Just a year ago, Keynesians were telling us that the eurozone was stuck in a “liquidity trap” and that the ECB was “out of ammo”. Instead, Europe needed fiscal stimulus. Now markets are predicting that the ECB will raise rates within the next 12 months:
Obviously if the eurozone actually were stuck in a “liquidity trap” then it would be absolutely insane to raise interest rates this year.
For years I’ve been arguing that the sluggish NGDP growth we see in many developed countries is due to contractionary monetary policies. Central banks are perfectly capable of delivering faster NGDP growth, they simply don’t want to.
Prediction: Even as the ECB raises rates, we’ll still hear from the usual suspects that “fiscal austerity” is the problem, even though the US has done just as much austerity over the past 5 years, if not more.
Suggestion: Those who don’t think the supply side of the economy is important should take a look at Germany and Greece, both operating under the exact same monetary policy.