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KEYNES, PUBLIC DEBT, AND THE COMPLEX OF INTEREST RATES

Published online by Cambridge University Press:  18 December 2018

Tony Aspromourgos
Tony Aspromourgos*
Affiliation:
School of Economics, University of Sydney, Sydney NSW 2006, Australia. tony.aspromourgos@sydney.edu.au.
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Abstract

John Maynard Keynes consistently offered qualified endorsement of Abba Lerner’s “functional finance” doctrine—the qualifications particularly turning on Keynes’s attentiveness to policy management of the psychology of the debt market. This article examines Keynes’s understanding of the possible influence of public debt on interest rates, from 1930 forward. With the multiplier a mechanism whereby debt-financed public investment generates matching private saving (net of private investment) plus public saving, it becomes possible for Keynes to conclude that increasing public debt need not place upward pressure on the level of interest rates, so long as policy can successfully manage the psychology of the debt market. This particularly concerns long interest rates and hence the term structure of rates. His theory of the term structure enables Keynes’s conviction that policy can manage and shape long rates. The conclusion considers also whether Keynes’s caution concerning public debt and interest rates retains relevance today.

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Articles
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Journal of the History of Economic Thought , Volume 40 , Issue 4 , December 2018 , pp. 493 - 512
Copyright
Copyright © The History of Economics Society 2018 

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Footnotes

The author is indebted to J. Argyrou, R. Van Den Berg, two anonymous referees, and, most particularly, S. Howson, without thereby implicating them in the final product.

References

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