What are the economic effects of an interest rate cut when an economy is in the midst of a financial crisis? Under what conditions will a cut stimulate output and employment, and raise welfare? Under which will it have the opposite effects? The authors answer these questions in a general class...

The authors examine the inflation take-off of the early 1970s in terms of the expectations trap hypothesis, according to which fear of violating the public’s inflation expectations pushed the Fed into producing high inflation. This interpretation is compared with the Phillips curve hypothesis,...