The Limits to Monetary Policy Effectiveness
During the Great Moderation, when advanced economies entered a relatively long period of a stable growth, it was believed that monetary policy is a sufficient tool for keeping the economy on its equilibrium growth path. Nonetheless, if recent worries on the advent of secular stagnation (with its chronic demand weakness and permanent excess of savings) materialize, monetary policy may be rendered to be ineffective as an instrument stabilizing economy. This may set the scene for a return of an active fiscal policy in a similar manner as it was in the 1930s during the Great Depression. If the advanced economies fail to escape a secular stagnation, central banks will still remain independent, however their monetary policy might become an auxiliary tool for supporting fiscal policy (as it is with quantitative easing programs). It may even become an integral element of fiscal policy, especially if budget deficits get partially financed with overt money creation in line with recent proposals. (original abstract)
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