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Economic Confidence, Negative Interest Rates, and Liquidity: Towards Keynesianism 2.0

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  • Ulrich van Suntum
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    Abstract

    A model is developed which explains deep recessions like the recent crisis by a lack of economic confidence, going along with a high liquidity preference of both private households and the private bynking system. Thus the paper argues for a new form of Keynesian policy, which rests on monetary rather than fiscal policy. In this approach, instead of borrowing in order to create a substitute demand, the state creates additional credit in order to restore private investment. While this might imply temporarily negative central bank interest rates, it does not require direct interventions in the private capital market by either the central bank or the government. It is argued that such an approach is both cheaper and more effective than the traditional deficit spending policy is.

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    File URL: http://www.wiwi.uni-muenster.de/cawm/forschen/Download/Diskbeitraege/DP_24_Economic-Confidence-Paper.pdf
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    Bibliographic Info

    Paper provided by Institute of Spatial and Housing Economics, Munster Universitary in its series Working Papers with number 200108.

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    Handle: RePEc:muc:wpaper:200108

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    1. Tony Yates, 2004. "Monetary Policy and the Zero Bound to Interest Rates: A Review," Journal of Economic Surveys, Wiley Blackwell, vol. 18, pages 427-481, 07.
    2. Buiter, Willem H., 2009. "Negative Nominal Interest Rates: Three ways to overcome the zero lower bound," CEPR Discussion Papers 7346, C.E.P.R. Discussion Papers.
    3. Paul Mizen, 2008. "The credit crunch of 2007-2008: a discussion of the background, market reactions, and policy responses," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 531-568.
    4. Barro, Robert J., 1974. "Are Government Bonds Net Wealth?," Scholarly Articles 3451399, Harvard University Department of Economics.
    5. Stephen G. Cecchetti, 2008. "Crisis and Responses: the Federal Reserve and the Financial Crisis of 2007-2008," NBER Working Papers 14134, National Bureau of Economic Research, Inc.
    6. Roger E. A. Farmer, 2009. "Fiscal Policy Can Reduce Unemployment: But There is a Less Costly and More Effective Alternative," NBER Working Papers 15021, National Bureau of Economic Research, Inc.
    7. Roger E. A. Farmer, 2011. "Confidence Crashes and Animal Spirits," 2011 Meeting Papers 603, Society for Economic Dynamics.
    8. Marvin Goodfriend, 2000. "Overcoming the zero bound on interest rate policy," Working Paper 00-03, Federal Reserve Bank of Richmond.
    9. Carmen M. Reinhart & Kenneth S. Rogoff, 2008. "Banking Crises: An Equal Opportunity Menace," NBER Working Papers 14587, National Bureau of Economic Research, Inc.
    10. Willem H. Buiter & Nikolaos Panigirtzoglou, 2003. "Overcoming the zero bound on nominal interest rates with negative interest on currency: gesell's solution," Economic Journal, Royal Economic Society, vol. 113(490), pages 723-746, October.
    11. Willem H. Buiter & Nikolaos Panigirtzoglou, 1999. "Liquidity Traps: How to Avoid Them and How to Escape Them," NBER Working Papers 7245, National Bureau of Economic Research, Inc.
    12. Hyman P. Minsky, 1992. "The Financial Instability Hypothesis," Economics Working Paper Archive wp_74, Levy Economics Institute.
    13. Niehans, Jurg, 1978. "Metzler, Wealth, and Macroeconomics: A Review," Journal of Economic Literature, American Economic Association, vol. 16(1), pages 84-95, March.
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