The Instigator
wjmelements
Pro (for)
Winning
16 Points
The Contender
nassif.nicholas
Con (against)
Losing
14 Points

Expansionary monetary policy does not lower interest rates.

Do you like this debate?NoYes+4
Add this debate to Google Add this debate to Delicious Add this debate to FaceBook Add this debate to Digg  
Post Voting Period
The voting period for this debate has ended.
after 6 votes the winner is...
wjmelements
Voting Style: Open Point System: 7 Point
Started: 4/20/2009 Category: Politics
Updated: 7 years ago Status: Post Voting Period
Viewed: 6,297 times Debate No: 7909
Debate Rounds (3)
Comments (6)
Votes (6)

 

wjmelements

Pro

Expansionary monetary policy is "monetary policy that seeks to increase the size of the money supply."
http://www.babylon.com...

This belief is widespread because of its intents. While the intent of such a policy is to increase the loanable funds (therefore decreasing interest rates [supply and demand]) http://www.economyprofessor.com... , the inflationary result leads interest rates to sky rocket and ultimately the result is nullified and in fact, overpowered.

Interest rates skyrocket because there is more currency units, and the dollar's value decreases. http://www.indepthinfo.com...
When the values of the loans currently held by banks decrease, then the banks lose overall value. They then must make up this value, specifically by increasing interest rates.

A bank cannot have its interest rates below the rates of inflation and expect to make a profit in real value. Therefore, as inflation increases, so do interest rates.

I'll leave my case here until my opponent presents his/her own.
nassif.nicholas

Con

Expansionary Monetary Policy vs. Contractionary Monetary Policy
Expansionary Monetary Policy Wins!
My Case;
Expansionary Monetary Policy
In the United States, when the Federal Open Market Committee wishes to increase the money supply, it can do a combination of three things:
Purchase securities on the open market, known as Open Market Operations
Lower the Federal Discount Rate
Lower Reserve Requirements
These all directly impact the interest rate. When the Fed buys securities on the open market, it causes the price of those securities to rise. In my article on the Dividend Tax Cut we saw that bond prices and interest rates are inversely related. The Federal Discount Rate is an interest rate, so lowering it is essentially lowering interest rates. If the Fed instead decides to lower reserve requirements, this will cause banks to have an increase in the amount of money they can invest. This causes the price of investments such as bonds to rise, so interest rates must fall. No matter what tool the Fed uses to expand the money supply interest rates will decline and bond prices will rise.
Increases in American bond prices will have an effect on the exchange market. Rising American bond prices will cause investors to sell those bonds in exchange for other bonds, such as Canadian ones. So an investor will sell his American bond, exchange his American dollars for Canadian dollars, and buy a Canadian bond. This causes the supply of American dollars on foreign exchange markets to increase and the supply of Canadian dollars on foreign exchange markets to decrease. As shown in my Beginner's Guide to Exchange Rates this causes the U.S. Dollar to become less valuable relative to the Canadian Dollar. The lower exchange rate makes American produced goods cheaper in Canada and Canadian produced goods more expensive in America, so exports will increase and imports will decrease causing the balance of trade to increase.

When interest rates are lower, the cost of financing capital projects is less. So all else being equal, lower interest rates lead to higher rates of investment.

What We've Learned About Expansionary Monetary Policy:
Expansionary monetary policy causes an increase in bond prices and a reduction in interest rates.

Lower interest rates lead to higher levels of capital investment.

The lower interest rates make domestic bonds less attractive, so the demand for domestic bonds falls and the demand for foreign bonds rises.

The demand for domestic currency falls and the demand for foreign currency rises, causing a decrease in the exchange rate. (The value of the domestic currency is now lower relative to foreign currencies)

A lower exchange rate causes exports to increase, imports to decrease and the balance of trade to increase.

For these reasons I urge a Con Vote.
Debate Round No. 1
wjmelements

Pro

I thank my opponent for his response.

"Expansionary Monetary Policy vs. Contractionary Monetary Policy"
This is not what we are debating (see resolution).

"Expansionary Monetary Policy Wins!"
This is irrelevant to this debate.

"Purchase securities on the open market, known as Open Market Operations"
This does not increase the money supply. It is just one of the ways that an increased money supply is put into the system after newly printed. http://www.uri.edu...
"Lower the Federal Discount Rate"
This allows banking institutions to borrow money at a lower interest rates. This money is lent, and must eventually be paid back. This is not expansionary monetary policy, because in the long run, it does not increase the money supply. http://www.bankrate.com...
"Lower Reserve Requirements"
This is not relevant to expansionary monetary policy. This does not increase the money supply; it merely allows banks to take more risks and lend more of their own money. http://www.federalreserve.gov...

Expansionary monetary policy is when the overall money supply is increased, not when government does things to lower interest rates. While the aim of expansionary monetary policy is to lower interest rates, expansionary monetary policy does not include all of the policy that actually does lower interest rates.

"When interest rates are lower, the cost of financing capital projects is less. So all else being equal, lower interest rates lead to higher rates of investment."
Irrelevant to the debate at hand: this debate is not over whether lowering interest rates is good, but whether expansionary monetary policy actually does lower interest rates. This applies to the remainder of my opponent's arguments.
-------------------------------

General response:
What my opponent has defined as expansionary monetary policy, with the exception of "Purchase securities on the open market, known as Open Market Operations", are not actually expansionary monetary policy.

"Purchase securities on the open market, known as Open Market Operations" leads to inflation by definiton, for the money supply is increased (which is the definiton of monetary policy).

My opponent has not answered my argument that inflation overrides the supply and demand of the market so that banks cannot sustain interest rates below the rate of inflation; so, he has dropped this argument.

This argument alone is enough to affirm the resolution. If expansionary monetary policy increases inflation, then it increases the minimal amount of interest required to maintian real value in its loans (though nominal value is retained). The result is an INCREASE in interest rates.

So, the resolution is affirmed. Vote PRO.
nassif.nicholas

Con

Definitions for clarity.
Expansionary monetary policy is when the Federal Reserve is using its tools to stimulate the economy. This usually means lowering the Fed Funds rate to increase the money supply. This will cause mortgage rates to decline, consumers to borrow and spend, and businesses to grow, thereby hiring more workers who will consume even more. The opposite is contractionary monetary policy.

Examples: If the Federal Reserve is lowering interest rates, it is engaging in expansionary monetary policy.

Monetary policy is the attempt to moderate the business cycle and control inflation by changing the quantity of money in circulation to change interest rates? (McTaggart et al, 1999: 27.2). In another words, it is the Reserve Bank of Australia (RBA)?s attempt to change the quantity of money and interest rates so as to affect aggregate demand and, ultimately, equilibrium real GDP and the price level. McDonald defines monetary policy as the government?s policy on setting the level of the money supply (1996: 149).

Through this explanation by McDonald, Expansionary Monetary Policy does lower the rates especially in our (US) Status Quo.
Debate Round No. 2
wjmelements

Pro

My opponent tries to change the definition of "Exapansionary Monetary Policy" late in the debate.
It was established early that "Expansionary monetary policy is "monetary policy that seeks to increase the size of the money supply" in the first round and my opponent accepted this definition.

My opponent bases most of his arguments off of the fallacy that "Expansionary monetary policy is when the Federal Reserve is using its tools to stimulate the economy". My opponent also defines expansionary monetary policy as "the attempt to moderate the business cycle and control inflation by changing the quantity of money in circulation to change interest rates". Neither defintion is acceptable, for the definition was agreed upon in the first round.

My opponent has sourced two claims that expansionary monetary policy does lower the interest rates. They claim this as if it is a fact and does not back it up. Further, my argument that inflation reduces the real value of loans, forcing banks to increase their interest rates has been conceded by my opponent. This overrides any temporary effect.

Clearly, inflation overrides the intents of expansionary monetary policy. Therefore, you, the voter, must vote PRO.

I thank my opponent for this debate.
nassif.nicholas

Con

If the Fed pursues expansionary monetary policy by increasing the supply of money then the nominal interest rate will fall, investment will rise, consumption will rise.

o interest sensitive purchases are less expensive
o people save less and consume more
o because the supply of money rises, people buy more goods and services. As the business cycle expansion gets underway, wealth rises and people buy more financial assets as well.

the fall in the nominal interest rate will mean that net exports will rise since the value of the dollar will fall. Note that dollar denominated assets will have a lower return when the nominal interest rate falls and investors will no longer wish to hold as many dollar denominated assets as they did before. When investors unload their dollar denominated assets they take the dollars that they receive and purchase assets denominated in other currencies. When the value of the dollar falls exports are cheaper and imports are dearer.

In sight of these points, I urge a Con Vote.
I thank my opponent for the debate.
Debate Round No. 3
6 comments have been posted on this debate. Showing 1 through 6 records.
Posted by wjmelements 7 years ago
wjmelements
"When the value of the dollar falls exports are cheaper and imports are dearer."
Actually, in real value, they stay the same and in nominal value, they increase. In neither definitions of price do exports get cheaper.
Posted by wjmelements 7 years ago
wjmelements
" As shown in my Beginner's Guide to Exchange Rates "
Say what?
Posted by alto2osu 7 years ago
alto2osu
Wiki is still a good place to start, and it says what he needs it to without too much ambiguity or inaccurate information. Not all of wiki is terrible.
Posted by masterzanzibar 7 years ago
masterzanzibar
well technically if interest rates are fixed than interest rates are lowered when there is increased liquidation in the market.
Posted by Hayslip 7 years ago
Hayslip
The Babylon source is just wikipedia...
Posted by alto2osu 7 years ago
alto2osu
This should get accepted no problem :) I esp. like the Babylon source. I don't have time right now, but I'm sure this'll be good! Favorite'd.
6 votes have been placed for this debate. Showing 1 through 6 records.
Vote Placed by Volkov 7 years ago
Volkov
wjmelementsnassif.nicholasTied
Agreed with before the debate:--Vote Checkmark0 points
Agreed with after the debate:-Vote Checkmark-0 points
Who had better conduct:--Vote Checkmark1 point
Had better spelling and grammar:--Vote Checkmark1 point
Made more convincing arguments:--Vote Checkmark3 points
Used the most reliable sources:--Vote Checkmark2 points
Total points awarded:00 
Vote Placed by JBlake 7 years ago
JBlake
wjmelementsnassif.nicholasTied
Agreed with before the debate:--Vote Checkmark0 points
Agreed with after the debate:--Vote Checkmark0 points
Who had better conduct:Vote Checkmark--1 point
Had better spelling and grammar:Vote Checkmark--1 point
Made more convincing arguments:Vote Checkmark--3 points
Used the most reliable sources:Vote Checkmark--2 points
Total points awarded:70 
Vote Placed by threelittlebirds 7 years ago
threelittlebirds
wjmelementsnassif.nicholasTied
Agreed with before the debate:-Vote Checkmark-0 points
Agreed with after the debate:-Vote Checkmark-0 points
Who had better conduct:-Vote Checkmark-1 point
Had better spelling and grammar:-Vote Checkmark-1 point
Made more convincing arguments:-Vote Checkmark-3 points
Used the most reliable sources:-Vote Checkmark-2 points
Total points awarded:07 
Vote Placed by Lazy 7 years ago
Lazy
wjmelementsnassif.nicholasTied
Agreed with before the debate:Vote Checkmark--0 points
Agreed with after the debate:Vote Checkmark--0 points
Who had better conduct:--Vote Checkmark1 point
Had better spelling and grammar:--Vote Checkmark1 point
Made more convincing arguments:Vote Checkmark--3 points
Used the most reliable sources:--Vote Checkmark2 points
Total points awarded:30 
Vote Placed by wjmelements 7 years ago
wjmelements
wjmelementsnassif.nicholasTied
Agreed with before the debate:Vote Checkmark--0 points
Agreed with after the debate:Vote Checkmark--0 points
Who had better conduct:Vote Checkmark--1 point
Had better spelling and grammar:--Vote Checkmark1 point
Made more convincing arguments:Vote Checkmark--3 points
Used the most reliable sources:Vote Checkmark--2 points
Total points awarded:60 
Vote Placed by nassif.nicholas 7 years ago
nassif.nicholas
wjmelementsnassif.nicholasTied
Agreed with before the debate:-Vote Checkmark-0 points
Agreed with after the debate:-Vote Checkmark-0 points
Who had better conduct:-Vote Checkmark-1 point
Had better spelling and grammar:-Vote Checkmark-1 point
Made more convincing arguments:-Vote Checkmark-3 points
Used the most reliable sources:-Vote Checkmark-2 points
Total points awarded:07