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The fallacy of the natural rate of interest and zero lower bound economics: why negative interest rates may not remedy Keynesian unemployment

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  • Thomas I. Palley

    (Independent analyst, Washington, DC, USA)

Abstract

This paper provides a critique of zero lower bound (ZLB) economics which has become the new orthodoxy for explaining stagnation. ZLB economics is an extension of pre-Keynesian economics which attributes macroeconomic dysfunction to rigidities and market imperfections. The ZLB is the latest rigidity in that pre-Keynesian tradition. The paper argues negative nominal interest rates, even if feasible, may be unable to remedy Keynesian demand shortage unemployment, and might even aggravate the problem. That is because there exist non-reproduced assets whose return dominates that of investment, and saving may also increase in response to negative rates. Consequently, there may be no natural rate of interest.

Suggested Citation

  • Thomas I. Palley, 2019. "The fallacy of the natural rate of interest and zero lower bound economics: why negative interest rates may not remedy Keynesian unemployment," Review of Keynesian Economics, Edward Elgar Publishing, vol. 7(2), pages 151-170, April.
    • Handle: RePEc:elg:rokejn:v:7:y:2019:i:2:p151-170
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    Citations

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    Cited by:

    1. Citera, Emanuele & Sau, Lino, 2019. "Complexity, Conventions and Instability: the role of monetary policy," Department of Economics and Statistics Cognetti de Martiis. Working Papers 201924, University of Turin.
    2. Ogawa, Shogo, 2022. "Monetary growth with disequilibrium: A non-Walrasian baseline model," Structural Change and Economic Dynamics, Elsevier, vol. 62(C), pages 512-528.
    3. Andrea Borsato, 2021. "Does the Secular Stagnation hypothesis match with data? Evidence from USA," Working Papers of BETA 2021-11, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    4. Andrea Borsato, 2022. "An agent-based model for Secular Stagnation in the USA: theory and empirical evidence," Journal of Evolutionary Economics, Springer, vol. 32(4), pages 1345-1389, September.
    5. Manuel David Cruz & Daniele Tavani, 2022. "Secular Stagnation: A Classical-Marxian View," Working Papers PKWP2229, Post Keynesian Economics Society (PKES).
    6. Massimo Pivetti, 2019. "On Interest as a Monetary Phenomenon and the ‘Best’ Interest-rate Policy," Bulletin of Political Economy, Bulletin of Political Economy, vol. 13(2), pages 167-187, December.
    7. Stamegna, Marco, 2022. "A Kaleckian growth model of secular stagnation with induced innovation," MPRA Paper 113794, University Library of Munich, Germany.
    8. Ogawa, Shogo, 2022. "Survey of non-Walrasian disequilibrium economic theory," MPRA Paper 115011, University Library of Munich, Germany.
    9. Jan Willem van den End & Paul Konietschke & Anna Samarina & Irina M. Stanga, 2020. "Macroeconomic reversal rate: evidence from a nonlinear IS-curve," Working Papers 684, DNB.
    10. Di Bucchianico, Stefano, 2020. "Discussing Secular Stagnation: A case for freeing good ideas from theoretical constraints?," Structural Change and Economic Dynamics, Elsevier, vol. 55(C), pages 288-297.
    11. van den End, Jan Willem & Konietschke, Paul & Samarina, Anna & Stanga, Irina M., 2021. "Macroeconomic reversal rate in a low interest rate environment," Working Paper Series 2620, European Central Bank.
    12. Stefano Di Bucchianico, 2021. "Negative Interest Rate Policy to Fight Secular Stagnation: Unfeasible, Ineffective, Irrelevant, or Inadequate?," Review of Political Economy, Taylor & Francis Journals, vol. 33(4), pages 687-710, October.
    13. Shogo Ogawa & Hiroaki Sasaki, 2022. "Numerical analysis of the disequilibrium monetary growth model: secular stagnation, slow convergence, and cyclical fluctuations," Evolutionary and Institutional Economics Review, Springer, vol. 19(1), pages 369-394, April.
    14. Di Bucchianico, Stefano, 2021. "Inequality, household debt, ageing and bubbles: A model of demand-side Secular Stagnation," IPE Working Papers 160/2021, Berlin School of Economics and Law, Institute for International Political Economy (IPE).
    15. Bossone Biagio, 2022. "The Portfolio Theory of Inflation and Policy (in)Effectiveness: Exploring it Further and Righting the Wrongs," Economics - The Open-Access, Open-Assessment Journal, De Gruyter, vol. 16(1), pages 257-275, January.
    16. Bossone, Biagio, 2019. "The portfolio theory of inflation and policy (in)effectiveness," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 13, pages 1-25.

    More about this item

    Keywords

    zero lower bound (ZLB); natural rate of interest; non-reproduced assets; stagnation; New Keynesianism; nominal rigidities;
    All these keywords.

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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