Funniest Macro Line of the Month

Krugman, in the old paper, is talking about the helicopter. The problem is that once the helicopter is threatened, the central bank has already gotten in bed so deep with the banks that no one would believe him.

Mattyoung, The helicopter drop is not the point of his 1998 paper, it is temporary vs permanent money supply increases. (Nor is high inflation required.) Krugman could easily write a reply to my post by noting that it isn't the swap of cash for T-bills that makes the 1998 stimulus work, it's the creation of inflation expectations, so there is no contradiction. But of course the inflation expectations come from making the monetary injections appear permanent. So what the 1998 paper is saying is that even ordinary OMOs with T-bills are effective in a liquidity trap, if believed to be permanent. What bugs me about his recent posts is that he says things like "Period. End of story" when he knows it is much more complicated, and he has to know that his readers won't infer that he believes permanent money supply increases would work in a liquidity trap. I know from the online chatter of his supporters that most don't understand his true position. And of course the other amusing thing is that if his supporters actually went back and read the pages I quoted, they'd see him present cogent arguments for why monetary stimulus is more desirable than fiscal stimulus in a liquidity trap--he sure persuaded me!

Thanks for comment Scott, and I have followed this debate on the periphery; certainly not at the same depth as the pros. Krugman is contradicting himself, but he was originally wrong. (Confession, I have only read summaries of this paper and I will go back and read the whole thing) I brought up the helicopter as I think the only way to give us an expectation of permanent money increase is to bypass the banks.

My true thinking is the fed increases liquidity, but reserves pile up as the banks seek to make fewer but larger investments in the highest yield pay-offs. I see this happening because investors never believed that monetary transmission was the constraint, something else is constraining the economy and bankers will wait until the constriction is apparent and profitable investments appear. The more the fed eases, the bigger the bank war chest when we hit bottom.