Wednesday, March 13, 2013

Lord Keynes — Post Keynesian Policy on Interest Rates

...there are two traditions within modern Post Keynesian economics on the role and effect of interest rates:
(1) the activist Post Keynesians (Basil Moore [1988], Giuseppe Fontana, Thomas Palley), who, instead of an inflation target, advocate activist monetary policy as a useful tool for targeting output, investment or capacity utilization;

(2) the group Rochon calls the “parking it” Post Keynesians, who contend the fiscal policy is the main tool to target output, employment and investment, while monetary policy comes with disturbing side effects on real variables. The relationship between interest rates and output is complex and not linear: the monetary transmission between interest rates and real economic variables is unreliable and complicated. The interest rate should be parked at a given level and fiscal policy should be employed. They are three further subdivisions within the “parking it” Post Keynesians:
(i) the Smithin rule: the real rate of interest should be very low, close to zero (John Smithin);
(ii) the Kansas city rule: the nominal rate of interest should be zero, possibly negative real rates of interest (Wray, Matthew Forstater, Pavlina Tcherneva).

(iii) the Pasinetti rule/Fair Rate rule: the real rate of interest should be equal to the rate of growth of labour productivity (Pasinetti).
My feeling is that the “parking it” Post Keynesians are essentially right.
Social Democracy for the 21st Century
Post Keynesian Policy on Interest Rates
Lord Keynes

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