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Edited by Thomas Cate

in the future – with the ‘waiting’ that investors provide when they undertake ‘roundabout’ capital investment that promises a return of marketable consumer goods in the more distant future. Knut Wicksell’s (1935) natural rate of interest likewise signals time preferences for consumption and the productivity of capital. From Fisher’s and Wicksell’s ‘real’ perspectives, any potentially disequilibrating monetary influences on the real or natural rate are temporary and/or inconsequential, so that real savings and investment will be

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Edited by Thomas Cate

Equations. The members of the Cambridge Circus took Keynes to task over an essential feature of these stories – namely, the fact that the level of output did not vary. Out of that discussion came the essential elements of the General Theory . Wicksell’s explanation of the cumulative process relies on two rates of interest, the money or the market rate of interest that is the cost of borrowing money and the natural rate of interest that is the yield on newly created capital or the internal rate of return. More precisely, for Wicksell the real or natural rate of

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Edited by Thomas Cate

Central banks affect the level of economic activity by influencing the size of a nation’s money supply or the level of nominal interest rates. Through their ability to issue high-powered money by purchasing securities in the open market or by lending to banks, central banks influence both the quantity of money created by banks and the interest rate on loans. Monetary policy refers to the use of central bank policy tools to achieve macroeconomic or financial goals. The choice of an appropriate policy goal depends on the structure of

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Edited by Thomas Cate

’ (ibid., pp. 182–3). Contrary to Wicksell’s concept of a ‘natural rate of interest’ that is independent from the actual loan rates, Lindahl argued that the ‘real rate of interest on capital’, defined as the prospective profit rate, ‘has a tendency to adjust itself to the actual loan rate of interest in every period (ibid., p.249). Which level of interest rates should central banks target? Lindahl ( [1930] 1939 ) arrived at the definition of a ‘normal’ or ‘neutral rate of interest’ that ‘does not necessarily imply an unchanged price level

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correct the situation. The rate of interest is one of many prices within the economic system that is infinitely flexible, and its task is to maintain savings and investment in equilibrium. Wicksell in 1898 modified Say’s Law, suggesting that there were two rates of interest: the market rate and the natural rate of interest. The central bank could determine, within limits, the market rate of interest. The real forces of the economic system determined the natural rate of interest. If the market rate and the natural rate of interest were equal, then savings and

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– unemployment trade-off exists in the short run along a given short-run Phillips Curve, once economic agents have fully adjusted their inflationary expectations the trade-off disappears, resulting in a vertical long-run Phillips Curve at the natural rate of unemployment. The natural or equilibrium level of unemployment is associated with a stable (or non-accelerating) rate of inflation that, in the long run, is determined by the rate of monetary expansion. Any attempt to maintain unemployment below the natural rate will result in an accelerating rate of inflation, which can

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Edited by Thomas Cate

rapidly resumes its natural equilibrium unemployment position. The failure of unemployment rates to decline rapidly to golden age levels (and indeed the slowness with which inflation rates declined) was the result of outward shifts in the long-run vertical Phillips Curve, that is, increases in the NAIRU. This made it impossible for unemployment rates to fall to anywhere near their golden age levels without generating accelerating rates of inflation. Given the properties of the NAIRU and a belief in automatic convergence tendencies to this equilibrium unemployment rate

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Edited by Thomas Cate

. The Austrian or monetary malinvestment theory The ‘Austrian’ theory was built on the basis of general economic theory primarily by Ludwig von Mises and Friedrich A. von Hayek. It argues that business cycles arise from the institution of fractional reserve central banking, and the theory is unique in its consideration of the heterogeneous nature of real capital goods and how this structure of capital goods is altered by changes in the relationship between the money rate of interest and the natural rate of interest ( Batemarco

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Gesell’s most committed followers, Hugo R. Fack (1931) , set out in the pages of The Way Out actual steps to be followed in the United States to introduce stamped currency. For Gesell the critical barrier to continuous full employment in a capitalist economy was the money/interest system: the tendency of individuals to hold their wealth in the form of money lent at interest inhibits their inclination to engage directly in productive investments. Moreover, in an environment where loan rates were perceived to be excessively

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Edited by Thomas Cate

the deficit into its cyclical and structural components requires an estimate of the total revenues and expenditures when the economy is at full employment, or at its ‘natural’ or ‘non-accelerating inflation rate of unemployment’ (NAIRU). However, since the economy is seldom at this point, and since there is even some debate over what the NAIRU is or should be, the separation of the overall deficit into its structural and cyclical components is likely to involve some degree of error. Even so, the distinction must still be made if the policy goal is to balance the