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The "New consensus"and the Post-Keynesian approach to the analysis of liquidity traps

Palacio Vera, Alfonso (2008) The "New consensus"and the Post-Keynesian approach to the analysis of liquidity traps. [Working Paper or Technical Report]

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Abstract: We compare the “New Consensus” (NC) in macroeconomics as expounded in Woodford (2003)
and the Post-Keynesian (PK) approach regarding the causes of a “liquidity trap” (LT). We argue that in the
NC a LT is a phenomenon caused by unusually large transitory shocks that depress the “neutral” interest
rate temporarily. We show that this is the case because it is assumed that the “neutral” or “natural” interest
rate converges in the long run to a gravitation center whose (positive) lower bound is determined by the
rate of time preference of the representative household. By contrast, in the PK approach, the economy may
also exhibit a “structural” or long-lasting LT even in the absence of large adverse shocks. This may be the
case if a combination of high precautionary saving, low investment spending and stringent conditions for
access to bank credit stemming from a high degree of uncertainty and liquidity preference makes the sum
of the steady-growth “neutral” interest rate and the inflation rate fall short of the term/risk premium on
long-term interest rates.

Item Type:Working Paper or Technical Report
Additional Information:JEL Classification: B50, E12, E24, E50
Uncontrolled Keywords:Neutral interest rate, Liquidity trap, New Consensus in macroeconomics, credit rationing and liquidity preference
Subjects:Social sciences > Economics > Macroeconomics
Series Name:Documentos de Trabajo de la Facultad de Ciencias Económicas y Empresariales
ID Code:8453
Deposited On:27 Jan 2009 14:55
Last Modified:06 Feb 2014 08:07

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