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This is similar to Keynes' concept of the marginal efficiency of capital schedule being separate from the interest rate. For Gesell the product of money and velocity is effective demand nominal growth but because of money capital's superiority to real capital, if money supply expands it comes at the expense of velocity. The new money supply is hoarded because as interest rates fall, expected returns on capital also fall through oversupply - for economic agents goods remain unattractive to money. The demand for money thus rises as velocity slows.

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This is simply a deflation spiral, consumers delaying purchases of goods, hoarding money, expecting further falls in goods prices before they are willing to part with their money. In a Keynesian world of deficient demand, the burden is on fiscal policy to restore demand. Monetary policy simply won't work if there is a liquidity trap and demand for cash is infinite. Interest rates cannot be reduced any further to stimulate demand.


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In Gesell's terminology the product of velocity and money supply i. In Gesell's world money itself needs to be taxed to prevent hoarding and to equalize the worth of money to goods. If cash is taxed and he suggested at the annual tax rate might be 5. The tendency to oversupply however in an economy unfettered by "privilege" effectively implies that interest rates in equilibrium may converge to zero. Taxing of money specifically is to deal with an ex ante effective demand deficiency. Europe's long time obsession with negative rates, to quote our present day Fischer, is fair but misleading in the context of how negative interest rates are being applied.

The combination of penalty rates on banks' excess reserves and QE is designed at one level to expand private sector credit. This if anything will promote supply of goods. If supply creates its own demand and or if Keynesian investment accelerator models are valid, then they may well be successful in restoring a Keynesian deficient demand problem.


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  • This is essentially the same as saying there is no liquidity trap. If we think of the inverse bond price on the vertical axis as being a private sector asset price, then a large price rise can be achieved for a relatively small amount of money expansion. But it presupposes that there is deficient loan demand due to high money capital interest rates rather than due to too low real capital expected returns.

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    The risk is that QE itself is simply new money being hoarded on the demand side so that money velocity falls and effective demand remains weak. Falling interest rates may well promote new loan demand and increase supply but only in a deflationary spiral of further falls in expected capital returns and the perceived need for still lower money interest rates. If Gesell is correct, it is essential to tax money itself which means not just retail deposits but cash in circulation.

    Then velocity would stabilize with effective demand as households would be willing to own goods rather than money.

    Europe may still be stuck in a liquidity trap - Business Insider

    It is conceivable that the Europeans are heading in this direction and maybe it will be worse before it gets better. Or maybe there is still time for the Keynesian mechanism to prove that we are not in a liquidity trap. World globe An icon of the world globe, indicating different international options. Use the link below to share a full-text version of this article with your friends and colleagues.

    Learn more. We use the aggregation procedure for historical Euroland data advocated by Beyer, Doornik and Hendry for application to aggregation of money, GDP and prices when exchange rates were varying. Volume 42 , Issue 4.

    The Demand for Divisia Money in a Core Monetary Union

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