Here is what Ben became also famous for : "As a Member of the Board of Governors of the Federal Reserve System on February 20, 2004, Bernanke gave a speech in which he postulated that we are in a new era called the Great Moderation, where modern macroeconomic policy has decreased the volatility of the business cycle to the point that it should no longer be a central issue in economics" and, therefore, what do we need Keynes for?
If this is not the proclamation of the triumph of monetarism then I am left wondering what it is.
And what about Japan? You may ask. Well, for the reasons expressed in the speech that I directed your attention to, according to Ben that couldn't happen in America. That speech was made to reassure America that a lost decade could not happen there and, indirectly, to criticise Japan.
Krugman used to view the concept of liquidity trap as an oddity, some thing so unlikely to happen that nobody, including himself, was willing to pay much attention to. However, he tells us that all that changed when while studying Japan under the Keynesian framework he built a model showing how easy it was for an economy to fall into a liquidity trap. All that was necessary was an external shock of sufficient magnitude to make the IS and LM curves to intercept at a negative interest rates level. I am sure you have seen that. He then went to alert people about the possibility of America falling into such a trap by starting to publish a series of articles about the return of Depression Economics, which Ben and many others completely ignore.
QE within the framework of the Keynesian model is viewed as insufficient to bring the economy quickly back into equilibrium at full employment because under a liquidity trap condition the printing of money is predicted not to cause inflation. However, writhing that same framework the printing of money is required in order not to aggravate the situation further. Interest rates have to stay as low as possible and money extra loose..
This later aspect is shared by both the monetarist and Keynesian schools, but not by what Krugman calls the very serious people or sometimes the Austerians. People like Ferguson, Alisina, Peter Schiff, the governor of the Bundasbank, etc.
However, it has to be said that Krugman thinks that it is possible to get out of a liquidity trap if the central bank makes a credible promise to behave irresponsibly
In order to understand what he may mean let's get some help from a monetarist.
"Under our current inflation-targeting monetary regime, the expectation of low inflation seems to have become self-fulfilling. Without an explicit increase in the inflation target or the price-level target (or the NGDP target), the Fed cannot deliver the inflation that could provide a significant economic stimulus"
It seems to mean the abandonment of the 2 % target and its replacement either directly or indirectly with much higher inflation rates.
Is Krugman being a monetarist? Yes that is true, but all Keynesians turned to monetarism when the preferred option for some reason (normally political) cannot be implemented. Moreover, monetary stimulus is always seen by all of them as an welcome complement.
