We're Not in a Liquidity Trap
By Bryan Caplan
Mankiw shows two diagrams that many will misinterpret as evidence that we’re in a Keynesian liquidity trap. What’s a liquidity trap? Roughly speaking, it’s a situation where monetary policy has no effect on aggregate demand because interest rates are too low or banks are too worried to lend.
One of Mankiw’s diagrams shows a vertical jump in the monetary base. The other shows a vertical jump in excess bank reserves. In you look closely at the diagrams, however, you’ll notice that their scales are different. The monetary base jumped by over $300B. Excess reserves jumped by less than $60B. Contrary to the liquidity trap, the new money is not flying straight into bank vaults and locking the vault door behind it. Not even close.
P.S. Mankiw sent over a clarification:
The latest data on the base is Oct 22.
The latest data on the excess reserves is Sept 1.
That could explain the difference.
Who wants to bet on this? When the excess reserve data for October 22 come out, will the number be over $300B? $200B?