Nominal GDP Targeting: Is It Simply the Re-animation of Dead Tissue? by DeLong

I would say that I think Christy Romer has the best argument here. It seems to me that Eggertsson's and Woodford's argument is incomplete. To the extent that taxpayers are different from bondholders--and they are--portfolio-balance effects are real. Sufficiently large quantitative easing would make those portfolio-balance effects large enough to destroy the bad equilibrium--and then the economy would quickly transit to the good one. That is what Krugman means by "huge quantitative easing".

And, of course, once expectations coordinate on the good equilibrium, you don't need to do any quantitative easing at all--rather the reverse: the Fed will have to shrink its balance sheet relatively quickly in order to maintain a good and non-inflationary equilibrium.

The economy is growing at our current bad equilibrium because of accommodating policy of the Fed. Business investment is up. Exports are up. Government is pulling back. Consumer savings rates is down, but there is high unemployment which means missing demand and excess capacity. Deleveraging and a sluggish mortgage market is also holding the growth rate back and keeping the economy at the bad equilibrium.

We can get to a better equilibrium, one that would be more resilient to shocks like an unruly breakdown of the Euro. If we don't the Fed will have to engage in further periodic QEs to ward off deflation. Won't it? I guess the Fed hopes the private sector will pick up the growth baton and produce "catch-up" growth. But will the private sector be able to do this if high unemployment is creating deflationary headwinds that the Fed needs to "artificially" ward off with periodic QEs? Only by reaching the good equilibrium will the delflationary headwinds be eliminated and the Fed can scale back its accomodating policy accordingly.