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Abstract
This paper provides a critique of zero lower bound (ZLB) economics which has become the new orthodoxy for explaining stagnation. ZLB economics is an extension of pre-Keynesian economics which attributes macroeconomic dysfunction to rigidities and market imperfections. The ZLB is the latest rigidity in that pre-Keynesian tradition. The paper argues negative nominal interest rates, even if feasible, may be unable to remedy Keynesian demand shortage unemployment, and might even aggravate the problem. That is because there exist non-reproduced assets whose return dominates that of investment, and saving may also increase in response to negative rates. Consequently, there may be no natural rate of interest.
Highlights
THE SEARCH FOR AN EXPLANATION OF STAGNATIONHaving been surprised by the global financial crisis of 2008 and the Great Recession, mainstream economics was further surprised by the onset of stagnation after the Great Recession
This paper provides a critique of zero lower bound (ZLB) economics which has become the new orthodoxy for explaining stagnation
This paper has provided a Keynesian critique of ZLB economics which has become the new orthodoxy for explaining stagnation
Summary
Having been surprised by the global financial crisis of 2008 and the Great Recession, mainstream economics was further surprised by the onset of stagnation after the Great Recession. This paper explores the ZLB new orthodoxy.2 It begins by exploring the economic logic of ZLB economics, and shows that the ZLB explanation of stagnation links directly to classical macroeconomics with its concept of the natural rate of interest (NRI). It is a critique of the ZLB explanation of stagnation It is a critique of the classical doctrine of the NRI, in that there may be no rate of interest that delivers full employment goods market clearing given existing conditions. In such a world, negative nominal interest rates may even aggravate the problem of aggregate demand (AD) shortage
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