Business

Is The Economy Self-Correcting? (Wonkish)

krugman.blogs.nytimes.comVia Mark Thoma, there have been multiple interesting responses to my post about what has and hasn’t worked in macro since 2008. I guess the piece was useful, if only for focusing debate.

What I want to focus on in this post is the suggestion by Brad DeLong that I missed a failed implication of Hicksian analysis — that demand shocks should be short-term in their effect. Actually, and very unusually, I think Brad has this wrong. The proposition of a long-run tendency toward full employment isn’t a primitive axiom in IS-LM. It’s derived from the model, under certain assumptions. But there’s good reason to believe that even under “normal” conditions it’s a very weak, slow process. And under liquidity trap conditions it’s not a process we expect to see operate at all.

krugman.blogs.nytimes.com

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