Quite surprisingly, although there is so much talk about the liquidity trap and its close concept, the zero lower bound (see the definition of liquidity trap), the criticism of these concepts is rather thin. This is even more puzzling since the liquidity trap concept is known for a long time, ever since Keynes proposed it (Rhodes did not find any mention of it in the work By Keynes).
After the rather successful concept of BRIC economies, Goldman Sachs came in 2005 with another group of potential fast growing economies, the so called Next Eleven or N11. The group of the BRIC economies is quite known (Brazil, Russia, India and China) and the concept has been successfully adopted by politicians, researchers and media. However, this N11 idea has had until now a harder way to be generally adopted.
If you read opinions like the one by James Bullard (current president of the Federal Reserve of St. Louis), you might think that Quantitative Easing has been a succes and it has shown how monetary policy can be effective even when the interest rate is near zero.
The literature on exchange rate forecasting and the out of sample evaluation has basically started with the work by Meese and Rogoff (1983). They were the first to show that the basic random walk model outperforms other economic models of exchange rate in terms of forecasting.
This post is dedicated to a rather different topic than what has been discussed until now. It deals with scholarly publishing in the field of academic macroeconomics.
I discussed in a previous post about the failure of austerity measures in Portugal. Here, I would like to take a few steps back and look better at the theoretical foundations of austerity. Without being a theoretical presentation of austerity, this post rather discusses the empirical evidences regarding the effects of austerity measures.
To many, this is not news. However, given the persistence of IMF and other international institutions to insist with new austerity measures, it is still surprising.
Explaining the crises (not all, but many of them) as being liquidity traps is not only a misinterpretation but it also leads to false solutions. Just look at the case of Japan after two decades of “policy experiments”. (New) Keynesians like Krugman have reduced its stagnation problem to a liquidity trap and prescribed a wrong therapy which in the end failed to lead to real economic growth. But probably the case of Japan deserves a separate discussion.