In February 1999, the Bank of Japan announced that its call money rate would be zero ‘until deflationary concerns subside.’ Other than a temporary shift in 2001 and 2006, deflationary concerns remain. How effective was monetary policy? That point has been partially answered by the introduction of QE over and over and over again. The zero lower bound is to orthodox economists a major problem. They do not, however, have an answer for why it is now a global problem as the ZLB spread out everywhere.
In a speech to the ASSA in Boston, MA, in January 2000, Princeton professor Ben Bernanke criticized the Bank of Japan for its, in his view, reluctance to act. Though he applauded ZIRP and BoJ’s announced intention to keep it in place for as long as ‘necessary’ (without addressing why that might be forever forward), it was nearly enough as he said in conclusion:
Policy options exist that could greatly reduce these [economic] losses. Why isn’t more happening? To this outsider, at least, Japanese monetary policy seems paralyzed, with a paralysis that is largely self-induced. Most striking is the apparent unwillingness of the monetary authorities to experiment, to try anything that isn’t absolutely guaranteed to work.
There is enormous conceit in that statement, compelled by an inflated sense of duty. Why, if monetary policy isn’t working, does that necessarily lead to more of it? The easy answer is because that is the task central banks have given themselves, covered politically by governmental paralysis on any central bank question. The more central banks fail, the easier they cry ‘independence.’
This post was published at David Stockmans Contra Corner on June 22, 2016.
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