Must-Read: Paul Krugman: Prudential Macro Policy: Monetary

Must-Read: Once more: the importance of the zero lower bound in generating asymmetric risks, and the importance of asymmetric risks in generating a policy bias toward substantial easing. The reason is the same as the reason that you stand well out to sea when sailing from Point Arena to San Francisco…

Paul Krugman:: Prudential Macro Policy: Monetary:

It was easy to say what U.S. monetary and fiscal policy should be doing…

the indicated demand policy was pedal to the metal all the way–no need to worry about inflation, no reason to believe that deficit spending would cause any crowding out (in fact it would almost surely crowd in private investment, because such investment depends on demand.)… The right kept warning about a debased dollar, while the Very Serious People were obsessed with debt and deficits, so that in practice we didn’t do the obvious. But it was obvious.

Now, however, we’re arguably not too far from full employment…. Has the macro case for strongly stimulative policy gone away?… [On] monetary policy… uncertainty plays the central role…. Risks are asymmetric. Waiting too long [to raise interest rates] risks embarrassment and some cost of wringing out the extra inflation, but moving too soon risks long-term stagnation. Wait until you see the whites of inflation’s eyes!…