Effect of Heli’s on Credit Markets

Lowering interest rates to stimulate AD and inflation undermines the effectiveness of the credit markets. Credit can be stimulated in two ways. Higher AD stimulates credit primarily through higher profits and income. Lower interest rates stimulate credit primarily through lower interest costs. It is better if credit responds to higher income and profits because it has greater guidance as to where to go to most profitable areas. Therefore lending can be more effectively channeled. Lowering rates is a broad lending stimulus, which encourages greater levels of lending to all areas including more speculative ones. Consequently interest rate stimulus makes lending of a more speculative nature because lenders have to anticipate to a greater degree where the most profitable areas will be. Increasing lending to areas that have realized increases in profits/income makes lending less speculative in nature. An inefficient lending system will result in lower real GDP growth and an increasing debt to GDP ratio due to higher levels of malinvestment and speculation.

Heli’s are the optimal monetary policy instrument to improve the function of the credit system because they generate aggregate demand by increasing monetary wealth of people without needing stimulus from lowering of rates.

Heli’s could send interest rates higher or lower depending on the relative changes in income, inflation and loanable funds caused by heli’s.

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