No reader responded, but I found, in today’s Financial Times, an intelligent argument debunking yesterday’s post “Keynes was right!“.
Does monetary policy become ineffective once interest rates reach zero? With negative interest rates, monetary policy can continue to work, regardless of how low interest rates go. Real negative rates are certainly possible, and often observed, when the rate of inflation is greater than the interest rate. But the relevant question is: Are negative nominal interest rates possible? Martin Sandbu, writing in the Financial Times, thinks so.
In liquidity trap models of the economy, the central bank is impotent. Although it can create money at will, this power no longer provides influence over interest rates or the ability to give the economy a boost.
The reason this is said to happen is a supposed
Tags: Keynes, Willem Buiter
[…] Martin believes that economic imbalances are now so severe that monetary medicine will have dangerous side effects, and explains why negative interest rates, though possible, may not be a good idea. For a more optimistic