian data, but in North America, labour markets are tight, and wage growth has been unsurprisingly buoyant. I do not think the path of inflation post-2020 was too "surprising" once we got past the very hard to predict peak rate. The spike faded, but the tight labour market keeps inflation above its pre-pandemic 2% average.