The Partial Effectiveness of Monetary Policy: a Keynesian Criticism of the New Neoclassical Synthesis Model

Beginning with the recognition that monetary policy is not easily able to stimulate the economy in a recession by lowering interest rates, we propose revising the ISTRI model of Abraham-Frois (2003) and its more complete version proposed by Pollin (2003), which makes the DSGE model more easily accessible for students. We believe that these models are based on the unconvincing assumption that monetary policy plays an effective stabilizing role at all times. We highlight situations in which this is not the case (downward rigidity of interest rates and/or lack of investment despite interest rate moves). In these cases, the shape of the aggregate demand curve is modified. Applying the post-Keynesian critique that investment is only marginally sensitive to interest rates in a DSGE-type model leads us to invalidate many of the DSGE policy conclusions.