Since Krugman wrote the introduction to the latest edition of Keynes General Theory, which is where Keynes lays out the liquidity trap issue, this might be a source of embarrassment to a liberal, especially if he indeed has a conscience. But as Jan points out, in the world of Very Serious Macroeconomists, there are people walking around calling themselves New Keynesians, when really they are just Old Friedmaniac monetarists, with a little pre-Great Depression Irving Fisher, and maybe a dash of 19th century Wicksell too, thrown in on the side for good measure. And they get away with it. Somehow. Like Kudlow does.
New Keynesians like Krugman, Bernanke, Blinder, Yellen, etc. believe they have found a hammer, namely Irving Fisher’s real interest rate hammer, and so the whole economic world looks like a nail to them. Got an unemployment problem? Lower real interest rates. Got an inflation problem? Raise real interest rates. Life is simple, and life is good. It’s all there in Krugman’s 1998 paper – seriously, skim that piece.
In that world, we are encouraged to forget about fiscal policy – government debt to GDP ratios are too high already – just ask Reinhart and Rogoff – and so few developed markets nations have the policy “space” to use fiscal stimulus, ever again, apparently. Even if they have sovereign currencies. Instead, monetary policy is deemed hegemonic....Naked Capitalism
The Large Fly in Krugman’s New Keynesian Soup
Rob Parenteau, MacroStrategy Edge
