Effective Demand Failures and the Limits of Monetary Stabilization Policy

Michael Woodford

No 27768, NBER Working Papers from National Bureau of Economic Research, Inc

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: E12 E52 E63 (search for similar items in EconPapers)
Date: 2020-09
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Note: EFG ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (32)

Published as Michael Woodford, 2022. "Effective Demand Failures and the Limits of Monetary Stabilization Policy," American Economic Review, vol 112(5), pages 1475-1521.

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Journal Article: Effective Demand Failures and the Limits of Monetary Stabilization Policy (2022)
Working Paper: Effective Demand Failures and the Limits of Monetary Stabilization Policy (2020)
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