BEE Partner, South Africa Economy Watch

The endogenous determination of the interest rate

In a boom, banks will lend more and will seek to create new deposits or issue additional notes. To support these activities, they will have to attract additional reserves. This will lead them to bid up interest rates, as they seek to attract idle reserves from one another and from hoards. In a slump, they will issue less and lend less, and will seek to shed reserves, lowering interest rates. In other words, while long-term average rates are determined by costs and competition, current interest rates reflect the balance of supply and demand in the market. They move pro-cyclically.

This is illustrated by a simple model. On the one hand, the rate of interest (in relation to the rate of profit), is likely to affect investment inversely, and investment, in turn, will have an impact on prices and employment. Changes in prices and employment will call for changes in reserves. Read the rest of this entry »

The application of functional finance to the operation of the labor market in the form of the payment of wage subsidies to employers to encourage the hiring of disadvantaged workers is a means for altering the mix of employment in their favor while also improving the inflation/unemployment trade-off. One proposal, which related specifically to teenage workers, suggested giving all teenagers vouchers that can be used either for schooling or to subsidize employers who hire them (Feldstein, 1973). This proposal has not been translated into policy. However, under the now phased-out Concentrated Employment Program (CEP), employers were reimbursed for the costs of job training to encourage them to hire workers they would otherwise not consider. Reimbursement of training costs incurred by firms that locate plants in or near slum areas is provided for under the Jobs Opportunities in the Business Sector (JOBS) program. Read the rest of this entry »