Some economists such as a Nobel Laureate Paul Krugman are of the view that if the US were to fall into liquidity trap the US central bank should aggressively pump money and aggressively lower interest rates in order to lift the rate of inflation. This Krugman holds will pull the economy from the liquidity trap and will set the platform for an economic prosperity. In his New York Times article of January 11, 2012, he wrote,
If nothing else, we’ve learned that the liquidity trap is neither a figment of our imaginations nor something that only happens in Japan; it’s a very real threat, and if and when it ends we should nonetheless be guarding against its return – which means that there’s a very strong case both for a higher inflation target, and for aggressive policy …(of the central bank).
But does it make sense that by means of more inflation the US economy could be pulled out of the liquidity trap?
This post was published at Ludwig von Mises Institute on 08/25/2017.