Seems that Paul Krugman no longer “believes in” liquidity traps:
The passivity of the Bank of Japan offers an object lesson. The BOJ is now under political pressure? Why? Because it still sees no reason to act after fifteen years of deflation.
He is certainly in good company ;].
11 comments
Comments feed for this article
Friday ~ July 16th, 2010 at 3:06 pm
David Lentini
Clearly, you don’t understand Krugman’s points. Krugman never argued there was no way out of a liquidity trap; he argued that when you’re in the trap many of the standard tools for fighting recession either work against you or not at all. So when you’re in the trap it’s tough to get out. So far, the facts seem to support Krugman quite well.
As Krugman has argued consistently, under liquidity trap conditions the government has to stimulate demand and create a policy that carries a realistic expectation of some future inflation in order to encourage spending. That includes the central back, which has to make it clear that it will pursue an inflationary policy in the short- to medium term. In fact, had you read the article Krugman referred to closely, you’ll see that the discussion switched from the policies of the BoJ alone to those of the Japanese government.
And I have to say that I find Krguman’s explanations far superior to your approach of making categorical and conclusory statements based on cherry-picked quotes from third parties. You’ve added nothing to this debate.
Friday ~ July 16th, 2010 at 3:20 pm
Niklas Blanchard
If he is arguing (which as you noted, he has) that it is difficult to stimulate aggregate demand when short-term nominal interest rates are at-or-near zero, then he is wrong.
Having to change your all-along sub-par policy of interest rate targeting to a more sensible policy of targeting the forecast does not a “liquidity trap” make.
But this post was mostly tongue-in-cheek, hence the smiley.
Friday ~ July 16th, 2010 at 4:12 pm
David Lentini
“Having to change your all-along sub-par policy of interest rate targeting to a more sensible policy of targeting the forecast does not a “liquidity trap” make.”
But the trap is being at or near a zero rate of interest. The targeting is part of the attempt to get out of the trap. And to be fair to Krugman as well, his point has also included statements and policies from the central bank that they will support inflationary government policies—the central bank can’t do it alone. Still it’s a nasty place to be, as we are starting to learn.
“But this post was mostly tongue-in-cheek, hence the smiley.”
Point taken. (But that’s a rather evil looking smiley.
)
Finally, if you’re not convinced by Krugman’s arguments, and you’re certainly in good company, then how do you explain Japan’s situation and our lack of success in bringing back investment?
Friday ~ July 16th, 2010 at 4:13 pm
David Lentini
“f he is arguing (which as you noted, he has) that it is difficult to stimulate aggregate demand when short-term nominal interest rates are at-or-near zero, then he is wrong.”
Why? As I asked above, how can you explain the Japanese experience?
Friday ~ July 16th, 2010 at 4:38 pm
Andy Harless
I think you’re getting hung up on semantics. Nobody questions that it is possible to stimulate aggregate demand when short-term nominal interest rates are zero. (Is it “difficult”? What does that even mean? How difficult is it even by the Keynesian method? Unless the Treasury Secretary has carpal tunnel problems when he signs checks.) Have the Fed buy the entire national debt, then Fannie and Freddie, then all the outstanding commercial paper, and so on. Eventually it will work. Krugman or anyone will agree. But there are costs and uncertainties that are greater than those that apply when short-term nominal interest rates are positive. Simply announcing a nominal target will not be sufficient, unless there is enough credibility, and the actions necessary to create that credibility will create additional risks. If you deny that, then you are wrong.
Friday ~ July 16th, 2010 at 5:14 pm
David Lentini
I’m not sure what you mean by “additional risks” or “eventually”. To borrow from Keynes, eventually we’ll all be dead.
And that, I think, is Krugman’s point: that under liquidity trap conditions, when the market has plenty of liquidity, using the central bank, and even Keynesian pump-priming, to stimulate is tough, because people will hoard money. So, it’s far better to avoid the trap.
And again, how do you explain Japan’s experience?
Saturday ~ July 17th, 2010 at 10:12 am
Andy Harless
What I’m saying is that the “tough” aspect is either political or the result of greater uncertainty about the mapping from policy to outcomes. If policymakers are risk neutral, it’s very easy to stimulate demand in a liquidity trap: all you have to do is buy up so many assets that people think you’re crazy and lose confidence in the value of money — which forces them to spend it. In principle, there’s a happy medium, where you’re just crazy enough to stimulate demand into a recovery without subsequently stimulating it into a hyperinflation, but that happy medium is hard to know in advance. (I meant “eventually” in policy space, not eventually in time. You could get to the right policy very quickly if you don’t mind the risk of overshooting.)
Saturday ~ July 17th, 2010 at 11:46 am
David Lentini
But aren’t we really saying the same thing, that the government (including the central bank) needs to act in way that instills a fear of inflation in the market? In effect, you are creating future risk—of inflation—to offset the virtue of hoarding. And isn’t that tough to do, since no policy maker is truly risk neutral?
Saturday ~ July 17th, 2010 at 4:51 pm
Andy Harless
I’ll agree with that. I just think this whole question of whether there is such a thing as a liquidity trap is mostly an argument over semantics. There is no absolute liquidity trap until the central bank runs out of assets to buy, and it seems implausible that that could ever happen (at least in the US), but policy becomes more complicated and uncertain when the short-term interest rate goes to zero.
Sunday ~ July 18th, 2010 at 11:03 am
David Lentini
Ok, I see your point. I’ve been following Krugman’s line, which, as I understand it, is that the “trap” is sprung when the central bank can no longer use interest rate reduction to accelerate economic activity. Buying assets then falls into the actions the bank takes to (hopefully) get out of the trap. Your approach, as I see it, makes the trap “absolute”.
Wednesday ~ October 20th, 2010 at 5:34 pm
RN
What a moronic conclusion to draw from that one comment.
My God, you’re worthless.