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


  • Ulrich van Suntum


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.

Suggested Citation

  • Ulrich van Suntum, "undated". "Economic Confidence, Negative Interest Rates, and Liquidity: Towards Keynesianism 2.0," Working Papers 200108, Institute of Spatial and Housing Economics, Munster Universitary.
  • Handle: RePEc:muc:wpaper:200108

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    References listed on IDEAS

    1. Buiter, Willem H., 2009. "Negative nominal interest rates: Three ways to overcome the zero lower bound," The North American Journal of Economics and Finance, Elsevier, vol. 20(3), pages 213-238, December.
    2. Buiter, Willem H. & Panigirtzoglou, Nikolaos, 1999. "Liquidity Traps: How to Avoid Them and How to Escape Them," CEPR Discussion Papers 2203, C.E.P.R. Discussion Papers.
    3. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
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    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. 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.
    7. 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.
    8. Roger E. A. Farmer, 2012. "Confidence, Crashes and Animal Spirits," Economic Journal, Royal Economic Society, vol. 122(559), pages 155-172, March.
    9. Marvin Goodfriend, 2000. "Overcoming the zero bound on interest rate policy," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, pages 1007-1057.
    10. Reinhart, Carmen M. & Rogoff, Kenneth S., 2013. "Banking crises: An equal opportunity menace," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4557-4573.
    11. Niehans, Jurg, 1978. "Metzler, Wealth, and Macroeconomics: A Review," Journal of Economic Literature, American Economic Association, vol. 16(1), pages 84-95, March.
    12. Hyman P. Minsky, 1992. "The Financial Instability Hypothesis," Economics Working Paper Archive wp_74, Levy Economics Institute.
    13. 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.
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    JEL classification:

    • E - Macroeconomics and Monetary Economics
    • G - Financial Economics


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