Chapter 8: Saving and investment: the theoretical case for lower interest rates
Basil Moore INTRODUCTION The economics profession has not yet absorbed the full implications of perhaps the most important policy insight of Post Keynesian theory: in modern overdraft economies, the level of short-term interest rates is exogenous. Monetary authorities administer the interest rate as their chief policy instrument, so as to affect the rate of growth of aggregate demand (AD) in an attempt to guide the economy toward their stabilization targets. Interest rates are raised and lowered procyclically, but central bankers have a wide range of discretion over the particular rates set. The levels chosen depend on the authorities’ perception of the state of the economy, and their policy objectives, theoretical model and ‘policy reaction function’. Most central banks have recently made price stability their central objective. Inﬂation targetting has supplied the justiﬁcation for not reducing interest rates, even in the face of unemployment, excess capacity and AD deﬁciency. A number of major theoretical issues currently divide the profession. One important diﬀerence concerns whether economies are demand constrained, and the underlying causal relationship between saving and investment. Mainstream economists adopt the classical position that economics is about scarcity. Income and output are resource-constrained. Since resources are normally fully employed, saving must ﬁrst be available to provide the resources necessary for investment.1 Saving ‘causes’ investment.2 The heterodox Post Keynesian minority vociferously adopts Keynes’s vision that macroeconomics is centrally about uncertainty. In the real world the production possibility frontier is a wide band. Excess capacity is built in, since...
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