Quantitative Easing, Functional Finance, and the "Neutral" Interest Rate

Alfonso Palacio-Vera

Economics Working Paper Archive from Levy Economics Institute

Abstract: The main purpose of this study is to explore the potential expansionary effect stemming from the monetization of debt. We develop a simple macroeconomic model with Keynesian features and four sectors: creditor households, debtor households, businesses, and the public sector. We show that such expansionary effect stems mainly from a reduction in the financial cost of servicing the public debt. The efficacy of the channel that allegedly operates through the compression of the risk/term premium on securities is found to be ambiguous. Finally, we show that a country that issues its own currency can avoid becoming stuck in a structural "liquidity trap," provided its central bank is willing to monetize the debt created by a strong enough fiscal expansion.

Keywords: Floor System; Debt Monetization; Functional Finance; Policy Coordination; Neutral Interest Rate (search for similar items in EconPapers)
JEL-codes: E10 E12 E44 E52 E58 (search for similar items in EconPapers)
Date: 2011-09
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-pke
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.levyinstitute.org/pubs/wp_685.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:lev:wrkpap:wp_685

Access Statistics for this paper

More papers in Economics Working Paper Archive from Levy Economics Institute
Bibliographic data for series maintained by Elizabeth Dunn ( this e-mail address is bad, please contact ).