Many conservatives seem to think that monetary policy is the best way to escape recessions and prevent bubbles. At the moment however, we are limited in our monetary policy solutions since the most powerful tool - lowering short term interest rates - is not workable because those interest rates are near zero.
I wonder though if using monetary policy alone leads to situations like this. I am no economist (ignore the fact that it was one of my majors in undergrad - it wasn't a very rigorous program), but it seems that at least through the 2000s we were willing to decrease interest rates to get out of a recession but were less willing to increase interest rates to slow down a boom.*
If this is true, how often does monetary policy operate like this? It seems similar to how we actually practice Keynesian policies - where government deficit spends in recessions but does not run surpluses in boom times. They call this one-eyed Keynesian policies. Do we use one-eyed monetary policies?
Either way - it seems clear that at times - this being one of them - monetary policy is unlikely to save us. If only we have the political will to use more fiscal policy.
*Paul Krugman says that fed policy did not cause the bubble. I can't tell though if he is saying then that fed policy could not have prevented the bubble. What would have happened if the fed had increased interest rates in 2005ish? Would it at least have allowed them to lower interest rates more now to get out of the recession?
