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

Alfonso Palacio-Vera ()
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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.

Eastern Economic Journal, 2010, vol. 36, issue 2, 198-216

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.

Date: 2010
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