Edward Conard

Top Ten New York Times Bestselling Author

  • “Unintended Consequences offers deep and well-argued analyses on almost every issue.” - The New York Times
  • “Unintended Consequences is far smarter and more thought-provoking than most economics written for the general public” - Greg Mankiw, Harvard University, Former Chairman of the Council of Economic Advisors
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
  • “Unintended Consequences represents the most cogent and persuasive analysis of the Financial Crisis to date.” - Andrei Shleifer, 1999 John Bates Clark Medal Winner
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “Unintended Consequences should be read by anyone who takes for granted the superiority of progressive taxation and has not thought carefully about the trade-offs involved.” - The New Republic
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
  • “A full-throated defense of economic dynamism.” - The Wall Street Journal
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
Upside of Inequality Oxford Unintended Consequences

AI Summary. The authors present a framework in which temporary disruptions like banking crises and excessive debt, along with structural factors like demographic decline and rising inequality, can push natural interest rates below zero, and argue that a negative natural rate combined with interest rates stuck at zero is necessary for a liquidity trap.

Gauti Eggertsson and Sergey Egiev National Bureau of Economic Research
Date Posted:
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.@GautiEggertsson and @SEgiev note the difficulty of achieving negative nominal rates and argue that big downturns have resulted from a negative natural real rate – driven either by a crisis or secular stagnation – combined with stubbornly low inflation.

What causes liquidity traps in major economic downturns?

Core argument: The paper argues that a negative natural interest rate and the zero lower bound are both necessary conditions for a liquidity trap, applying a single framework to the U.S. Great Depression, the U.S. Great Recession, and Japan's Long Recession.

This paper presents a unified framework to explain three major economic downturns: the U.S. Great Depression, the U.S. Great Recession, and Japan’s Long Recession. Temporary economic disruptions, such as banking crises and excessive debt accumulation, can drive natural interest rates into negative territory in the short term. At the same time, structural factors, including demographic decline and rising inequality, can depress natural interest rates over short and long horizons. A negative natural interest rate and the zero lower bound (ZLB) are necessary conditions for a liquidity trap. Credible monetary policy can counteract the adverse effects of short-run liquidity traps. Diminished monetary policy credibility or persistent negative natural rates may necessitate fiscal interventions. The framework sheds light on the macroeconomic challenges of low-interest-rate environments and underscores the central importance of policy regimes.

Takeaways by Macro Roundup® AI

  1. The paper argues that a negative natural interest rate and the zero lower bound are both necessary conditions for a liquidity trap, applying a single framework to the U.S. Great Depression, the U.S. Great Recession, and Japan's Long Recession.
  2. Temporary disruptions such as banking crises and excessive debt accumulation can push natural interest rates negative in the short run, while structural factors including demographic decline and rising inequality can depress them over short and long horizons.
  3. Credible monetary policy can counteract short-run liquidity traps, but diminished monetary policy credibility or persistent negative natural rates may necessitate fiscal intervention, according to the framework.

Related Articles:

  • Liquidity Traps, Gobal and Local (Somewhat Wonkish) — Europe's weak domestic demand, reflected in core inflation of 0.6%, is exported globally through large current account surpluses, while low inflation interacting with the zero lower bound on interest rates keeps policy from reaching equilibrium. Liquidity traps can persist locally despite international capital mobility when domestic demand stays weak.
  • The Puzzling Persistence of Financial Crisis — Financial crises are costly, with average declines of 5.5% of real GDP and median fiscal costs of 16% of real GDP to resolve distressed banks. The authors identify four categories of causal factors: politically motivated risk subsidies such as government support for housing credit, shifts in investor risk preferences, investor learning, and fraud.
  • Frying Pans and Fiscal Policy — The US economy remained significantly depressed for roughly a decade after the financial crisis, a lost decade the author argues could have been avoided with different policies. The evidence offered is the post-Covid recovery, in which major federal spending programs helped the economy regain lost ground in just over three years.
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