In Search of Rube Goldberg Capital under Unconventional Monetary Policy

Abstract

In the General Theory, Keynes argued that more roundabout production methods were not necessarily more efficient and capital intensity of the best production methods would be finite at zero interest rate. The US unconventional monetary policy provides a “natural laboratory” to examine if Keynes is right. The capital productivity trend during 1985-2021 is characterized by a vintage growth model and the “technical progress function” is found to shift downward after 2008 when interest rates were close to zero or even negative. Because of the uncertainty about quantitative easing, firms held buffer-stock money or postponed investment in the newest capital goods