Sunday, March 5, 2017

Yes, Monetary Policy Works in a Liquidity Trap, and Fiscal Stimulus Stimulates

Here's a nice short article in VoxEU by Benoit Mojon showing the decoupling of US and Euro interest rates after the Taper Tantrum, and the increase in US interest rates after the US election of Donald Trump raised likelihood of fiscal stimulus. 

Here are the key graphs: 

Interestingly, the expected Trump fiscal stimulus increased interest rates in the US, and in Europe, although to a lesser extent. But, longer term, European rates rose just as much. Interesting stuff.

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