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Edited by Louis-Philippe Rochon and Sergio Rossi

on the concept of Wicksell’s natural rate of interest. The goal of monetary policy within this framework is to keep the actual interest rate from deviating from the natural rate of interest, which in turn will control inflation and deflation as well as output gaps. The emphasis of mainstream monetary policy has been on the control of inflation, with little importance placed on unemployment. Most central banks around the world now have some sort of interest rate rule (generally a Taylor-like rule) as well as inflation targets to dictate their monetary policy (Rochon

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A. P. Thirlwall

natural rate being endogenous. Although it was Harrod in 1939 who first coined the term ‘the natural rate of growth’, as a matter of historical interest, Keynes had effectively anticipated Harrod’s idea two years earlier in his Galton Lecture to the Eugenics Society in 1937 on ‘Some Economic Consequences of a Declining Thirlwall 02 chaps rprnt 81 28/6/07 15:02:07 82 The nature of economic growth Population’ (Keynes, 1937), where he expressed the worry that, because of a falling population, there would not be enough demand to absorb full employment saving. Consider

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Noemi Levy Orlik

directly (in negative terms) interest rates and investment spending, setting aside credit. Both economists argue that there is a monetary interest rate set by the central bank and a ‘natural’ or a profit rate, and the differential of these two variables is the main investment determinant, differing in terms of causality between the two. Wicksell claimed that the ‘natural’ (real) rate determines the monetary rate, which is set by the central bank. Hence the monetary rate adjusts to the natural rate with temporal lags (see Pivetti 1998, p. 42); a cumulative process takes

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Edited by Louis-Philippe Rochon and Sergio Rossi

. Of course, the monetization of fiscal deficits is also a type of FR, but because it is related to government expenditures, it has other implications. Let us therefore focus strictly on monetary and financial policies. FR is largely supported by the Wicksellian approach: any persistent State intervention in order to determine the monetary interest rate below (above) the natural rate of interest (or the natural rate of unemployment in Friedman’s approach) generates a cumulative inflationary (deflationary) process. Thus, a persistent expansionary financial and

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Eckhard Hein

of capital stock, growth rate of output gn Natural rate of growth gw Warranted rate of growth gTF Target growth rate of the firm gTH Target growth rate of shareholders Target growth rate of managers gTM G Government expenditures GK Capital gains h Profit share h0, h1 Coefficients in firms’ target profit share equation hTF Target profit share of firms H Human capital i Rate of interest I Investment IB Broad investment in physical and human capital k Capital–labour ratio kW Wage- ost mark- p in Weintraub’s theory c u K Capital stock KB Broad

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John Smithin

bound to carry a heavy load of intellectual baggage, such as the bogus concept of the natural rate of interest. They also suffer from a failure to recognize that there can be multiple sources of inflation and deflation, and this is quite fatal once the idea of endogenous money has been admitted. The common ground between recent neo-Wicksellian models and earlier post-Keynesian theory is the idea that monetary policy is conducted via changes in the policy rate of interest set by the central bank, rather than by quantitative restrictions on the money supply. Although

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Edited by Louis-Philippe Rochon and Sergio Rossi

interest rate, as the central banks’ instrument, has been associated with the adoption of discretionary policies aimed at temporarily reducing the natural rate of unemployment. In fact, Friedman’s approach to the Phillips curve trade-off between inflation and unemployment enhances a critique on the active role of central banks to manage interest rates in order to achieve employment or real gross domestic product growth as ultimate targets. In open economies, Friedman’s policy proposal also supports the adoption of flexible exchange rates, in conjunction with the control

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George Norman and Darlene C. Chisholm

, electricity, rail service); purchasing economies (buying in bulk on long-term contracts); financial economies (larger firms typically can negotiate lower interest rates on borrowing); marketing (spreading the cost of advertising and having greater advertising reach ); the two-thirds rule ; and technological (taking advantage of increased specialization of inputs as operating scale increases).

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John Smithin

the notion of a completely inelastic money supply. THE CREDIT ECONOMY AND THE NATURAL RATE OF INTEREST The next logical (again, as opposed to strictly chronological) stage in the development of thinking about the monetary system is therefore the notion of a ‘credit economy’ in which the money supply consists primarily of the liabilities of financial institutions such as banks. In this environment the 198 Concluding remarks 199 money supply will expand when bank lending increases, and contract when loans are repaid. Now the seemingly most natural way of thinking

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Marc Lavoie

necessaries goods parameter designed to calculate the natural rate of growth parameters of a modified Phillips curve output elasticity of capital impact of an increase in the real exchange rate on the domestic rate of capacity utilization income elasticity of import demand in the domestic economy income elasticity of import demand in the foreign economy parameter reflecting the animal spirits of firms or the trend growth rate of sales effect of the interest rate on the rate of accumulation 1 3 3, 5 3, 7 3, 7 3, 5–8 1, 7 7 6 4, 6 1, 3–6, 8 5, 6 5 5, 6 2 3 4, 7 1, 5, 6 5 5 5