Simon Wren-Lewis makes a point I've tried to hammer ever since I first started writing about how to respond to the crisis, monetary policy alone is not enough when the economy is in a deep recession:
Zero Lower Bound Denial, mainly macro: ...While I believe macroeconomists practicing demand denial represent a minority (albeit still a distressingly important minority), I think what I might call Zero Lower Bound (ZLB) denial is far more prevalent. What I mean by this is a belief that somehow monetary policy alone can overcome the problem of the ZLB. It is in many ways a perfectly understandable belief, reflecting what I have called the consensus assignment developed and implemented during the Great Moderation, which was (rightly) seen as an advance on the bad old days where fiscal policy was routinely used for demand stabilization. Nevertheless the belief is incorrect, and damaging.
It is incorrect for two reasons. ... Monetary policy that involves temporarily creating money to buy financial assets is of an order less effective and reliable than conventional monetary policy, or fiscal policy. The second is ... just as important. Even if you follow the Krugman/Woodford idea of using commitments about future interest rate setting to mitigate the recession today (which is equivalent to permanently creating more money), this does not mean that you can forget about fiscal policy. To put it another way, fiscal policy would still be a vital stabilization tool at the ZLB even if the central bank targeted nominal GDP (NGDP). It is reluctance to accept this last point which is a particular characteristic of ZLB denial. ...
I have elaborated on this second point before... First, the ZLB still matters. NGDP targets help reduce (but not eliminate) the cost of the ZLB today, but only by incurring costs in the future. Second, fiscal policy could in principle eliminate all of these costs. A fiscal stimulus today could eliminate the ZLB constraint, allowing desired output and inflation to be achieved today and tomorrow. Equally, fiscal austerity today moves inflation and output further away from desired levels both today and tomorrow, even if we have NGDP targets.
This is why I keep irritating some by going on about fiscal policy when commenting on the current conjuncture. Apart from a few academic caveats, I’m a fully paid up member of the ‘monetary policy is all you need’ club outside of a potential ZLB or monetary union. My views on monetary policy targets are very similar to, and have been heavily influenced by, those of Michael Woodford. But the ZLB does make a difference. It is a feature of the real world, not a consequence of any particular monetary policy strategy. ZLB denial, particularly in the hands of independent central banks, leads not just to wishful thinking, but encourages governments to make bad fiscal policy decisions.