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Paul Krugman: IS-LM RULZ!!

Paul Krugman:

Been There, Done That: Monetary and Fiscal Policy Edition: The remarkable thing is the desperation with which inflationistas keep conjuring up new explanations…. Instead of saying that a simple IS-LM framework… has worked very well--and that whatever other model they were using failed the test--they keep coming up with excuses. It’s Obamacare! It’s interest on reserves! It’s the decline of traditional marriage! OK, they haven’t used that last one yet, but give them time.

And let me admit that I’m especially exasperated…. Look, please, at my [1999] Brookings Paper on the liquidity trap…. You’ll find me explaining that once you’re up against the zero lower bound:

  1. Changes in government spending are still effective… with full Ricardian equivalence.
  2. Unless you break that equivalence, it doesn’t matter how government spending is financed….
  3. Even very large increases in the monetary base will have no effect if seen as temporary.
  4. Large increases in the base are likely to show up partly in increased cash holdings, partly in a large rise in excess bank reserves; this rise in excess reserves tells you nothing about whether the problem lies in the banking system….

So you can see why it was so frustrating…. Look, we have a framework here that has been a stunning success in practice. Why won’t you guys admit it?

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