Interesting Relationship: Interest Rates and Unemployment
Cutting interest rates raises unemployment!
Brilliance from Krugman. As always:
Of course, we all understand that the correlation runs the way it does because the Fed cuts rates in an effort to fight recessions.
But here’s the thing: a lot of people are asserting that because unemployment has risen along with the budget deficit, fiscal expansion has failed or even made things worse. Why don’t we apply the same standards to monetary policy?
OK, I actually know the answer: it’s ideological. Fiscal expansion bothers people because it violates the dogma that government is the problem, not the solution, whereas monetary policy has become accepted as a mainly technocratic thing without political implications.
But if we treated fiscal policy the same way we treat monetary policy, it would be clear that we need more stimulus, not less.
