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Krugman explains the saving glut and liquidity traps

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Nobel Prize winning economist Paul Krugman posted an interesting analysis on the relationship between savings and investment and the interest rate. 

In essence he says that:

Which brings us to the current state of affairs. Right now the interest rate that the Fed can choose is essentially zero, but that’s not enough to achieve full employment. As shown above, the interest rate the Fed would like to have is negative. That’s not just what I say, by the way: the FT reports that the Fed’s own economists estimate the desired Fed funds rate at -5 percent.

Indeed, the liquidity trap is why monetary policy has its limits.  We saw how this prolonged the Great Depression, and today’s situation is eerily similarly to those times.  The current picture of the savings glut shows that the optimum interest rate for savings and investment to balance each other is below zero.

Elsewhere, via Brad Delong’s blog I also found a 2006 introduction to John Maynard Keynes’ seminal work The General Theory of Employment, Interest and Money by Paul Krugman. It’s an interesting read.

Written by defennder

May 3, 2009 at 4:46 PM

One Response

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  1. Hi, good post. I have been wondering about this issue,so thanks for posting. I will definitely be coming back to your posts.


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