Economics

Answering the Hardest Question in Economics

Economists are starting to understand why zero interest rates can spur inflation some times, send it lower others.

Now I get it.

Source: Bettmann/getty images

Xavier Gabaix, a New York University economist who gets far less attention than he should, has written what might prove to be the most interesting macroeconomic theory paper in years. The title, “A Behavioral New Keynesian Model,” isn't exactly exciting and the paper is still incomplete, but it might help resolve the most important and difficult macroeconomic debate in academia today -- whether low interest rates cause inflation, deflation or neither. And it might signal a sea change in the way macroeconomic theory gets done.

To continue reading this article you must be a Bloomberg Professional Service Subscriber.