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READING KEYNES AT THE ZERO LOWER BOUND: THE GREAT DEPRESSION, THE LIQUIDITY TRAP, AND UNCONVENTIONAL POLICY

Published online by Cambridge University Press:  20 June 2018

Richard Sutch
Richard Sutch*
Affiliation:
Distinguished Professor Emeritus of Economics, University of California, Riverside; and Research Associate, National Bureau of Economic Research. Contact the author at [email protected].
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Abstract

John Maynard Keynes’s analysis of the Great Depression has strong parallels to recent theorizing about the post-2008 Great Recession. There are also remarkable similarities between the two historical episodes: the collapse of demand for new fixed investment, the role of the zero lower bound liquidity trap in hampering conventional monetary policy, the multi-year period of near-zero short-term rates, and the protracted period of subnormal prosperity. A major difference between then and now is that monetary authorities in the recent situation actively pursued an unconventional policy with massive purchases of long-term securities. Keynes couldn’t convince authorities of his era to pursue such a plan, but it was precisely the monetary policy he advocated for a depressed economy stuck at the zero lower bound of nominal interest rates.

Type
Articles
Information
Journal of the History of Economic Thought , Volume 40 , Issue 3 , September 2018 , pp. 301 - 334
Copyright
Copyright © The History of Economics Society 2018 

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Footnotes

I have received valuable advice from Ingo Barens, Michael Bauer, Susan Carter, John Cochrane, William Collins, Robert Dimand, Barry Eichengreen, Christopher Hanes, Joshua Hausman, Matthew Jaremski, Sarah John, Stephen Marglin, Gabriel Mathy, Pierluigi Molajoni, Larry Neal, Haelim Park, Peter Temin, and participants at the History of Economics Society Conference at Michigan State University, 2015. The editor and the readers for the Journal of the History of Economic Thought provided welcome guidance concerning the structure of the argument and many helpful specific suggestions. Financial support was provided by the Edward A. Dickson Endowment, University of California, Office of the President.

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