Munich Personal RePEc Archive

A permanent zero interest rate would maximise GDP.

Musgrave, Ralph S. (2018): A permanent zero interest rate would maximise GDP.

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The arguments for government borrowing do not stand inspection, thus the effect of such borrowing is to artificially raise interest rates above their free market level. Since GDP is maximised where prices are at the free market level, absent good reasons for thinking otherwise, it follows that the GDP maximising rate of interest is zero, in the sense that no interest should be offered to those holding base money.

It is just possible that there are arguments for a limited amount of borrowing to fund public investments like infrastructure, though conventional thinking on that point is chaotic at the moment. But even if that infrastructure idea is accepted, it does not change the above “permanent zero interest rate” conclusion.

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