Dinar Daily
Would you like to react to this message? Create an account in a few clicks or log in to continue.

Get Daily Updates of the NEWS & GURUS in your EMAIL
CHECK YOUR EMAIL for VERIFICATION

Enter your email address:

Dr.. Ola Al-Din Jaafar *: The zero interest rate option in the face of the current deflationary crisis DinarDailyUpdates?bg=330099&fg=FFFFFF&anim=1

Dr.. Ola Al-Din Jaafar *: The zero interest rate option in the face of the current deflationary crisis

Go down

Dr.. Ola Al-Din Jaafar *: The zero interest rate option in the face of the current deflationary crisis Empty Dr.. Ola Al-Din Jaafar *: The zero interest rate option in the face of the current deflationary crisis

Post by claud39 on Wed May 20, 2020 10:44 am

Dr.. Ola Al-Din Jaafar *: The zero interest rate option in the face of the current deflationary crisis


05/19/2020



Dr.. Ola Al-Din Jaafar *: The zero interest rate option in the face of the current deflationary crisis Alaa-Aldeen-Jaafar-image






Many central banks, including the US Federal Reserve, went to the option of reducing interest rates to close to zero degrees to address economic and financial crises in order to maintain investment activities and exit from the state of deflation and stagnation caused by the Corona virus and the decline in oil prices in a double crisis the world has never seen before . Despite our prior knowledge that adopting the zero interest rate option is an unconventional monetary policy and is resorted to when all other measures are not feasible to avoid economic downturn or are costly to the citizen, then this option is on the cards to face deteriorating economic conditions and avoid slipping towards deflation and stagnation. .

 

In normal times, central banks applied a positive nominal interest rate when lending money to organize the economic cycle, but in recent years that have seen frequent crises, these banks have resorted to adopting a low base rate of interest to encourage banks to lend money instead of keeping them in their coffers. As for the current financial crisis, some central banks have cut interest rates to zero and perhaps even lower in order to stimulate economic activity and give an incentive to all consumers and companies to spend and invest money instead of leaving it in their bank accounts and hoarding them.

 

The applications of this policy in Japan and in some European countries have proven that their practical risks are much less than the risks of other frustrating growth policies, especially as they contribute to the recovery of credit movement and the restoration of life to the faltering economy and prevent banks from enriching and achieving an abnormal profit at the expense of the citizen who is tempted to borrow and finds himself bound With debts, installments, and interest that he has no ability to bear, and as was recently disclosed information from one of the main banks in Iraq about the interest rate exceeding 50% in a procedure that has no economic or financial basis for it, at a time when the interest rate of the monetary policy of the Central Bank Iraqi costume only 4%.

 

The basic interest rate set by the central bank provides a key reference to enable borrowing in response to changes in the economic cycle and in line with prevailing inflation rates, and low basic interest rates are often resorted to to stimulate consumption and reduce the cost of investment, which is what commercial banks must not move away from This price is very much.

 

Therefore, this paper came to clarify the effect of the zero option for the interest rate, especially since the Holy Qur’an was the first to adopt this concept to show us the dimensions of this option and its effect on the movement of other economic variables and the restoration of economic activity through it.

 

Many economic theories pointed to the pivotal role that the interest rate plays in achieving the general economic balance, especially the low interest rate that would stimulate investment and consumer spending, which helps to enhance the value of assets and assets, due to the tendency of stock and bond prices to rise and increase the movement of consumer and durable goods. Rather, the matter also extends to the value of the exchange rate, which decreases with a certain degree as a result of the low interest rate, which helps to increase the level of net exports and increase spending in many economic fields, as other studies have pointed to the results of AD It is a consequence of the low interest rate policy, including the redistribution of income between creditors and debtors. The second category has a high marginal tendency to spend more than the first category and then the low interest rate will provide additional amounts for investment and consumption at the same time and the high value of the assets, which gives a high sense of wealth, which is They are called a trace

 

There is no need to say that high interest rates will lead to adverse results, including declining investment, a decline in economic activity, and a state of uncertainty. Uncertainty, and it is true that high interest rates will stimulate the flow of capital from abroad to inside, which means high credit supply and then the amounts available For investment, but this matter or this effect will be limited in the short term. When the central bank resorted to raising the interest rate, this will attract short-term speculative capital, which is often used in the field of consumption and real estate trading, and to a greater degree than its use in long productive investments. Long.

 

The flow of capital will lead to an increase in the value of the local currency exchange against foreign currencies Appreciation, which weakens the national economy in the medium and long term, given that exports and local industries will lose their competitiveness in the markets, which frustrates growth in the long term.

 

It seems that the position associated with the prohibition of hoarding and lowering the interest rate (making it zero according to the Qur’anic concept) is more advanced than the theory of effective aggregate demand brought by the well-known British economist John Maynard Keynes as he stressed the importance of moving aggregate demand by all possible means including monetary issuance in order to stimulate the economy And raise the level of employment and create new jobs. The man may be right in that his theory came against the backdrop of the great recession that prevailed in the major capitalist economies at the end of the twenties of the last century, but the dilemma in which his theory occurred later was clear, which paved the way for other more advanced theories to address the new economic problems that the countries ’economies suffered Advanced. As for the Qur’an, and in its basic premises, we found it keen to maintain the stability of the value of the currency, and that it would not accept any transactions leading to a decline in the value of money, including the wide monetary issuance, one of whose proven results is inflation, the macroeconomic instability it leaves, the disruption of the income distribution mechanism, and the widening inequality Among groups of the same society. It seems that investing in this framework is not just a financial or monetary transaction through which we achieve profit by trading the currency as the money itself is not considered capital and it cannot achieve a return without using it in real activity.

 

Accordingly, the monetary policy according to these premises must be based on real assets. The banking system is not permitted to create money from nothing or finance government budget deficits without the availability of sufficient assets for the government apparatus to be able to generate income, hence the wisdom in making the interest rate Equal to zero as the banks ’ability to create real money depends largely on the level of bank credit or bank loan demand, and that this matter will only be available at very low levels of the interest rate, the inverse relationship between the interest rate and demand for credit by individuals and projects.

 

This position is very close to the concept of (liquidity trap) where the public desires to carry any amount of money offered when the interest rate is very close to zero and thus the increase in the money supply will not affect the real sector, then monetary policy will be ineffective.

The Qur’an, with its stance on the interest rate, has set a wall between the monetary sector and the real sector. Therefore, any fluctuations in the money and money sector (which is known as the speed of movement of changes in it) will not affect the same degree or speed on the real sector and thus isolate the real economy from repeated financial crises. Or at least provide sufficient space for time to take the necessary measures to deal with the situation when crises happen, and then the low interest rate is no longer a liquidity trap as described by economist Keynes on the understanding that speculators will expect an increase in the interest rate at any time soon in the future. Rather, this expectation and Canceling the interest rate will be absent in the first place and there is no room for profit taking through it. Therefore, the available liquidity is real liquidity and it cannot be speculated for the sake of achieving profits as investment in real activities becomes the only way to obtain profits and then the economy will operate within the limits of its real potential and in a language Economic balance

 

In such a mechanism, we find that credit does not arise except to the extent that there are real possibilities for obtaining more wealth through real activities and that the abolition of interest will lead to a large extent to curbing the confusing speculation of financial transactions while the opposite occurs with the presence of the interest rate where the owners of money and business look to rates A very high profit outweighing the prevailing interest rate and the resultant trend towards higher product prices or lower real wages, and hence the level of aggregate demand. The system based on the abolition of the interest rate provides the appropriate opportunity to establish a real partnership relationship between the banking system and investors and traders and not the relationship of a lender and a borrower or a creditor and a debtor.

 

One of the most important arguments presented by supporters of the high interest rate is that it is considered the best way to face inflationary pressures and the expectations resulting from it that motivate speculation with funds and stay away from productive activities and therefore it is necessary to impose an interest rate that is at the minimum equal to the prevailing inflation rate in order to maintain a positive real interest rate His promise is the price of money, which serves the stability of demand for the currency to meet the Expectation of inflation, as well as maintaining a stable exchange rate. Thus, monetary policy turns into the art of managing expectations. It is clear that these arguments are valid only in the short term, as the interest rate signal, no matter how low, will turn into an important tool for building inflationary expectations by curtailing investment activity on the one hand and stimulating financial speculation on the other hand, as it will rise again.

 

The Qur'an with this legislation has severely fulfilled these expectations by making the interest rate equal to zero, which means stopping the work of one of the main sources of inflation. Thus it appears that this argument for facing inflation finds a place for it only in the short term, as the interest rate shifts from being considered part of the solution to part of the problem in the long term as governments often care to address the problems of inflation and income and others in the short term while in the long term If most of its attention is focused on achieving economic growth, this will only be achieved by raising the level of investment when the interest rate is low to the point that stimulates investment spending and the growth of productive capacities.

 

Canceling the interest rate and achieving synergy

 

Another important effect that the economic theory has linked to the rise in the interest rate is the so-called Crowding out effect. Increasing government spending for any reason will lead to higher total demand and a higher level of income and production and that this increase in income will lead to an increase in demand for money, which is what It is pushed by the monetary authority to raise the interest rate, which leads to a decrease in investment demand and a depreciation function, In other words, the increase in the interest rate will lead to a decline in the balance point and reduce the effect of the multiplier effect caused by the increase in government spending as a result of the competition that the latter creates with the private sector, which is witnessing a decline in its investment spending as a result of the high interest rate, which leads to a reduction in the impact of expansion. On high government spending.

 

Thus we see that the use of the interest rate in this way has allowed a decline in economic activity and the negative effects of unemployment, lack of commodity supply, inflation and other problems.

 

Again, the importance of the position of the cancellation in full interest rate, showing that this cancellation will not allow this scenario to work, and therefore the sector offsets the private for economic activity will not get as long as the interest rate is equal to where the door is open to the activities of the zero investment all work provided That the monetary authorities provide a parallel cash supply for the cash demand and that what will happen under a system that works without the interest rate is the synergy between government and private investment, as the first rise will lead to the activation of all economic sectors, which opens the way for the private sector to invest more Z. For example, increasing government spending on infrastructure will increase the return on private sector investment and stimulate higher investments in all economic sectors, especially in developing countries where the multiplier is very high, as the economy is far from a state of full use, and then the impact of competition will not be inevitable .

 

Thus it seems to us that canceling the interest rate or building an economic system without the interest rate will limit the work of three basic variables (speculation, inflationary expectations, and the effect of competition) that work against the macroeconomic stability. It seems that this approach is the one that may provide the first solution to the problems resulting from the double global crisis resulting from the outbreak of the Corona virus and the decline in oil prices that led to stopping economic activity and then stopping and retreating economic growth, instead of going to difficult traditional solutions, including printing money and reducing the exchange rate or Resorting to (foreign) debt that is not currently available, we must return the interest rate to zero and make it zero so that we can find a solution to our economic problems that have become impossible to solve.

 

 

 

Sources

 

1- Muhammad Ayoub, The Financial System in Islam, Beirut, 2009

2- Samuelson, Economics, Beirut, 2006

3- Dr. Sinan al-Shabibi, Monetary Policy Features in Iraq, Abu Dhabi, 2007

4- Dr. The appearance of Muhammad Salih, Monetary Policy in Iraq, an analytical view, Baghdad, 2009

5- David Begg, Stanley Fischer, Rudiger Dornbush, Economics, London, 1987

6- Shari Spiegel, 2007. “Macroeconomics and Growth Policies,” Policy Notes 1, United Nations, Department of Economics and Social Affairs

7- Paul Wachtel, Macroeconomics from theory to practice, USA, 1989

8- IMF, Finance & Development, March, 2020

(*) Director General of the Department of Economic Policy / Ministry of Planning

Copyright reserved for the Iraqi Economist Network. Republishing is permitted provided that the source is indicated. May 19, 2020

To download the search as a PDF, click on the following link











claud39
claud39
VIP NewsHound
VIP NewsHound

Posts : 15439
Join date : 2018-11-04

Back to top Go down

Back to top


 
Permissions in this forum:
You cannot reply to topics in this forum