The "New consensus"and the Post-Keynesian approach to the analysis of liquidity traps

Résumé

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.