Does Ed Balls Believe in the Liquidity Trap?
First, Paul Krugman’s definition of a liquidity trap:
In a liquidity trap the problem is that the markets believe that the central bank will target price stability, given the chance – and hence that any current monetary expansion is merely transitory. The traditional view that monetary policy is ineffective in a liquidity trap, and that fiscal expansion is the only way out, must therefore be qualified: monetary policy will be effective after all if the central bank can credibly promise to be irresponsible, to seek a higher future price level.
(I’ll pause here while we wait for the inflation hawks to stop laughing about the BoE’s credibility in seeking a “higher future price level”. Have you all finished? Good, let’s continue.)
Guy Johnson: Ed Balls, you do have your economics GCSE, we all know that. Do you think the change in the [BoE] mandate will lead to higher inflation?
Balls: No, because I think the Bank of England will do its job, and it’s got a very clear remit to meet a symmetric target of 2% and that’s not changed.
My emphasis. Yes, I omitted transcribing the previous question in the interview where Balls talked about a liquidity trap and how monetary policy was “pushing on a string”… so shoot me. I also omitted the hilarious joke, where Balls says he has “not seen any sign of reluctance” from the BoE to “support growth”. Mr. Balls, that’s a good one.
Does Ed Balls really believe the “liquidity trap” is a problem, if he thinks the Bank of England “will do its job”? Answers on a postcard to No. 11 Downing Street.