What’s at stake: As we approach Jackson Hole, monetary policymakers are considering how to redesign monetary policy strategies to better cope with a low r-star environment.
The new murky economics
Paul Krugman writes that we’re no longer in the simple, depressed-economy world anymore. Early in the crisis, liquidity-trap macroeconomics had become the story of the day. And the basic message of the models — that everything changes when you hit the zero lower bound — was being overwhelmingly confirmed by experience. It was all beautifully hard-edged: a crisp boundary at zero, a sharp change in the impact of monetary and fiscal policy when you hit that boundary.
Paul Krugman writes that things have now gotten a bit murky. We’re no longer in a liquidity-trap macroeconomic situation, but we’re not either in what we used to call a normal macroeconomic situation. We are, if you like, half-out of the liquidity trap, with one foot on dry land — but the other foot is still hanging over the edge, and it wouldn’t take much to topple us right back in.
The new environment
Gavyn Davies writes that when the FOMC increased rates last December they seemed fairly sure that they knew what “normal” meant. Now, they seem to have lost that certainty, and have simultaneously shifted their central assessment of the “normal” level for short rates sharply downwards. Ylan Q.