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Natural and Neutral Rates of Interest in Theory and Policy Formulation

  • The Quarterly Journal of Austrian Economics
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Tags Capital and Interest Theory

07/30/2014Roger W. Garrison

 

Volume 9, No. 4 (Winter 2006)

 

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.

Cite This Article

Garrison, Roger W. "Natural and Neutral Rates of Interest in Theory and Policy Formulation." The Quarterly Journal of Austrian Economics 9, No. 4 (Winter 2006): 57–68.

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