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• W3122336844 abstract "Paul Samuelson (2005: 242) advises that, sage economist must muster best available knowledge about history and theory giving plausible pragmatic advice. Economists frequently use historical anecdotes to justify theories they prefer and policies they advocate. Unfortunately, policy-motivated history often depends on stylized facts and hazy metaphors--such as bubbles bursting, central banks pushing on strings, and budget deficits jump-starting economy. By early 2009, global recession and financial crisis were being widely compared to Great Depression or Japan's Writing about U.S. economy mid-2009, Krugman (2009a) notes this is the third time history that a major economy has found itself a liquidity The other two traps were United States 1929-39 and Japan 1990s. In all three cases, he argues, alleged impotence of monetary policy justifies large debt-financed government spending plans. On basis of theory, Krugman (1998) once proclaimed, When economy is a liquidity trap, government spending should expand up to point at which full employment is restored (emphasis original). The Federal Reserve more than doubled monetary base five months, between August 2008 and January 2009. In response, Krugman (2009a) wrote that, rising monetary base isn't inflationary when you're a liquidity trap. monetary base doubled between 1929 and 1939; prices fell 19 percent. Japan's monetary base rose 85 percent between 1997 and 2003; deflation continued apace. There is no question that demand for base money increases substantially during any period of widespread bank runs and failures. Banks naturally want more reserves as a cushion against possible bank runs, and public wants to keep less cash banks and more currency. A liquidity trap, however, suggests demand for reserves and currency is insatiable, so central banks cannot possibly finance inflation or even resist deflation (Boianovsky 2004). As Krugman (2009b) explains, My definition of a liquidity trap is, purely and simply, a situation which conventional monetary policy--open-market purchases of short-term government debt--has lost effectiveness. Period. End of story. Taken literally, that definition implies Federal Reserve could buy up outstanding Treasury bills and commercial paper without slightest risk of inflation (Hamilton 2008, Grier 2008). This article questions data Krugman uses to suggest that Federal Reserve's recent doubling of monetary base five months was any sense comparable to (1) what Fed did 1929-39 and (2) what Bank of Japan did during Lost Decade. find that monetary policy was not ineffective (for good or ill) United States during 1930s, or Japan since 1991. Krugman uses alleged impotence of monetary policy as an argument for aggressive use of debt-financed government purchases and transfers. But his argument is problematic. Ineffectiveness of monetary stimulus would not demonstrate effectiveness of fiscal stimulus. Indeed, find no evidence that traditional fiscal policy stimulated real or nominal GDP growth during Great Depression or Japan's Lost Decade. These historical case studies are consistent with other evidence casting doubt on empirical validity of view that budget deficits are an effective way to accelerate growth of domestic demand. Liquidity Trap Great Depression? Keynes (1937: 207-8) described something similar to a hypothetical liquidity trap. But he said, I know of no example of it other than a very abnormal episode in United States at certain dates 1932. By writing that America's monetary base doubled between 1929 and 1939; prices fell 19 percent, by contrast, Krugman implies that monetary policy was ineffective against an entire decade of continuous deflation. …" @default.
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• W3122336844 date "2009-09-22" @default.
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• W3122336844 title "THE MISUSE OF ECONOMIC HISTORY: FLAWED ANALOGIES WITH JAPAN'S LIQUIDITY TRAP AND THE GREAT DEPRESSION" @default.
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