Less Than Zero

Paul Krugman says he’s been a bit surprised about inflation dynamics during the Great Recession. Of course the people who thought a giant increase in the monetary base would automatically be inflationary have been proven wrong, but we haven’t seen the kind of “clockwise spiral” that would have pushed us below zero:

He attributes this to “[d]ownward nominal rigidity — the great difficulty of actually cutting wages and many prices.” I agree that this is an important factor. But I think an equally important role is being played by the Federal Reserve’s meandering behavior. As Krugman has shown elsewhere, monetary policy near the zero bound is all about expectations and credibility. What I think’s happened is that with Ben “Making Sure ‘It’ Doesn’t Happen Here” Bernanke at the helm, the Fed has successfully embedded the expectation of non-deflation. People (or at least the people who matter) know that the Fed will push the panic button and show Rooseveltian resolve to set things aright. But contrary to what I would have expected three years ago, he’s shown no inclination to reach into the Helicopter Ben toolkit to actively reflate a depressed economy that’s not teetering on the brink of a deflationary spiral. So we kind of bounce along, with no new disasters really striking after the terrible winter of 2008-2009 but no catchup and real recovery either.