Stagnation and unnaturally low interest rates: a simple critique of the amended New Consensus and the Sraffian supermultiplier alternative

Franklin Serrano, Ricardo Summa and Vivian Garrido Moreira
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Ricardo Summa: Professor Associado, Instituto de Economia, Universidade Federal do Rio de Janeiro (IE–UFRJ), Brazil
Vivian Garrido Moreira: Post-Doctoral Researcher, Programa de Pós-Graduação em Economia, Universidade Federal de Santa Catarina (PPGE–UFSC), Florianópolis, Brazil

Review of Keynesian Economics, 2020, vol. 8, issue 3, 365-384

Abstract: This paper argues that the amended versions (financial wedge and secular stagnation) of the simple pragmatic New Consensus model are as open to theoretical criticism as the original one was. The authors show that: (i) the real natural rate of interest is unlikely to be negative, (ii) it (inconsistently) depends on the Neoclassical investment function drawn at a position of full employment in a model in which the economy is demand-constrained, and (iii) both investment and full employment saving are induced by the trend of demand in the longer run and this challenges the usefulness of the notion of a natural or neutral rate of interest, which (iv) are also subject to the Sraffian capital critique. This is then contrasted with an alternative simple Sraffian supermultiplier model in which the interest rate and the financial wedge are distributive instead of allocative variables, and there is no natural rate of interest since in the longer run there is no trade-off between consumption and investment and also no full employment of labor. As the capital stock adjusts to demand, potential (capacity) saving will be determined by investment, and both investment and capacity saving increase when consumption increases. Finally, we briefly illustrate how this alternative model could begin to make sense of the recent relevant stylized facts.

Keywords: stagnation; Sraffian supermultiplier; New Consensus model (search for similar items in EconPapers)
JEL-codes: E11 E21 E22 E40 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:elg:rokejn:v:8:y:2020:i:3:p365-384

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