Article;
Auto-correct not working, wonkish (US).
Comment;
When demand goes down
after the shock, prices will come down which will increase real wages relative
to prices which will, again, push the aggregate demand that restores
full-employment. Interest rates in this scene will go down because people will
save more because of low prices. People will save more and the economy will
invest more. This how market works to restore full-employment... Precisely
called Pigou-Effect... And if interest rates are at zero it will push real
interest rates in negative where the central bank should literally be paying
for new investment (may be the government too) which is what the negative
interest rates suggest... In this situation when we try to increase monetary
base it increases expected inflation which in a liquidity trap situation is
difficult to achieve because people are hoarding cash and expecting that prices
will come down once the Fed's policy to target inflation is over. Short-term
inflation targeting will not help; we need to target prices for an unlimited
period of time to break liquidity-trap…
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