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When money isn't everything

1) The most prominent may be the liquidity trap story Mr Krugman references above. Definitions of the liquidity trap differ; some use the phrase to refer to the dynamic at the zero-lower bound, at which nominal interest rates can no longer be reduced. Others make a more careful argument: that the liquidity trap is a problem when monetary policy is unable to raise the price level. Any expansion in the money supply is simply hoarded.


2) A related breakdown, which one might consider a special case of the above, is the balance-sheet recession. In this story, a huge fall in asset prices leaves the private sector with a substantial debt overhang. Private firms and households are forced into oversaving to deleverage, a behaviour that is immune to changes in interest rates, making monetary policy impotent.

3) Then there is the "broken financial markets" story, in which problems in markets block key monetary policy transmission channels. If banks are worried about funding conditions, then easier monetary policy may not induce more lending, for instance.
When money isn't everything When money isn't everything Reviewed by Adslah Admin on 6:06:00 AM Rating: 5

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