Must-Read: Paul Krugman: What Have We Learned since 2008?: “Some annoying propositions…

…”Complex” econometrics never convinces anyone. “Complex” includes multiple regression. Natural experiments rule. But so do “surprising” ex-ante predictions that come true…. “In the study of social phenomena, disorder is, it is true, the sole substitute for the controlled experiments of the natural sciences.” — Frank Graham…. Demand side: The liquidity trap as a baseline…. Predictions: * Little or no effect of even very large increases in monetary base. * No crowding out from deficits * Large fiscal multipliers. These were controversial predictions!….

Very little effect of monetary expansion. Certainly no inflation. Did QE do anything?… Feel the [debt] crowding out!… Things we didn’t expect: crucial role of liquidity…. Things we didn’t expect: negative rates…. But there is still presumably a lower bound set by storage costs for currency….

The supply side: what was the baseline? Probably the accelerationist Phillips curve…. But what’s missing is the acceleration, not the unemployment => inflation causation…. Strong evidence of downward nominal wage rigidity (courtesy Olivier Blanchard)…. Things we didn’t expect: Very strong hysteresis (maybe)….

What is the post-2008 experience trying to tell us? * Liquidity-trap economics passes with flying colors. * Fiscal policy effectiveness confirmed. * Monetary iffy at best. * Neo-paleo-Keynesian aggregate supply in short run. * Long run seems to reinforce, not diminish, that case.