Must-Read: Mauro Boianovsky: Knut Wicksell, Secular Stagnation, and the Negative Natural Rate of Interest

Must-Read: Thinking of monetary policy as matching the market rate of interest controlled by the Federal Reserve to some underlying Wicksellian “neutral” rate that produces full-employment stable-price equilibrium was introduced, or reintroduced, into the American macroeconomic policy discussion by Alan Greenspan in the early 1990s. But, as Mauro Boianovsky points out here, that way of framing the issue is Wicksellian–but it was not quite Knut Wicksell’s way:

Mauro Boianovsky: Knut Wicksell, Secular Stagnation, and the Negative Natural Rate of Interest:

The notion of secular stagnation is consistent with… [Knut Wicksell’s] hypotheses of diminishing returns to technical progress and to capital accumulation alike….

The concept of “dynamic equilibrium” applied to the “past one hundred years”, when the economy was anything but stationary…. [But] diminishing… population growth and (capital-intensive) technical progress led the Swedish economist to consider… [a] stationary state… revealed by recurrent cyclical depressions… close to Marshall’s “different world” of higher saving and few opportunities for investment, as indicated by his critical discussion of Böhm-Bawerk’s treatment of the first reason for the existence of interest….

Wicksell’s notion of a negative natural interest rate in depressions is only implicit…. In fact, he was generally shy of using the concept of natural (or normal) rate of interest in his discussion of the business cycle…. Wicksell’s notion of the natural interest rate as the (expected) marginal productivity of capital applies strictly to a capital structure in equilibrium: “The operation of the laws of capital depends upon the assumption of a constant adjustment of concrete capital goods in an endless repetition of the same process of investment and production. But this is only of practical importance in capital investment of relatively short duration”…. In periods of great industrial development… such equilibrium is conspicuous for its absence (p. 187). In the subsequent depression period, “there is plenty of circulating capital, but it is no longer profitable to convert it into fixed capital”…. Despite the theoretical problems entailed by the application of Wicksell’s natural rate of interest concept(s) to cyclical fluctuations, it is clear that he grasped the restrictions posed to the formulation of monetary policy in periods of relative economic stagnation…