Eventually the economy would reach a new equilibrium (which presumably would contain the same amount of private consumption as the old equilibrium).
I expect less consumption in the new equilibrium.
The Fed has limited power to affect real demand. Fed stimulus is only helpful if there’s unemployment due to something like deflation.
I predict step 3 causes a lot of unemployment.
We also seem to have different opinions about whether the ZLB is a real thing. Even at the ZLB I think the Fed can still stimulate demand with QE.
The Fed can stimulate nominal demand at the ZLB. But (outside of times when it’s correcting the results of overly tight monetary conditions) that means mostly more inflation, and has strongly diminishing returns on increased real consumption.
I expect less consumption in the new equilibrium.
The Fed has limited power to affect real demand. Fed stimulus is only helpful if there’s unemployment due to something like deflation.
I predict step 3 causes a lot of unemployment.
We also seem to have different opinions about whether the ZLB is a real thing. Even at the ZLB I think the Fed can still stimulate demand with QE.
The Fed can stimulate nominal demand at the ZLB. But (outside of times when it’s correcting the results of overly tight monetary conditions) that means mostly more inflation, and has strongly diminishing returns on increased real consumption.