Four days ago I said this:
But interest rate targeting (which underlies all of New Keynesian economics) has been an unmitigated disaster for American workers. And given that rates are likely to frequently hit the zero bound in future recessions (as trend productivity growth and population growth both slow) NK policy will fail us again and again in future recessions, i.e. when we most need it to be effective. Our current monetary regime is roughly like a car with a steering wheel that works fine—except when driving on twisting mountain roads with no guard rail. (emphasis added.)
Today Matt Yglesias said this:
Zero Bound Recessions: Again and Again
Let me just flag this post as something to think about that will play a role in questions I’ll be arguing further. The present economic dilemma in which setting short-term nominal interest rates to zero has failed to revive the economy looks exceptional from our present perspective but will in fact be typical of future recessions.
That’s because of factors related to population aging, slowing population growth, and eventual population decline.
And he concluded as follows:
Long story short, unless you want to be in a permanent depression you either need to find a way to put nominal interest rates below zero or else to permanently increase the background level of inflation to 4 or 5 percent a year to give yourself headroom.
Those would work (although a cashless society is obviously decades away—if only for political reasons.) But we don’t need 4% to 5% inflation, just 4% to 5% NGDP growth, level targeting. We could have avoided this recession with higher trend inflation, but we also could have avoided it with level targeting of NGDP.
PS. Enjoy your honeymoon in Argentina.