A Post Keynesian Perspective on Twenty-First Century Economic Problems

A Post Keynesian Perspective on Twenty-First Century Economic Problems

Edited by Paul Davidson

This book explores key economic problems and new policies for the global economy of the 21st century. The contributors discuss to what extent past policy errors were due to the incompetence of policymakers, and highlight problems including: international payments imbalances and currency crises, volatile security markets, inflation, achieving full employment, income distribution and alleviating individuals and nations of poverty.

Chapter 8: Saving and investment: the theoretical case for lower interest rates

Basil Moore

Subjects: economics and finance, post-keynesian economics

Extract

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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