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100 Foreign Aff. 174 (2021)
The Rate Debate: Rethinking Economics in the Age of Cheap Money

handle is hein.journals/fora100 and id is 392 raw text is: The Rate Debate
Rethinking Economics in the Age of
Cheap Money
James H. Stock
The past five years of U.S. economic policy have been noisy, as
the Trump administration and its allies in Congress pursued
controversial agenda: a trade war with China, a push to repeal
the Affordable Care Act, tax cuts that mostly benefited the well-off, and
so on. Behind this sound and fury, however, lies a story of quieter but
deeper economic changes that will have far-reaching implications. That
story revolves around four interconnected developments: the fall in the
natural rate of interest, the remarkable decline in the price of renewable
energy, the stubborn persistence of inflation below the U.S. Federal
Reserve's target of two percent, and the stunningly fast collapse and
then partial rebound of the economy during the COvID-19 crisis.
These changes do not necessarily call into question any fundamen-
tal principles of traditional economic theory. In fact, in many cases,
they confirm the value and validity of certain core concepts. They
were largely unexpected, however: taken together, they require econ-
omists to rethink some key parts of their models. They also open new
dimensions in old debates about taxes and spending. And what is per-
haps most consequential, they present new opportunities for policy-
makers when it comes to the fight against climate change.
The natural rate of interest, or r*, is the real interest rate-that is, the
actual current interest rate minus expected inflation-that would pre-
vail in an economy enjoying full employment without any government
intervention. Savers and investors use r* to project interest rates over
the long run; for example, the expected long-term value of the yield on
JAMES H. STOCK is Harold Hitchings Burbank Professor of Political Economy at Harvard
University and a member of the faculty at the Harvard Kennedy School.


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