Quantitative easing, functional finance, and the "neutral" interest rate

The main purpose of this study is to explore the potential expansionary effect stemming from the monetization of debt. We develop a simple macroeconomic model with Keynesian features and four sectors: creditor households, debtor households, businesses, and the public sector. We show that such expansionary effect stems mainly from a reduction in the financial cost of servicing the public debt. The efficacy of the channel that allegedly operates through the compression of the risk/term premium on securities is found to be ambiguous. Finally, we show that a country that issues its own currency can avoid becoming stuck in a structural "liquidity trap", provided its central bank is willing to monetize the debt created by a strong enough fiscal expansion. -- Floor System ; Debt Monetization ; Functional Finance ; Policy Coordination ; Neutral Interest Rate