Some economists doubt the Federal Reserve's ability to spur growth by expanding monetary policy, because they think the U.S. is in a liquidity trap. The idea is essentially that more credit won't help if businesses don't sense any demand to expand and consumers insist on saving instead of spending. But not everyone is convinced. Economist Tyler Cowen provides twelve reasons he doesn't believe the U.S. is in a liquidity trap. Here's my favorite:
The stock market responded positively to the announcement of QEII and the TIPS spread went negative; both are the opposite of what a liquidity trap model would predict. Markets don't seem to think the liquidity trap idea is a very useful one and that alone creates real positive effects from monetary policy. If markets don't believe in a liquidity trap, that's enough for the trap not to bind.
Read the full story at Marginal Revolution.
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