Tag Archives: Inflation expectations

Liquidity Trap Kills Liquidity Effect

In his blog, John Cochrane registers disagreement with Larry Summers and reiterates his own argument that in a liquidity trap, interest rate policy does not have a liquidity effect and thus, only a long-run “expected inflation” or “Fisher” effect:

When the liquidity effect is absent, the expected inflation effect is all that remains. Inflation must follow interest rates.