Wednesday, September 28, 2011

It's a liquidity trap

From Modeled Behavior:

In some cases people suspect that the Central Bank will vacuum up
every single dollar it dropped. In those cases, the dropping doesn’t
make anyone happier because they are just going to get hurt again by the
exact same amount.

This is a liquidity trap.

Hence, monetary policy won't work much, but fiscal policy has been limited by politics (in fact there has been no net fiscal policy - see here), so what can Ben do but try crazy things like the twist?

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