American Economic Review Vol. 112 No. 5 2022
Effective Demand Failures and the Limits of Monetary Stabilization Policy
Abstract
The challenge for stabilization policy presented by the COVID-19 pandemic stems above all from disruption of the circular flow of payments, resulting in a failure of what Keynes (1936) calls “effective demand.” As a consequence, economic activity in many sectors can be inefficiently low, and interest-rate policy cannot eliminate the distortions—not because of a limit on the extent to which interest rates can be reduced, but because interest-rate reductions fail to stimulate demand of the right sorts. Fiscal transfers are instead well suited to addressing the fundamental problem, and can under certain circumstances achieve a first-best allocation of resources.
- DOI
- 10.1257/aer.20201529
- Volume
- 112
- Issue
- 5
- Pages
- 1475-1521
- Language
- en
- Sources
- openalex bibtex:phds-export.bib crossref