Abstract
This paper argues that the amended versions (financial wedge and secular stagnation) of the simple pragmatic New Consensus model are as open to theoretical criticism as the original one was. The authors show that: (i) the real natural rate of interest is unlikely to be negative, (ii) it (inconsistently) depends on the Neoclassical investment function drawn at a position of full employment in a model in which the economy is demand-constrained, and (iii) both investment and full employment saving are induced by the trend of demand in the longer run and this challenges the usefulness of the notion of a natural or neutral rate of interest, which (iv) are also subject to the Sraffian capital critique. This is then contrasted with an alternative simple Sraffian supermultiplier model in which the interest rate and the financial wedge are distributive instead of allocative variables, and there is no natural rate of interest since in the longer run there is no trade-off between consumption and investment and also no full employment of labor. As the capital stock adjusts to demand, potential (capacity) saving will be determined by investment, and both investment and capacity saving increase when consumption increases. Finally, we briefly illustrate how this alternative model could begin to make sense of the recent relevant stylized facts.
Highlights
The relative stagnation of growth in advanced countries since the Great Recession of 2008 has led to a debate about its underlying causes
Some policy-oriented mainstream economists – such as Lawrence Summers, Olivier Blanchard, Paul Krugman, and Robert Hall – took the challenge and have amended the New Consensus model to explain the stagnant growth under very low interest rates, by using ideas such as the zero lower bound of nominal interest rates, combined with the financial wedge and/or negative levels of the natural real interest
These amended versions can be roughly organized into two broad types: (i) a shorter-run version that emphasizes financial frictions and disturbances causing changes in the financial wedge between the pure natural rate of interest and the actual full employment-rate ruling in the market; and (ii) a secular stagnation version that emphasizes changes in the long-run determinants of the natural rate of interest
Summary
The relative stagnation of growth in advanced countries since the Great Recession of 2008 has led to a debate about its underlying causes. Some policy-oriented mainstream economists – such as Lawrence Summers, Olivier Blanchard, Paul Krugman, and Robert Hall – took the challenge and have amended the New Consensus model to explain the stagnant growth under very low interest rates, by using ideas such as the zero lower bound of nominal interest rates, combined with the financial wedge and/or negative levels of the natural real interest These amended versions can be roughly organized into two broad types ( many authors combine elements of the two): (i) a shorter-run version that emphasizes financial frictions and disturbances causing changes in the financial wedge between the pure natural rate of interest and the actual full employment-rate ruling in the market; and (ii) a secular stagnation version that emphasizes changes in the long-run determinants of the natural rate of interest. Brief remarks on how the latter kind of model could make sense of some of the relevant recent stylized facts are made in the final Section 6
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