"Quantitative Easing, Functional Finance, and the "Neutral" Interest Rate"

The main purpose of this study is to explore the potential expansionary effect stemming from the monetization of debt. We develop a simple macroeconomic model with Keynesian features and four sectors: creditor households, debtor households, businesses, and the public sector. We show that such expansionary effect stems mainly from a reduction in the financial cost of servicing the public debt. The efficacy of the channel that allegedly operates through the compression of the risk/term premium on securities is found to be ambiguous. Finally, we show that a country that issues its own currency can avoid becoming stuck in a structural "liquidity trap," provided its central bank is willing to monetize the debt created by a strong enough fiscal expansion.Floor System; Debt Monetization; Functional Finance; Policy Coordination; Neutral Interest Rate

"On Lower-bound Traps: A Framework for the Analysis of Monetary Policy in the ÒAgeÓ of Central Banks"

We present a simple theoretical framework that integrates the notion of the natural or neutral interest rate, liquidity preference theory, and the monetary policy practice by modern central banks. We claim that this theory explains the conditions under which an economy will experience an aggregate demand deficiency problem within a modern institutional setting. Contrary to the predictions of the New Consensus View in macroeconomics, the model suggests that ÒstructuralÓ factors such as a high saving rate and, especially, a low ÒnaturalÓ rate of growth increase the chances that an economy experiences an aggregate demand deficiency. Contrary to conventional wisdom, the model predicts that a fall in the NAIRU may lead to a rise in the natural interest rate, and vice versa.

Capital accumulation, technical progress and wage flexibility: Keynes´approach to aggregate supply and demand analysis revisited

The aggregate supply and demand model (AS-AD) posited by Keynes in the General Theory and elaborated by Weintraub and Davidson is analysed by inserting a CES production function. We perform a comparative statics analysis where the effects on the equilibrium level of employment and the price level of changes in a wide range of variables and parameters are worked out. The effect of changes in the money wage rate on the level of employment and the price level are found to be ambiguous. Finally, we argue that this approach provides a more consistent approach than conventional AS-AD analysis does.

Money wage rigidity, monopoly power and hysteresis

The literature that addresses the effects on the level of aggregate demand of changes in the degree of monopoly typically assumes away the existence of an “inflation barrier” and an inflationtargeting central bank. The presence of these two institutional factors entails that any aggregate demand change brought about by changes in the functional distribution of income will tend to be offset by changes in real interest rates. We postulate a simple macroeconomic model for a closed economy with a government sector and hypothesize that a change in the average mark up affects the inflation rate, the “inflation-barrier” and aggregate demand. The model allows for the analysis of the effects on the employment rate of demand and supply shocks when the economy exhibits asymmetric inflation dynamics (AID) and hysteresis effects. Among other results we find that, if the economy exhibits AID and hysteresis, the effect on the employment rate of a change in the mark up is likely to be either ineffectual or counterproductive even if the associated demand shock is expansionary. We also show that an inadequate functional distribution of income may lead to the occurrence of an aggregate demand deficiency problem.Neutral interest rate, degree of monopoly, asymmetric inflation dynamics, zero lower bound, hysteresis, reversibility

"Can Portugal Escape Stagnation without Opting Out from the Eurozone?"

The creation of the Economic and Monetary Union (EMU) has not brought significant gains to the Portuguese economy in terms of real convergence with wealthier eurozone countries. We analyze the causes of the underperformance of the Portuguese economy in the last decade, discuss its growth prospects within the EMU, and make two proposals for urgent institutional reform of the EMU. We argue that, under the prevailing institutional framework, Portugal faces a long period of stagnation, high unemployment, and painful structural reform, and conclude that, in the absence of institutional reform of the EMU, getting out of the eurozone represents a serious political option for Portugal.Nominal Wage Cuts; Eurozone; Relative Unit Labor Costs; Zero-sum Game

Are Long-Run Price Stability and Short-run Output Stabilization All that Monetary Policy Can Aim For?

A central tenet of the so-called new consensus view in macroeconomics is that there is no long-run trade-off between inflation and unemployment. The main policy implication of this principle is that all monetary policy can aim for is (modest) short-run output stabilization and long- run price stability—i.e., monetary policy is neutral with respect to output and employment in the long run. However, research on the different sources of path dependency in the economy suggests that persistent but nevertheless transitory changes in aggregate demand may have a permanent effect on output and employment. If this is the case, then, the way monetary policy is run does have long-run effects on real variables. This paper provides an overview of this research and explores how monetary policy should be implemented once these long-run effects are acknowledged.monetary policy, new consensus, path dependency, opportunistic approach

"Are Long-run Price Stability and Short-run Output Stabilization All that Monetary Policy Can Aim For?"

A central tenet of the so-called new consensus view in macroeconomics is that there is no long-run trade-off between inflation and unemployment. The main policy implication of this principle is that all monetary policy can aim for is (modest) short-run output stabilization and long-run price stability i.e., monetary policy is neutral with respect to output and employment in the long run. However, research on the different sources of path dependency in the economy suggests that persistent but nevertheless transitory changes in aggregate demand may have a permanent effect on output and employment. If this is the case, then, the way monetary policy is run does have long-run effects on real variables. This paper provides an overview of this research and explores how monetary policy should be implemented once these long-run effects are acknowledged.

Quantitative easing, functional finance, and the "neutral" interest rate

The main purpose of this study is to explore the potential expansionary effect stemming from the monetization of debt. We develop a simple macroeconomic model with Keynesian features and four sectors: creditor households, debtor households, businesses, and the public sector. We show that such expansionary effect stems mainly from a reduction in the financial cost of servicing the public debt. The efficacy of the channel that allegedly operates through the compression of the risk/term premium on securities is found to be ambiguous. Finally, we show that a country that issues its own currency can avoid becoming stuck in a structural liquidity trap, provided its central bank is willing to monetize the debt created by a strong enough fiscal expansion

Liquidity and growth traps: a framework for the analysis of macroeconomic policy in the 'age' of Central Banks

Conventional explanations of how a growing potential output generates an equi-proportional increase in aggregate demand in the long run usually rely on the real balance effect. Yet this mechanism has a negligible size and an uncertain sign. We present a theoretical framework for the analysis of the power of conventional monetary policy to take the economy down its potential output path. We develop a simple model that predicts the behavior of the ‘neutral’ interest rate and the ‘pseudo-warranted’ interest rate in the wake of different types of shocks. We identify several different scenarios according to whether the behavior of the ‘neutral’ real interest rate enhances or weakens the power of conventional monetary policy. Likewise, we identify several regimes depending on whether a rise in the target rate of inflation in steady growth yields faster or slower output growth when the ‘natural’ rate is not (fully) exogenous. In addition, we provide a formal definition of the concept of the ‘growth trap’ which complements the notion of the ‘liquidity trap’. Finally, we propose a taxonomy of monetary policy regimes.Bancos centrales. Política macroeconómica. Neutral and warranted real interest rate. Liquidity trap. Growth trap. Inflation. Monetary policy.

Can Portugal escape stagnation without opting out from the Eurozone?

The creation of the Economic and Monetary Union (EMU) has not brought significant gains to the Portuguese economy in terms of real convergence with wealthier eurozone countries. We analyze the causes of the underperformance of the Portuguese economy in the last decade, discuss its growth prospects within the EMU, and make two proposals for urgent institutional reform of the EMU. We argue that, under the prevailing institutional framework, Portugal faces a long period of stagnation, high unemployment, and painful structural reform, and conclude that, in the absence of institutional reform of the EMU, getting out of the eurozone represents a serious political option for Portugal