As the private sector deleverages, the economy faces the collective-action problem of a liquidity trap. The vicious cycle of lack of demand breeding even less demand can fundamentally alter the trajectory of the world economy if not handled properly. Look here for the latest new economic thinking on liquidity traps and how to prevent the economic tailspins they can create.

Blogs and Commentary

Are the dollar’s days as a reserve currency numbered?

Barry Eichengreen says yes. In his op-ed yesterday for the Financial Times, Eichengreen writes that a lack of US growth may lead to a fall in the dollar's popularity, and the result could be a global liquidity shortage.

An Economic Manifesto

Are we doomed to repeat the past? Even when we know better? Or do we not know better even when we should?

As economic crises persist around the world, mainstream economic theory has been unable to provide the solutions that will get us back on track, a situation reminiscent of the Great Depression. Paul Krugman and Richard Layard’s recent Manifesto for Economic Sense offers a diagnosis. “The reason is simple,” they write. “We are relying on the same ideas that governed policy in the 1930s.”

Robin Wells: We Are Greg Mankiw… or Not?

In this essay, Robin Wells warns teachers of letting the classroom become disconnected from the real world. Amid mass unemployment and economic turmoil, "instructors who lecture on the superiority of free markets without acknowledging the dysfunction in the wider economy are at risk of appearing out of touch and exacerbating antipathy towards economics."

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Papers and Research

by Michael Kumhof, IMF Research Department
and Jaromir Benes
October, 2012
by Richard Koo, Nomura Research Institute
September, 2010