Working Paper

Power or Economic Law?

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Some fresh reflections on ECB policy

I have chosen Eugen von Böhm-Bawerks classic article of 1914 for the title of my paper. „The upshot of Böhm-Bawerk’s treatise, as demonstrated by the example of the wage level, can best be summarized as follows: The range of power and its execution would be quite considerable in the short run. In the long run, however, it would strongly shrink in favor of what is subjected to economic laws or rather economic logic.“

Today’s question is: Does ECB’s power or do market forces determine the level of interest rates, which since the 1990s have been falling and are nowadays very low indeed? The assumption of most people around the world is that central banks alone control interest rates. I will take issue with this view and present some evidence that market forces play a more important role.