I recently did a post pointing out that higher interest rates don't reduce AD. Indeed even higher interest rates caused by a decrease in the money supply don't reduce AD. Rather the higher rates raise velocity, but that effect is more than offset by the decrease in the money supply.
Of course that's not the way Keynesians typically look at things. They believe that higher interest rates actually cause AD to decrease. Except under the gold standard. Back in 1988 Robert Barsky and Larry Summers wrote a paper showing that higher interest rates were expansionary when the dollar was pegged to gold. Now in fairness, many Keynesians understand that higher interest rates are often associated with higher levels of AD. But Barsky and Summers showed that the higher rates actually caused AD to increase. Higher nominal rates increase the opportunity cost of holding gold. This reduces gold demand, and thus lowers its value. Because the nominal price of gold is fixed under the gold standard, the only way for the value of gold to decrease is for the price level to increase. Thus higher interest rates boost AD and the price level. This explains the "Gibson Paradox." However I very much doubt whether Summers has applied this model to our current fiat money regime.
Both Keynes and Wicksell thought that monetary policy worked through interest rates, at least in their own country. Lower interest rates meant easier money. But when they looked at Germany circa 1923, they ignored interest rates and focused on the money supply. You could probably say the same thing about American Keynesians and Zimbabwe during the hyperinflation.
American Keynesians were contemptuous about the failure of the BOJ to boost AD during the late 1990s and early 2000s, but mostly gave Bernanke's Fed a pass under similar circumstances. Indeed even Bernanke himself went through this change in attitude.
In the late 1930s Keynesians would have laughed at the idea that tight money caused the Great Contraction, but by the 1980s many had bought into the Friedman and Schwartz hypothesis.
Why are Keynesians able to clearly see how monetary policy works in other places and times? Why can't they understand how monetary policy works in the here and now? Elsewhere I've argued that monetary economics is extremely counterintuitive. Up close it's confusing, as easy money looks like tight money, and vice versa. From a greater distance the issues become clearer. You look at outcomes---hyperinflation, deflation, etc.
Barsky and Summers understood that at its most basic level monetary economics is the study of the supply and demand for the medium of account. That was true during the gold standard, and its equally true today. Unfortunately market monetarists seem to be the only group that apply this approach to current policy, and we don't have much influence. So society must suffer, until a future generation of smart and influential New Keynesians (Soltas and Wang?) diagnose what the Fed did wrong in 2008.
PS. Caroline Baum is ahead of the rest of the media on these issues.