Self-correcting economies and macro management

Michael Roberts Blog

The Keynesians have a problem.  Why has it taken so long to recover from the slump of 2008-9 even after central banks have applied Keynesian-style unconventional monetary policies?  The answer from Britain’s leading Keynesian Simon Wren-Lewis and from America’s top Keynesian, Paul Krugman, is that capitalist economies in slumps are not self-correcting.

So we need central banks to apply easy money policies, especially when an economy is in a ‘liquidity trap’, where everybody holds cash and won’t spend.  And when interest rates are at zero (zero-bound) and nothing happens, we then need ‘unconventional’ monetary policies like quantitative easing (printing money to buy government bonds from banks) or negative interest rates (charging banks for holding cash).

But even these policies are not working.  The major economies are still growing well below previous trend growth rates and many still have not got their GDP per head levels back above pre-global crash…

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