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Title:Quantitative easing, functional finance, and the "neutral" interest rate PDF Logo
Authors:Palacio-Vera, Alfonso
Issue Date:2011
Series/Report no.:Working paper, Levy Economics Institute 685
Abstract: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.
Subjects:floor system
debt monetization
functional finance
policy coordination
neutral interest rate
JEL:E10
E12
E44
E52
E58
Document Type:Working Paper
Appears in Collections:Working Papers, Levy Economics Institute of Bard College

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