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The “New Consensus” and the Post-Keynesian Approach to the Analysis of Liquidity Traps

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  • Alfonso Palacio-Vera

    (Departamento de Economía Aplicada III, Facultad de Ciencias Económicas y Empresariales, Campus de Somosaguas, Universidad Complutense de Madrid, 28223 (Madrid), Spain.)

Abstract

We compare the “New Consensus” (NC) in macroeconomics as expounded in Woodford (2003) and the Post-Keynesian (PK) approach regarding the causes of a “liquidity trap” (LT). We argue that in the NC approach a LT is a phenomenon caused by unusually large transitory shocks that depress the “neutral” interest rate temporarily. By contrast, in the PK approach, the economy may also exhibit a “structural” or long-lasting LT. This may be the case if a combination of high precautionary saving, low investment spending and stringent conditions for access to bank credit stemming from a high degree of uncertainty and liquidity preference makes the sum of the steady-growth “neutral” interest rate and the expected inflation rate fall short of the term/risk premium on long-term interest rates.

Suggested Citation

  • Alfonso Palacio-Vera, 2010. "The “New Consensus” and the Post-Keynesian Approach to the Analysis of Liquidity Traps," Eastern Economic Journal, Palgrave Macmillan;Eastern Economic Association, vol. 36(2), pages 198-216, Spring.
    • Handle: RePEc:pal:easeco:v:36:y:2010:i:2:p:198-216
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    Cited by:

    1. Li MA & Zhongyuan DUAN & Huadan YU, 2013. "The Transmission Mechanism and Effectiveness of the Fed's Operation Twist," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(3), pages 164-181, October.
    2. Jorge Garcia-Arias & Eduardo Fernandez-Huerga & Ana Salvador, 2013. "European Periphery Crises, International Financial Markets, and Democracy," American Journal of Economics and Sociology, Wiley Blackwell, vol. 72(4), pages 826-850, October.

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