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Keynes’s own General Theory of Employment, Interest, and Money

By Roger W. Garrison


book, focus on the critical role that interest rates play in coordinating production plans with consumption preferences. The General Theory represents a significant departure from classical (and Austrian) thinking but not because of the title-role status of interest. Rather, the departure stems from the fact that, in Keynesian theory, the role played by a market-determined interest rate is a disruptive one. In contemporary policy discussions, the interest rate occupies center stage if only because the much-watched federal funds rate is the Federal Reserve’s sole surviving policy target. (A quarter-century ago, the Fed lost the ability to target the money supply—or even to identify a distinctly relevant monetary magnitude.) By its very nature an extra-market institution, the Federal Reserve is expected to exert a countervailing force. It is to move against market forces that, presumably, would otherwise be disruptive. In accordance with the Keynesian vision, market interest rates fail to coordinate saving and investment decisions, leaving saving decisions dependent only on incomes and leaving investment decisions dominated by Keynes’s “animal spirits.” Worse, high rates of interest can stem from fetishistic attitudes toward liquidity and a corresponding deficiency of spending. The federal funds rate, which is the overnight rate on interbank loans, can be lowered or raised in an effort to control interest rates generally. The Federal Reserve lowers the federal funds rate to stimulate spending and keep the economy from sinking into recession; it raises the federal funds rate to retard ROGER W. GARRISON is professor of economics at Auburn University. THE QUARTERLY JOURNAL OF AUSTRIAN ECONOMICS VOL. 9, NO. 4 (WINTER 2006): 57–6

Year: 2010
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