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Edited by Louis-Philippe Rochon and Sergio Rossi

In economics there are several references to natural magnitudes. One of the most famous among them, in both the history of economic thought – as epitomized by the work of Wicksell ( 1898 [1936], 1906 [1934]) – and present-day monetary policy, is the natural rate of interest. In conformity with the nature of real objects, the natural rate of interest constitutes, in principle, a “real” rate of interest expressed in terms of some commodities. Although the natural rate of interest is not directly observable, it has a normative dimension for economic policy. For

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Thomas I. Palley

introducing yet another nominal rigidity, this time regarding nominal interest rates. 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). Put simply, the ZLB prevents the economy from obtaining the NRI needed to ensure goods market clearing at full employment. Thereafter, the paper develops a Keynesian critique of the ZLB explanation of stagnation. The argument is that even

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Clement A. Tisdell

Sustaining Biodiversity and Ecosystem Functions 15.  Biodiversity conservation, loss of natural capital and interest rates: the relationships are irregular 15.1  INTRODUCTION The view is widely accepted in natural resource economics that a rise in the market rate of interest usually increases the rate of exploitation of natural resources (reduces their conservation) because it lowers the net present value of deferring their use, that is their user cost. For example, Tietenberg (2003, pp. 92–3) states in his widely adopted textbook that ‘The general

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Mauro Boianovsky

second “Fundamental equation” of the price level Wicksell’s notion of the “natural rate of interest”, redefined as the rate at which “saving and the value of investment are exactly balanced, so that the price level of output as a whole exactly corresponds to the money rate of the efficiency earnings of the factors of production”. Keynes (1930 [1971], ch. 13) used that concept to discuss the “modus operandi” of the bank rate of interest on investment, aggregate demand and prices, building on Wicksell’s Geldzins, regarded the sole and “outstanding” exception to the

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Takatoshi Ito

secular stagnation. The “secular” happens because aggregate demand is always below aggregate supply, due to a too-high real interest rate. When the actual real interest remains higher than the natural real rate of interest, stagnation cannot be overcome easily. Secular stagnation can be defined as the natural real rate of interest becoming negative, while the actual rate stays above the natural rate. See Eggertsson and Mehrotra (2014) for formal modeling. Nominal zero bound: i = 0. The third characteristic is that the policy rate, i, is lowered to and stuck at (near

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Hiroaki Sasaki and Shinya Fujita

), which implies that the dynamics of the system could become unstable. Thus, limit cycles occur in the boundary between the stable feedback effect and the unstable feedback effect. 4 COMPARATIVE STATIC ANALYSIS We investigate the effects of changes in the natural rate of growth, retention ratio, profit share, and interest rate on the debt–capital ratio, rate of capacity utilization, capital–effective labor supply ratio, and employment rate. Table 2 shows the results of our comparative static analysis. 14 Table 2 Results of comparative static analysis Notes: a

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Brett Fiebiger

the 1970s. An intellectual debt was owed to Milton Friedman for his concept of a non-accelerating inflation rate of unemployment. Friedman's (1968) ‘natural rate of employment’ was intended to be an extension of Wicksell's (1898 [1936]) ‘natural rate of interest’. Wicksell and Friedman were to provide the inspiration for the ‘cashless’ canonical New Keynesian macro model ( Woodford 2003 ). The NCM's policy advice is simple: all that is needed is an inflation-targeting central bank (that follows a Taylor rule). The crisis has prompted the profession to rethink

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Ingo Barens

investment are considered to be the result of two distinct decisions and to depend positively, in the case of savings, or negatively, in the case of investment, on the rate of interest. The rate of interest at which windfall losses are zero, that is, equality of savings and investment has been established (at full employment, as implicitly assumed) is the “naturalrate of interest. This rate of interest is contrasted by Keynes with the market rate of interest, determined by the preference for liquidity (money) and the quantity of money supplied by the banking system

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Louis-Philippe Rochon and Sergio Rossi

willingness to borrow depends on effective demand more than on banks’ rates of interest (a price administered by the national central bank). In this sense, inflation is neither a monetary nor a monetary-policy phenomenon (see the next section for a discussion of the causes of inflation). So far, two of the three core Friedman–Phelps principles outlined in the previous section have been disproven. Indeed, we would argue that, in themselves, these should discredit Friedman's discussion of a natural rate of unemployment, which itself is made to depend on the exogeneity of the

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Marc Lavoie

AND THE NATURAL RATE OF INTEREST Several other beliefs, that one would have thought were well entrenched in mainstream macroeconomics, have been questioned as a consequence of the financial crisis and its aftermath. One of them is the belief that the aggregate demand curve has the standard negative slope. The desperate efforts of central bankers to stop prices from falling has clearly shown that central bankers, for all practical purposes, do not hold to the standard view that more flexibility in wages and prices is conducive to a better performance. The textbook