If interest rates are zero and inflation is under 2% per year then why not have the fed print money without borrowing until inflation is back at 2% per year? The money could be used to pay off the national debt. Businesses would have a predictable floor of a 2% inflation rate. The slippery slope argument against that sort of policy could be prevented by having the policy written into law. It's a fix where everyone wins, right?
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1$\begingroup$ So what is the reverse side if inflation rises above 2%? Escalating tax increases or interest rises until the economy crashes? $\endgroup$– HenryAug 15, 2016 at 23:37
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$\begingroup$ Once inflation goes above 2% or interest rates rise above zero then you stop printing money and revert to standard monetary policy- use interest rate hikes to control inflation. $\endgroup$– user2133034Aug 19, 2016 at 17:38
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That's essentially what Quantitative Easing was supposed to be.
However, we've known for about 80 years that it doesn't work in times like these, and like the 1930s, when demand is flat because of a massive debt overhang. The demand for money just isn't there.
In these times, trying to simply expand the money supply is like pushing on a piece of string.
Japan's been battling with non-responsive flat demand for many years now (though driven largely by demographics). Monetary stimulus has failed. Fiscal stimulus has at least steadied the ship.
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$\begingroup$ Printing money works if it gets to the publics hands, and if the public decide to spend it. In the case of Japan, people save a lot more than in other countries, and everywhere else where there has been a quantitative easing, the transmission channel was sort of broken, the money didn't get to the public hands, because banks didn't lent the money on fear they won't get it back. That's why, in this kind of situation printing money doesn't fight deflation. $\endgroup$– capmAug 16, 2016 at 22:15
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3$\begingroup$ This is like a stimulus package that doesn't add anything to the national debt. Printing money can be used to boost public spending, which gets back into the public hands in the form of teacher salaries or transportation engineering jobs. Banks and borrowing are not part of the equation. $\endgroup$ Aug 19, 2016 at 17:36
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$\begingroup$ @user2133034 did you find an answer? I was just going to write the same question... this does indeed not answer it, since the effect concerning deflation, is the same whether bonds are bought or not... so why do it? $\endgroup$– UserDec 9, 2016 at 0:04