Template-type: ReDIF-Paper 1.0
Author-Name: Alfonso Palacio Vera 
Author-Workplace-Name: Departamento de Economía Aplicada III (Política Económica). Universidad Complutense de Madrid.
Author-Workplace-Homepage:
 https://www.ucm.es//departamento-de-economia-aplicada,-publica-y-politica
Title: The "New consensus"and the Post-Keynesian approach to the analysis of liquidity traps
Abstract: We compare the “New Consensus” (NC) in macroeconomics as expounded in Woodford (2003) and the Post-Keynesian (PK) 
	approach regarding the causes of a “liquidity trap” (LT). We argue that in the NC a LT is a phenomenon caused by 
	unusually large transitory shocks that depress the “neutral” interest rate temporarily. We show that this is the case 
	because it is assumed that the “neutral” or “natural” interest rate converges in the long run to a gravitation center 
	whose (positive) lower bound is determined by the rate of time preference of the representative household. By contrast, 
	in the PK approach, the economy may also exhibit a “structural” or long-lasting LT even in the absence of large adverse 
	shocks. This may be the case if a combination of high precautionary saving, low investment spending and stringent 
	conditions for access to bank credit stemming from a high degree of uncertainty and liquidity preference makes the sum of 
	the steady-growth “neutral” interest rate and the inflation rate fall short of the term/risk premium on long-term interest 
	rates.
Classification-JEL: B50, E12, E24, E50
Keywords: Neutral interest rate, liquidity trap, New Consensus in macroeconomics, Credit rationing and liquidity preference.
Length: 38 pages

Creation-Date: 2008 
Number: 08-03
X-File-Ref: http://america.sim.ucm.es/repec/ucm/ref/doctra08-03.txt
File-URL: https://eprints.ucm.es/id/eprint/8453/1/0803.pdf
File-Format: Application/pdf
Handle: RePEc:ucm:doctra:08-03