Of course, Keynesians often argue that an increase in interest rates is contractionary. Why do they say this? If asked, they’d probably defend the assertion as follows:
“When I say higher interest rates are contractionary, I mean higher rates that are caused by the Fed. And that requires either a cut in the monetary base, or an increase in IOR. In either case the direct effect of the monetary action on the base or IOR is more contractionary than the indirect effect of higher market rates on velocity is expansionary.”
And that’s true, but there’s still a problem here. When looking at real world data, they often focus on the interest rate and then ignore what’s going on with the money supply—and that gets them into trouble. Here are three examples of “bad Keynesian analysis”:
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TheMoneyIllusion » Nick Rowe on the New Keynesian model] What can we learn from this model? 1. Ceteris paribus, an increase in the base tends to increase NGDP. 2. Ceteris paribus, an increase in the nominal interest rate (i) tends to increase NGDP. <span>Of course, Keynesians often argue that an increase in interest rates is contractionary. Why do they say this? If asked, they’d probably defend the assertion as follows: “When I say higher interest rates are contractionary, I mean higher rates that are caused by the Fed. And that requires either a cut in the monetary base, or an increase in IOR. In either case the direct effect of the monetary action on the base or IOR is more contractionary than the indirect effect of higher market rates on velocity is expansionary.” And that’s true, but there’s still a problem here. When looking at real world data, they often focus on the interest rate and then ignore what’s going on with the money supply—and that gets them into trouble. Here are three examples of “bad Keynesian analysis”: 1. Keynesians tended to assume that the Fed was easing policy between August 2007 and May 2008, because they cut interest rates from 5.25% to 2%. But we’ve already seen that a cut in in Summary
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