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This is one of the best essays on recent macroeconomic history. Thank you. Maybe one small mistake? Paul Krugman's approach to escape the liquidity trap was to channel the "expectations imp". Central Bankers would have to do adopt a "whatever it takes approach", credibly promising to be irresponsible to achieve a higher rate of inflation, let's say 4%, which should be sufficient to escape the liquidity trap: At the ZLB, 4% inflation would then correspond to a real rate of negative 4%, which should generate enough traction. However, it was Lars Svensson's idea initially (?) to target the value of the currency to escape the liquidity trap (Paul was actually somewhat sceptical of this approach, if I remember correctly). See: "Escaping from a Liquidity Trap and Deflation: The Foolproof Way and Others" (Svensson, 2003) Of course, not every country in the world can adopt this approach at the same time. In that sense, this approach might not be foolproof after all if all advanced economies are stuck in a "secular stagnation equilibrium". One should note though that the Czech National Bank adopted Lars' approach in between late 2015 and early 2017 for about two years, pegging the value of the Czech Koruna to the Euro. While the balance sheet quickly swelled to about 80% of GDP as a result of FX interventions, the approach did work like a charm and inflation rose, unemployment fell, and the Czech economy escaped the ZLB. Foolproof indeed !?
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Oct 25, 2018