Matt Yglesias and Paul Krugman are rightfully pulling their hair out over the OECD call to raise interest rates. As far as I can tell, this is absolutely bizarre on three levels:
- If you are Keynesian/monetarist/mainstream of almost any type of economist it's obviously bizarre to call for increasing rates when unemployment is still so bad. Both Krugman and Yglesias make this point.
- If you are not a Keynesian/monetarist/mainstream economist but instead are an old-school moralist stable-prices fuddy-dud, then it's still crazy because as Yglesias points out, the OECD's own inflation projections are below target!
- But on top of all that, the one last hold-out for the moralizing fuddy-duds is the sovereign debt burden issue. Maybe they're not paying attention to unemployment, and maybe they're still worried about inflation despite their own forecasts, but all these guys at the OECD and IMF are always worried about "another Greece". Pushing up interest rates doesn't help countries that are struggling under a large debt burden, and a sovereign default is a lot scarier than having a modest "inflation tax" erode it away, because a little inflation doesn't spook the herd of international investors in the same way that a default does.
So this call doesn't make sense on a variety of fronts, even if you're the most Andrew Mellonesque, economics-as-morality-play international bureaucrat.
The only way it does make sense, I suppose, is if you think interest rates are artificially low and that that distorts the capital structure, setting us up for another bust and you wouldn't particularly miss modern, deficit-incurring state institutions. But I don't think these sorts of people are heavily represented at the OECD.