Effective Demand Failures and the Limits of Monetary Stabilization Policy

Michael Woodford

American Economic Review, 2022, vol. 112, issue 5, 1475-1521

Abstract: The challenge for stabilization policy presented by the COVID-19 pandemic stems above all from disruption of the circular flow of payments, resulting in a failure of what Keynes (1936) calls "effective demand." As a consequence, economic activity in many sectors can be inefficiently low, and interest-rate policy cannot eliminate the distortions—not because of a limit on the extent to which interest rates can be reduced, but because interest-rate reductions fail to stimulate demand of the right sorts. Fiscal transfers are instead well suited to addressing the fundamental problem, and can under certain circumstances achieve a first-best allocation of resources.

JEL-codes: E23 E32 E43 E52 E62 E63 H63 (search for similar items in EconPapers)
Date: 2022
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Working Paper: Effective Demand Failures and the Limits of Monetary Stabilization Policy (2020)
Working Paper: Effective Demand Failures and the Limits of Monetary Stabilization Policy (2020)
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DOI: 10.1257/aer.20201529

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