1. At some point the liquidity trap will end by itself, and the central bank will regain traction. If the central bank promises higher inflation for then, this would reduce real rates already now, and thus help the economy out of depression. This link looks plausible but weak. Consider an economy like the U.S. that goes through a protracted balance sheet recession: credit constrained borrowers pay down excessive debts, transferring funds to creditors who have a higher propensity to save. Until debt is paid down to sustainable levels, private sector demand will be depressed – a process that can take years. The central bank could therefore promise higher inflation only for years down the road, changing savers’ calculus at best for very long-term investments – which, in turn, would arguably trigger a minimal increase in demand only, insufficient to eliminate the excess in desired savings. Cash hoarding would remain prevalent.
[P.S.: this concern is independent from the question of whether announcing a higher long-term inflation target would be time consistent and therefore credible]
[P.S.: this concern is independent from the question of whether announcing a higher long-term inflation target would be time consistent and therefore credible]
2. The central bank could tie its currency to a foreign currency at a depreciated – and therefore inflationary – exchange rate. This is the Svensson mechanism. Essentially the central bank, unable do anchor inflation expectations itself, would temporarily adopt a foreign anchor. I see how this could work for a small, open economy – but not for large, relatively closed economies like the U.S. or the euro area. The required devaluation would be huge, and the countries whose currencies were supposed to appreciate against the dollar or the euro would not allow this to happen.
3. QE works not only through inflation expectations but also other channels, such as portfolio reallocation. I have no problem with the substance of this argument; one may label this Bernanke-QE as opposed to Woodford-QE. Yes, Bernanke-QE can work. But it is a different matter altogether: portfolio reallocation aims at reducing longer-term interest rates, and an economy with positive nominal longer-term rates is not truly in a liquidity trap.
"Our commentator Alex F. once noted that macroeconomists can be divided into mechanics and metaphysicists (similarly Nick Rowe)."
"Metaphysicists trust the power of expectations, mechanics need a physical transmission channel. He is right. I am a mechanic. I won’t believe into the success of a policy as long as I fail to understand how it works. And if there are more folks like me out there, fighting the liquidity trap through inflation targeting is doomed."
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i have not seen anyone besides joe gagnon try to put
stylized contextually analogous numbers
to this expectational formulation
i think its quite decisive to suggest as you do
not big enough
how in hell could the impact of these revised expectations
post the "announcement "
power a rapid and full recovery
particularly
in a context like most advanced national economies face today
we are in a credit trap
the monetary instrument cyclops approach
so long hegemonic even within NEW K circles
has flunked the applied macro course Clio has set for it this term
the cyclop idolators scramble scrap and blow much incense
but in fact i see the fiscal firsers long so marginalize
now moving into a secure alternative paradigmatic position
in the academy and the think tanker fleet
new fresh brains will be recruited
we can begin the world of macronautics anew
