How Would You Know?

How would you know if central banks were impotent at the zero lower bound?

You would have them target some nominal variable and then see if they can achieve that target. Wait, every central bank that I can think of off the top of my head does this: the Federal Reserve, BOJ, BOC, BOE, and the ECB. So, given that all of these central banks have had limited success at keeping inflation on target, monetary policy seems to have been pretty impotent.

Even if we restrict the analysis to countries that adopted the inflation target during the zero lower bound period (i.e. the BOJ and the Federal Reserve), we would find the same result: since the new target was adopted, in both cases 2% inflation, the target variable has been consistently below target.

Of course, all the market monetarists will respond by basically saying that inflation is always on target, so the recent experience only means that central banks are liars. This proposition is so ridiculous that I refuse to comment further on it.

For the remaining sane people in the room, the failure of inflation targeting central banks to have inflation on target is an indication of the ineffectiveness of monetary policy at the zero lower bound. Specifically, chronically low inflation means that the ability of central banks to loosen monetary policy (whatever the heck that means, everyone please stop referring to undefined terms like the 'stance' of monetary policy) has been severely limited over the last 8 years.

Actually, I do want to comment a little bit on the aforementioned ridiculousness. If your view is consistent with any empirical outcome, then it is unfalsifiable and should probably be ignored. Then again, this is probably true for the majority of economics, which is why your opinions, along with those of Post Keynesians, Austrians, and probably yet other heterodox school that I have never heard of, still exist.

Why can't we (unfortunately, I might add) reject market monetarism based on the last 8 years? Because if we did that, we'd also have to reject all the good theories like the Phillips curve, sticky prices at the individual firm level, Marshallian labor markets, etc.