Despite these limitations, the —money affects income through interest rates and investment, subject to traps and elasticities, and must be coordinated with fiscal policy—remains robust.
While Keynes had stressed the volatility of the marginal efficiency of capital, Kurihara adds a careful discussion of how monetary policy affects investment. Lower interest rates reduce the cost of borrowing, but the response (the interest elasticity of investment) depends on business expectations, the availability of internal funds, and the durability of capital goods. Kurihara warns that if investment demand is interest‑inelastic (a common finding for small or uncertain firms), monetary policy alone may be too weak to lift an economy out of a deep recession. Monetary Theory And Public Policy Kenneth Kurihara.pdf
Kurihara introduces the concept of an “effectiveness frontier” for monetary policy. At one extreme, in a deep depression with a liquidity trap and inelastic investment, monetary policy is almost useless. At the other extreme, in a boom with inflation, monetary restraint (selling bonds, raising rates) can be highly effective if banks are fully loaned up and firms are desperate for credit. Between these poles, the effectiveness varies. At the other extreme, in a boom with
One memorable simulation examines a recession with a liquidity trap: In normal times
Kurihara concludes that in extreme slumps, fiscal policy is the “first responder,” while monetary policy provides a supporting role by preventing interest rates from rising too much and crowding out private spending. In normal times, the roles reverse: monetary policy can fine‑tune the economy without creating large deficits.