Matthew Yglesias: Monetary Policy in an Emergency: I found this 1999 Paul Krugman article about Japan relevant to our contemporary situation:
If a zero short-term interest rate is not enough to generate an economic recovery, and if deficit spending has reached its limits, then there are only two serious remaining policy options. One is to extend open-market operations to those assets whose prices can still be driven up – most obviously, longer-term bonds and foreign currencies. The other is to try to bootstrap a recovery by convincing savers and investors that the future will bring not deflation but modest inflation, something that can best be accomplished by announcing an explicit inflation target, but could possibly be achieved through a less explicit policy of “quantitative easing” – essentially, producing attention-grabbing increases in the monetary base. In practice such policies are not alternatives but complements: unconventional monetary policy today should be used as the opening salvo of a campaign to convince the private sector that inflation rather than deflation will prevail tomorrow.
Such proposals are the natural implication of utterly orthodox monetary analysis, applied to Japan’s unusual plight. If you believe that an economy is in a liquidity trap, and that fiscal policy has reached its limits – both propositions about Japan that are hard to deny – it is hard to avoid the conclusion that in such circumstances to adhere to conventional notions of monetary prudence is to flirt with catastrophe, and that policies that would normally be regarded as irresponsible become not only reasonable but essential.
But although this conclusion is hard to avoid, influential Japanese are still trying. Say to them that the Bank of Japan should announce a minimum inflation target of at least 2 percent, or that there should be a clear commitment to increase the monetary base at an annual rate of at least 15 percent, and you get the feeling that you have proposed an immoral act. In public the BOJ’s leadership has adopted a posture that is best described as philosophical, full of skepticism about its ability to do much to turn the economy around. And since monetary policy in a liquidity trap must work mainly through its effect on expectations, such diffidence is not only an abdication of responsibility; it undermines the effectiveness of whatever monetary expansion actually takes place.
I hear a lot of people say that Krugman was better back in the nineties before he became “shrill” and/or “partisan.” I think this is a misunderstanding. I think that if you just turned this into an article about the United States of America that was full of the names of prominent American political, economic, and media figures it would just strike people as a shrill or extreme article. The fact that it’s a piece about a far-off land full of unknown “BOJ leadership” softens the blows, and the fact that the main point is that foreigners (rather than, say, politicians you may admire) are screwing up makes people non-defensive about the argument. But it’s impossible to write clear prose about American politics for an American audience without sounding shrill or hackish or something to some large segment of the population, we all know and care too much.