The General Theory and Keynes for the 21st Century
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The General Theory and Keynes for the 21st Century

Edited by Sheila Dow, Jesper Jespersen and Geoff Tily

This book is devoted to the lasting impact of The General Theory (and Keynes’s thought) on macroeconomic theory, methodology and its relevance for understanding the post-crisis challenges of the 21st Century. A number of contributions take their departure from Keynes's presentation during the 1930's of his new macroeconomic understanding and its policy implications. Other chapters take a more pluralistic view of Keynes's ideas and their importance for contemporary debates. Further, it is demonstrated that many textbooks often misrepresent The General Theory and therefore cannot be a reliable guide to 21st Century economic policy.
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Chapter 11: The ‘Gibson Paradox’, The General Theory and beyond

Gerhard Michael Ambrosi

Abstract

The Gibson Paradox states that interest rates and the price level are often positively correlated. This contradicts the doctrine that high interest rates dampen economic activity and the price level. In 1930 Keynes names, confirms and emphasises this phenomenon in his Treatise on Money. In 1936, in The General Theory, it is totally ignored. But Keynes’s new concept of given future effective demand as being related to entrepreneurs’ present outlay at a given degree of competition requires that higher discounting costs are compensated by higher prices. Macroeconomic modelling has to be wary of the contradictory influences of interest rates. As producers’ cost they affect the ‘supply channel’. As financing costs they affect an opposite ‘demand channel’. Recent empirical literature confirms the relevance of both channels. The chapter accentuates these issues in a minimalist simultaneous equations model. It stresses the problem of finding the balance between the two channels and it mentions Keynes’s appeal to maintain low interest rates for a continuous ‘quasi boom’.

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