Paul Krugman

@paulkrugman ↗

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Last Checked Dec. 10, 2021

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Tue Oct 26 19:13:30 +0000 2021

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Paul Krugman @paulkrugman

And that in turn meant that at the margin M0 and Treasuries were perfect substitutes — two assets with the same (zero) rate of return. Conventional open-market operations therefore did nothing — investors were already saturated with liquidity, increasing M0 added nothing 6/ — PolitiTweet.org

Posted Oct. 26, 2021

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Paul Krugman @paulkrugman

So increasing M0 increases liquidity, which sort of rolls through the economy via lower interest rates. But from late 2008 on the interest rate on short-term Treasuries was essentially zero, which meant that holding monetary base was costless 5/ — PolitiTweet.org

Posted Oct. 26, 2021

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Paul Krugman @paulkrugman

That's why we call it a liquidity trap. Normal monetary policy becomes irrelevant. Huge increases in M0 had basically no effect on GDP. I'll get into slight complications in a second, but that's the key insight 7/ — PolitiTweet.org

Posted Oct. 26, 2021