kent nickell
Well-known member
I think that what Krugman means by the statement "even falling inflation raises real interest rates when nominal rates can?t fall" relates to the fact that in a deflationary environment 'cash is king' and the real spending potential of your money increases similar to the decrease in the real spending power of a given amount of cash in an inflationary environment.
We probably need a deflationary environment to let the economy heal on a more natural basis but hopefully stimulus packages will be used wisely to help cushion the fall. (ie unemployment benefits are usually completely spent thus stimulating the economy)
http://krugman.blogs.nytimes.com/2010/03/02/disinflation-in-recessions/
Paul Krugman
March 2, 2010
Disinflation in Recessions
Tim Duy http://economistsview.typepad.com/e...-eager-to-dismiss-deflationary-pressures.html is right ? the Fed, and equally importantly the ECB, is seriously underestimating the deflationary danger.
The basic rules haven?t changed: a slack economy puts downward pressure on inflation. Here?s one measure of core inflation, the Dallas Fed?s trimmed-mean personal consumption expenditures deflator, in two big recessions and aftermath, 1981-82 and 2007-2009: (graph at link)
There?s a hint here in the data of stickiness as inflation gets close to zero. But zero isn?t a magic number: even falling inflation raises real interest rates when nominal rates can?t fall.
And with no sign that we?re about to have morning in America, the deflationary trend seems set to continue. This is not good.
We probably need a deflationary environment to let the economy heal on a more natural basis but hopefully stimulus packages will be used wisely to help cushion the fall. (ie unemployment benefits are usually completely spent thus stimulating the economy)
http://krugman.blogs.nytimes.com/2010/03/02/disinflation-in-recessions/
Paul Krugman
March 2, 2010
Disinflation in Recessions
Tim Duy http://economistsview.typepad.com/e...-eager-to-dismiss-deflationary-pressures.html is right ? the Fed, and equally importantly the ECB, is seriously underestimating the deflationary danger.
The basic rules haven?t changed: a slack economy puts downward pressure on inflation. Here?s one measure of core inflation, the Dallas Fed?s trimmed-mean personal consumption expenditures deflator, in two big recessions and aftermath, 1981-82 and 2007-2009: (graph at link)
There?s a hint here in the data of stickiness as inflation gets close to zero. But zero isn?t a magic number: even falling inflation raises real interest rates when nominal rates can?t fall.
And with no sign that we?re about to have morning in America, the deflationary trend seems set to continue. This is not good.