A few months ago I got into a series of arguments with some old-style Keynesians who kept insisting that monetary policy is ineffective once nominal rates hit zero. “Period. End of story.” I kept trying to explain that unconventional monetary policy could still be highly effective; the problem was that we needed to be much more aggressive. I pointed to FDR’s currency devaluation in1933 as an example of how an aggressive monetary policy could boost NGDP rapidly, even with interest rates near zero and much of the banking system shut down for months.
Finally my views are getting some respect, and from some unlikely quarters. First the NYT does a piece on my blog, and now there is this post from the Time’s Nobel Prize winning columnist:
Two months ago I wrote that there were hints of a relatively quick economic turnaround in Britain. Now those hints have gotten much stronger. Basically, aggressive monetary policy and the depreciation of the pound are giving Britain a boost relative to other advanced countries.
If only the US had followed a similar course, instead of relying almost completely on costly fiscal expansion, which has only a modest impact on the path of NGDP over time. Still, it’s not too late for US to learn some lessons from the Brits.
Ideas have consequences. Because so few people understood that monetary policy could be highly effective at zero rates, and because the only person on the left who did understand this mostly kept his mouth shut, a monetary alternative to fiscal stimulus was never seriously considered. On the right, lots of economists understood that monetary policy can be very effective at raising NGDP sharply when interest rates are zero. As far as I can tell, most of them failed to loudly condemn Fed policy because they thought that no further stimulus was needed. Thus when the Congressional debate over fiscal stimulus took place last winter, the right never used their most powerful argument. They deserved to lose the debate.
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