Paul Krugman responds to Scott Sumner
The post is here, excerpt:
My view, which I thought was pretty clear, is that the liquidity trap
is real: no matter how much the Fed increases the monetary base, it has
no effect, because it just substitutes one zero-interest asset for
another. If the Fed could credibly commit to inflation at rates higher
than the 2-ish percent target it’s already believed to have, that would
be effective. But right now I don’t see that as a realistic option,
hence the emphasis on fiscal policy and bank recapitalization.
Sumner outlines in detail a number of ways the Fed might increase aggregate demand, through monetary operations, without simply substituting one zero-interest asset for another. So I don't yet see how Krugman has responded to or even recognized Sumner's points. It also seems that the Fed can announce an inflation target of, say, four percent a year. That may not be one hundred percent credible, but if presented as an alternative to the trillions of dollars of bailouts, I believe it could be reasonably credible (and indeed popular) and of course it would become more credible all the time as the Fed's monetary policy was observed. Bennett McCallum has written persuasively on how to establish central bank credibility when such a course is welfare-improving. Sumner himself wrote:
One key to making the policy credible (as many have already argued) is
to set an explicit nominal target, and commit to make up for any
shortfall this year with even faster nominal growth in the future (and
vice versa.) I know that your [Krugman] expectations trap argument raises
questions about credibility. But explicit targets tend to be more
credible because it is embarrassing for policymakers to go back on
their word–they don’t like to lose credibility (for good reasons.) And
Bernanke, et al, already have reputations very different from the
members of the BOJ.
I don't myself agree with all of Sumner's points (especially his causal account of what happened), but again I don't see that Krugman has responded to the substance of the letter.
I should add that I don't think anyone (I'm not talking about Krugman here) has responded to the claim that quantitative easing, and other monetary reforms, could substitute for a very expensive fiscal stimulus. (It's much more common to bash "the Treasury view.") Usually there is simply a brush-off to the effect that we already are trying some monetary innovations.
Addendum: Arnold Kling offers comment. Sumner responds too.