Lars E.O. Svensson
Princeton University,
CEPR and NBER
Brookings Panel on Economic Activity, September 2004
Revised November 2004
The Bernanke-Reinhart-Sack paper mostly focuses on alternative policies in a liquidity trap to affect expectations of future interest rates. But the problem in a liquidity trap is rather to raise private-sector expectations of the future price level. Increased expectations of the future price level are likely to be much more affective in reducing the real interest rate and stimulating the economy out of a liquidity trap than further lowering of already very low expectations of future interest rates. Therefore, monetary-policy alternatives in a liquidity trap should be assessed theoretically and empirically according to how effective they are in affecting private-sector expectations of the future price level.