"Does a “Liquidity Trap” Ever End?"

From Pragmatic Capitalism:

Brad Delong has a very smart post over at Equitable Growth discussing the recent Feldstein commentary on inflation as well as Paul Krugman’s Liquidity Trap model of the current economic environment. Brad, unlike Paul, is not so quick to assert that the Hicksian model that Dr. Krugman has been using, is a big success.  He says:

The problem is that the macroeconomics that Paul Krugman learned at Jim Tobin’s knee wasn’t just 1930s-style Hicks-Hansen Keynesianism. It was the 1970s adaptive-expectations Phillips Curve neoclassical synthesis–nearly the same stuff that I first learned at Marty Feldstein and Olivier Blanchard’s knees in the spring of 1980. That is the framework that Marty is using know, and that generates his puzzlement. That framework had a short run of 1-2 years, a medium-run transition-dynamics phase of 2-5 years, and a long run of 5 years or more baked into it. You cannot–or at least I cannot–just throw away the medium run transition dynamics* and the declaration that the long run Omega Point is five years out, and say that mainstream economics does well.

Another way of saying this is that we’ve supposedly had a “Liquidity Trap” in Japan for several decades and now we’re starting to get very long in the tooth in the “Liquidity Trap” in the USA.  Given the apparent permanence of this environment we have to wonder at what point we begin to question whether we’re in a “Liquidity Trap” at all....MORE