What

Have We Learned Since

2008?
Paul Krugman

Some annoying proposi>ons:

1. Complex econometrics never convinces anyone
2. Complex includes mul>ple regression
3. Natural experiments rule
4. But so do surprising predic>ons that come true

In the study of social phenomena, disorder is, it is true, the

sole subs>tute for the controlled experiments of the
natural sciences.


-- Frank Graham

Demand side: The liquidity trap as a baseline

r
LM

Y
IS

Predic>ons:

LiWle or no eect of even very large increases in monetary base
No crowding out from decits
Large scal mul>pliers
These were controversial predic>ons!

Very liWle eect of monetary expansion. Certainly no ina>on.

Did QE do anything?

Feel the crowding out!

Things we didnt expect: crucial role of liquidity

Whatever it takes

Things we didnt expect: nega>ve rates

But there is s>ll presumably a lower bound set by storage

costs for currency.

The supply side: what was the baseline? Probably the

accelera>onist Phillips curve:

But whats missing is the accelera>on, not the unemployment=>

ina>on causa>on

Strong evidence of downward nominal wage rigidity (courtesy

Olivier Blanchard)

Things we didnt expect: Very strong hysteresis (maybe)

What is the post-2008 experience trying to tell us?

Liquidity-trap economics passes with ying colors
Fiscal policy eec>veness conrmed
Monetary iy at best
Neo-paleo-Keynesian aggregate supply in short run
Long run seems to reinforce, not diminish, that case