Negative interest rates — a Kaleckian perspective

18 Apr, 2019 at 10:53 | Posted in Economics | 2 Comments

At any one time a range of profit rates exists in the economy. That range may become more or less extensive in a boom or a recession, or move up and down with some profits cycle. However, the market forces equalising rates of profit across the economy … are weak. So that particular ‘long run’ has never been attained. The practical reality is that a range of profit rates always exists. That practical reality also undermines the argument of those neo-Wicksellians who attribute slow growth or under-investment to a very low or negative real natural or ‘equilibrium’ rate of interest …

kalThe existence of a range of profit rates suggests very strongly that there are always some firms that have a positive rate of return on their productive capital, even after paying near zero rates of interest. The question that arises is why these firms do not invest, in accordance with the standard theoretical imperative of profit-maximisation. The answer is obviously that they suffer from excess capacity in their existing plant and machinery. This is undoubtedly the main factor behind what is alleged to be the negative ‘real’ natural rate of interest that is supposed to warrant negative ‘real’ money interest rates. However, excess capacity is a problem of aggregate demand rather than monetary policy …

Neo-Wicksellian theory suggests that monetary policy is sufficient to regulate inflation and economic activity. However, the case for negative interest rates arises out of the failure of monetary policy and rests on conjecture rather than systematic analysis. More careful examination indicates that the problem of deficient effective demand that lies behind notions of a negative ‘real’ equilibrium or natural rate of interest that requires an even more negative
‘real’ money rate of interest, have to be addressed with measures to deal with that insufficient demand.

Jan Toporowski

For more on Kalecki in relation to MMT, see here.


  1. From

    The figure above [see paper] depicts the argument for profit maximization by firms under perfect competition. Assume that the firm is currently at point A. Since the marginal revenue (MR) is higher than the marginal cost (MC), the firm can increase its output and its profit to the point B where the marginal cost curve intersects the marginal revenue line. Beyond this point the marginal cost is higher than the marginal revenue and increasing output would reduce its total profit. So the firm should increase its output up to B which is the point of profit maximization.

    This argument assumes that there are no barriers to increasing output from point A to point B. However, by definition, recessions are periods in which demand is falling. So the typical firm that attempted to increase its output from A to B during a recession would find the additional output remaining unsold. If it tried to attain the point where theoretically its profit is greatest it would instead find its profit falling drastically. The argument for profit maximization implicitly assumes that output is always at a point where it can be freely increased. This assumption is invalid during a recession and hence the principle of profit maximization collapses during recessions.

  2. Negative interest rates are not about real production, but about financial realities. Traders make money from negative interest rates using carry trades. Negative interest is about money production and financialization, not production of real economy widgets.

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