Thinking about the liquidity trap

Ξ October 24th, 2005 | → 0 Comments | ∇ Science |


      THINKING ABOUT THE LIQUIDITY TRAP

      Paul Krugman

      December 1999



      We live in the Age of the Central Banker - an era in which Greenspan, Duisenberg, and Hayami are household words, in which monetary policy is generally believed to be so effective that it cannot safely be left in the hands of politicians who might use it to their advantage. Through much of the world, quasi-independent central banks are now entrusted with the job of steering economies between the rocks of inflation and the whirlpool of deflation. Their judgement is often questioned, but their power is not.

      It is therefore ironic as well as unnerving that precisely at this moment, when we have all become sort-of monetarists, the long-scorned Keynesian challenge to monetary policy - the claim that it is ineffective at recession-fighting, because you can%u2019t push on a string - has reemerged as a real issue. So far only Japan has actually found itself in liquidity-trap conditions, but if it has happened once it can happen again, and if it can happen here it presumably can happen elsewhere. So even if Japan does eventually emerge from its slump, the question of how it became trapped and what to do about it remains a pressing one.

       

 

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