Is this grandma’s liquidity trap?

I say no and David Andolfatto agrees:

In grandma’s liquidity trap, the real interest rate is too high because of the zero lower bound. Steve [Williamson] argues that in our current liquidity trap, the real interest rate is too low, reflecting the huge world appetite for relatively safe assets like U.S. treasuries.

If this latter view is correct, then “corrective” measures like expanding G or increasing the inflation target are not addressing the fundamental economic problem: low real interest rates as the byproduct of real economic/political/financial factors.

I remain surprised at how many policy discussions fail to draw this basic distinction.

Hat tip goes to Mark Thoma.

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