“Natural Rate” Mutations: Keynes, Leijonhufvud and the Wicksell Connection

In this chapter we make good on a promise from the introductory material and project the own-rates framework into familiar macroeconomic contexts, including its implications for IS/LM analysis. We do so by way of an implicit critique of Leijonhufvud’s “The Wicksell Connection.” This will also serve as a conclusion to our book in the sense that it demonstrates a main theme which was argued throughout this work and which culminated in Chapter 14. The own-rates of interest analysis offers an important avenue by which to demonstrate Keynes’s claim for the existence of unemployment equilibria. Keynes based his argument in this area on forces integral to an economy faced with uncertainty, where asset holders might choose to fly to safety. In such an economy he suggested there would be (at least) one asset exhibiting a liquidity premia in excess of its carrying cost. This is how he defined a monetary economy. This existence did not make the attainment of full-employment impossible, though, as Leijonhufvud argues. It does mean, however, that — given institutions, expectations and the propensities to save and to consume — it is possible for new investment activity to get hung up at a level lower than the full-employment level of savings. What would happen then? One possibility is that output adjusts to this new lower level of demand and settles into a less-than-full employment equilibrium.