Knife-Edge Hypotheses on Market Reference Rate: A Post-Keynesian Review of Quantitative Easing Policy (Keynote Speech)

Abstract

The scale of investment is not always promoted by a low rate of interest as assumed by Keynes in the General Theory. This paper suggests that there may exist an appropriate level of market reference rate, which can encourage the investors to absorb the relatively wider range of credit risk in the bond market. Extremely higher market rate would discourage the borrowers to raise funds, while lower market rate would drain “risk” funds in the bond market. In this context, the appropriate level of market rate may stand on a narrow range of the kind of “knife-edge”, even though the level per se does not always guarantee the optimal allocation of financial resources. This paper insists that there is no a priori mechanism in the economic theory for underpinning the commonly accepted view upon which the Quantitative Easing Policy (QEP) is based.