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A Keynesian factor in monetary policy: the Economic Growth Incentive Method (EGIM)

De Koning, Kees (2015): A Keynesian factor in monetary policy: the Economic Growth Incentive Method (EGIM).

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Abstract

In the U.S. over the past 17 years competition among banks to provide home mortgages has failed. The reason is that there is a finite need for new housing starts at around 1.8 million homes per year and that there is a finite need for funds if house prices are to move in line with the CPI inflation index. In 1997 new home mortgage funds of $125,260 were allocated for each new home, with a median house price level of $145,900. The turning point was already reached in 1998 and in 2006 home mortgage funds per new home had grown to $574,550. In 2006 on basis of the CPI index for new homes, not 1.8 million but nearly 5.5 million new homes could have been build; way above the need.

Over the period 1998-2007 the economic value of the output achieved with the money input had dropped considerably and the indebtedness of new mortgagees had increased dramatically. Both were a cause of a slow down in economic growth. The funding bubble burst in 2007.

The actions taken by the Federal Reserve saved the banks- bar one- and other financial institutions, but the Fed did not address the financial plight of individual households. Quantitative easing bought up $2.4 trillion of past government debt, which helped lower long-term interest rates. What was not considered was to give a cash injection to individual households to be repaid out of future tax revenues. Such tax advance should not be personalized but repaid to the Fed out of future general tax revenues over a period of say 10 years: the Economic Growth Incentive Method. A Keynesian factor can be introduced into monetary policies. The U.S. has gone through a six-year adjustment period since the beginning of 2008 in order to get back to economic growth. The Eurozone has not achieved the same result. The EGIM method would be very helpful for the Eurozone countries.

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