Mark Carney: evaluation

Transcript context

…What’s the model you use for thinking about why the liquidity trap may not have applied? Because as you well know, interest was being paid on reserves. It wasn’t identically equal to the T-bill rate, but it was very close. T-bill markets are extremely liquid. Why are bank reserves and T-bills sufficiently different assets to give monetary policy traction? Well, of course, bank reserves exist for settlement between banks. Bank reserves are not liabilities that the commercial bank can actually act on and lend out. Furthermore, of course, with quantitative easing, banks were in effect forced to carry these reserves, blessed with these extra reserves in order for the central bank, the Fed in this instance, to buy bonds. The reason the liquidity trap has not existed particularly in the United States, and UK as well, has been because financial conditions have been easier than they otherwise would be because of asset purchases and other measures that have been put in place. What I would argue — sorry, Tyler — is that there comes a point, even with those where — for example, I would say that Japan very close in fact has been in a liquidity trap. As you know, right now, we Americans are all debating as to whether the measured higher rate of price inflation will simply be transitory. Other than market prices, which is obvious, what are the indicators we should be looking at more closely that are perhaps a little underrated?…

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