Paul Krugman can’t understand why Larry Summers would say that an increase in interest rates in response to an overheated economy would result in a recession. I haven’t read Summers, but I’m pretty sure the answer is that low interest rates are baked into the expectations of investors to the point where any significant increase can cause a “taper tantrum.” Substantial losses in the stock and bond markets will lead to a decline in discretionary spending among investors, which will cause a recession.
The theory is based in recent history and makes sense. Let’s hope it is never tested.