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Why ZLB Economics and Negative Interest Rate Policy (NIRP) are wrong

Thomas Palley

No 172-2016, IMK Working Paper from IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute

Abstract: NIRP is quickly becoming a consensus policy within the economics establishment. This paper argues that consensus is dangerously wrong, resting on flawed theory and flawed policy assessment. Regarding theory, NIRP draws on fallacious pre-Keynesian economic logic that asserts interest rate adjustment can ensure full employment. That pre-Keynesian logic has been augmented by ZLB economics which claims times of severe demand shortage may require negative interest rates, which policy must deliver since the market cannot. Regarding policy assessment, NIRP turns a blind eye to the possibility that negative interest rates may reduce AD, cause financial fragility, create a macroeconomics of whiplash owing to contradictions between policy today and tomorrow, promote currency wars that undermine the international economy, and foster a political economy that spawns toxic politics. Worst of all, NIRP maintains and encourages the flawed model of growth, based on debt and asset price inflation, which has already done such harm.

Keywords: Negative interest rate policy; zero lower bound (search for similar items in EconPapers)
Pages: 36 pages
Date: 2016
New Economics Papers: this item is included in nep-cse, nep-hpe, nep-mac, nep-mon and nep-pke
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Persistent link: https://EconPapers.repec.org/RePEc:imk:wpaper:172-2016

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