ABSTRACT
The article revisits the IS-LM macroeconomic model by incorporating speculation into the investment function. The discussion is supported empirically by using data from the G7 countries to examine the different interest rate regimes in the pre- and post-2008 financial crisis. The estimation of an ‘anchor’ interest rate provides a reference rate for the G7 countries. The empirical study is extended to examine if the three quantitative easing (QE) episodes in the U.S. are growth promoting. The article concludes that the maintenance of a high and stable interest rate policy is needed for sustainable growth in the G7 countries.
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Acknowledgements
The author would like to thank the anonymous reviewers, editor Mark Taylor, participants and discussants in the 2014 Canadian Economic Society conference and scholars (Sven Arndt, Lee Spector, Tatsuyoshi Miyakoshi, Pok-sang Lam and Tung Liu) for their constructive comments on the earlier drafts. Research funding from City University of Hong Kong (Strategic Research Grant numbers 7008129 and 7002532) and a private fund donor through the City University of Hong Kong, David Zhang, is highly appreciated, so as research assistance from Siyang Ye. The usual disclaimer applies.
Disclosure statement
No potential conflict of interest was reported by the author.
Supplemental data
Supplemental data for this article can be accessed here.
Notes
1 While Wu and Xia (Citation2014) worked out the shadow interest rate for the U.S. economy, this article relies on the official interest rate as the more appropriate variable.
2 The Chow tests for the other six countries have similarly been conducted on interest rate to test the null hypothesis that the coefficients of policy from the two periods are the same. These results are excluded from the article.
3 See, Federal Research Monetary Policy Release, various years, or information on Quantitative Easing in Wikipedia.
4 The coefficient estimates for the three sub-periods in the U.S. economy are excluded in the text.