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http://hdl.handle.net/10419/57066
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| Title: | | Quantitative easing, functional finance, and the "neutral" interest rate  |
| 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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