Thinking About #Macroeconomics/ Paul #Krugman

Not all readers of this blog have been reading it consistently for the past few years, and as I read some of the comments it’s clear that many people don’t know where I’m coming from on macro issues. So it may be worth reiterating a point I’ve made before — that I’ve actually been very consistent on this stuff, and that there’s a simple model underlying almost everything I write about macro.

My view is that we had a deleveraging shock that landed us in a liquidity trap — a situation in which short-term nominal interest rates are close to zero, so that conventional monetary policy has no traction.
And I had worked out the implications of a liquidity trap long ago. In a liquidity trap even large increases in the monetary base aren’t inflationary; even large government deficits don’t drive up interest rates.
And so it has proved:

What’s striking to me is the way people who reject this framework keep inventing special reasons to explain why things aren’t going the way they “should” — e.g., it’s QE2 that’s holding down those interest rates, so just you wait, or the surge in commodity prices (driven by growth in emerging markets) is a harbinger of huge inflation here, never mind the flatness of wages. But as I see it, things have gone pretty much the way a model that we had before the crisis said they would.