No Monster At The ZLB, Just Supply

Before Chuck Yeager broke the sound barrier in his experimental Bell X-1 aircraft, it was long thought by many to be an extremely difficult challenge if not impossible altogether. Many test pilots spoke of a monster that lay beyond the speed of sound, one ready to destroy any human machine attempting to go faster. In fact, a year before Captain Yeager’s triumph, Geoffrey DeHavilland was killed when his DH-108 disintegrated near the barrier, with many witnesses on the ground reporting a sonic boom.
In economics, there remains today a similar constraint though one not nearly as useful in fact as well as in theory. Economists loathe the Zero Lower Bound (ZLB) mostly because it is a limitation on what they might do. Nominal interest rates can’t be negative (yet), so getting monetary policy into the Twilight Zone of the ZLB is an experiment in fantasy.
Not for lack of trying, of course. The Japanese have been struggling with nominality for decades now. Western central bankers have been well aware of the Bank of Japan’s inability to make much of it, but instead of reworking their theories they blamed the Japanese for poor execution. Now a decade after the global monetary panic, nobody wants to talk much about QE at all anymore.

This post was published at Wall Street Examiner on July 3, 2017.