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Zero Lower Bounds

By Robert Waldmann

These are the usual confused thoughts mostly stimulated by this excellent post by Simon Wren-Lewis

You really should click the link and read that post. I will try to summarise it.

First professor Wren-Lewis argues that monetary policy would not have offset less contractionary fiscal policy in the past 6 years, because short term safe nominal interest rates were stuck at the zero lower bound. Second, he argues that "For whatever reason (resistance to nominal wage cuts being the most obvious), inflation ceases to be a good indicator of underutilised resources when inflation starts off low and we have a major negative demand shock." So the not at all absolute zero lower bound on changes in nominal wages matters too.

The problem with the argument that nominal interest rates can't be negative is that they are in Denmark and Switzerland. The logic was that interest rates on… Read More …