I’d say the answers are no and no. Here’s Tyler Cowen:
When it comes to Japan and the Japanese lower bound, the empirical evidence seems to show that “standard theory” predicts quite well and the stranger zero bound theories do not predict well. Here is Braun and Korber:
“We show that a prototypical New Keynesian model fit to Japanese data exhibits orthodox dynamics during Japan’s episode with zero interest rates. We then demonstrate that this specification is more consistent with outcomes in Japan than alternative specifications that have unorthodox properties….”
Those same zero bound Keynesian models predict that economies should have quite volatile responses to real shocks, yet they do not:
“We also considered specifications of the model that have larger government purchase multipliers and some which also exhibit unorthodox predictions for the response of output to labor tax and technology shocks. We found that these specifications are difficult to square with the fact that the period of zero interest rates in Japan between 1999 and 2006 was a period of low economic volatility.”
That made me think of 2011, when Japan experienced the largest natural disaster to hit a developed country in my lifetime. A disaster that shut down the entire nuclear power industry for years (an industry that had supplied one fourth of Japan’s electrical power.) A disaster that killed 20,000 people. A disaster that occurred when interest rates were stuck at the zero bound. This graph shows the impact of the March 2011 tsunami on Japanese unemployment:
See the effect? Neither do I. The basic problem is that the zero rate models assume that Japanese monetary policy is passive. But it’s not, indeed the Bank of Japan has stabilized the Japanese price level more effectively that any other country in human history. And yes all you Austrian readers, I’m including the gold standard era. Japan’s price level was 100.0 in March 1993, and it’s 99.0 right now, almost 20 years later. The only changes during that period was a jump of a couple percent in the late 1990s when the national sales tax was added, and a tiny rise and fall in 2008 when world oil prices spiked. That’s it.
Because the BOJ is successfully targeting the price level at 100, by raising rates and reducing the monetary base when inflation threatens, and cutting rates back to zero and doing QE when deflation threatens, the NK zero bound models have no applicability to Japan. That’s why real shocks don’t push Japan into a deep recession.
So how about Britain? I’m afraid they don’t work there either. Unlike Japan, The BOE has not been able to hit Britain’s 2% inflation target. Indeed inflation has been accelerating in recent years:
This is why the BOE refrained from taking any steps (such as QE) to stimulate the economy during their last meeting. Does a central bank that refuses to ease because inflation has averaged 3.3% over 5 years face a “liquidity trap?” Keynes would roll on the floor laughing if he were alive today and heard some of the NK explanations for Britain’s current predicament.
BTW, I believe the BOE should be told to ignore inflation and target NGDP, which is why I favor additional monetary stimulus in Britain (and Japan.) But why should anyone expect them to do this when the British government has given them a target that calls for tightening?
If the Cameron government wants more demand, all they have to do is ask for it.
PS. I don’t recall any NK bloggers mocking Merkel’s call for (fiscal) demand stimulus in Germany a few weeks back, but perhaps I missed something that people can point me to. Recall that Germany has been opposed to monetary stimulus from the ECB.
PPS. Sweden is pursuing exactly the same tight money policies as Britain, indeed even tighter. And yet unlike Britain they are not at the zero bound. New Keynesians need to open their eyes and recognize that the zero bound isn’t the fundamental problem; ultra-conservative central banks are the problem.