From Jim D. to Mat:
>At 11:20 AM 12/12/00 -0600, you wrote:
>>"Krugman on the Liquidity Trap: Why Inflation Won't Bring Recovery In Japan,"
>>Jerome Levy Economics Institute, Working Paper No. 298, March 2000
>>Jan. A. Kregel
>>
>>Abstract
>>
>>Paul Krugman has argued that Japan is in a liquidity trap and that it can
>>recover only if the central bank there follows a policy of
>>"credible inflation."
>>This paper argues that Krugman's proposal, which is similar to what Fisher
>>proposed during the depression, is based on a different interpretation of the
>>liquidity trap from that proposed by Keynes and as a result his policy
>>recommendations can result in neither the elimination of the trap
>>nor in Japan's
>>economic recovery.
>
>I was a bit disappointed with this article, which seems obsessively
>concerned with "what Keynes really said." Sometimes the Keynesians
>can be more fundamentalist in their method than the Marxists.
Right, but Kregel's conclusion appears sounder than Krugman's (within
the confines of Keynesian economics, that is), at least to this
non-economist:
***** Clearly, in present conditions it is not the lack of a
credible inflation policy, but a credible interest rate policy that
is creating difficulty. As Keynes notes in relation to Fisher's
recommendations of inflating out of the Great Depression: "The
stimulating effect of the expectation of higher prices is due, not to
its raising the rate of interest (that would be a paradoxical way of
stimulating output --in so far as the rate of interest rises, the
stimulating effect is to that extent offset), but to its raising the
marginal efficiency of a given stock of capital" (JMK:VII, p. 143)
that is, raising the expectation of returns on new investment
relative to the rate of interest, and this requires a credible policy
that interest rates will not rise along with the rate of inflation,
which is to say that the Fisher relation and the quantity theory
should not hold. But the failure of a higher rate of increase in the
quantity of money to increase prices and the rate of interest is what
Krugman calls the liquidity trap and he identifies as the cause of
Japan's recession. In Japan even if the Bank of Japan could mount a
credible inflation policy, there would be no guarantee of the
stability of the yield curve. What is required is a credible policy
to ensure increased higher rates of return on investment, which may
or may not be accompanied by rising prices. In general in Japan it
has not. This requires credible increases in aggregate demand.
Traditionally in Japan this has come from exports. Given recent Yen
strength and other structural changes in global markets this is now
unlikely. What Japan needs is a credible policy of increasing the
return on producing for domestic demand. From a Keynesian point of
view it might be more appropriate to say that Japan is in an
underemployment equilibrium with deficient aggregate demand than in a
liquidity trap.
<http://www.levy.org/docs/wrkpap/papers/298.html> *****
Yoshie
