Matt Yglesias has an interesting post that discusses how the zero (bound) matters because rules matter:
This, I think, is why zero matters. It is true that there are lots of different ways the Fed can do. But during the Great Moderation the thing the Fed did do was stabilize the macroeconomy by cutting interest rates. Everyone anticipated the Fed’s behavior to follow a Taylor-type rule in which inflation and unemployment data determined interest rates. You would read paradoxical-sounding stories about the stock market jumping on disappointing jobs data, precisely because everyone felt they understood how everything worked. The problem with the zero lower bound then becomes that as rates got closer and closer to zero nobody knew what was going to happen. People in the know knew that students of monetary theory had proposed a variety of possible central bank measures at zero. But Ben Bernanke didn’t explicitly write down “this is the Federal Reserve’s plan of action if unemployment is high and interest rates hit zero” and then display it for all to see behind some “in case of emergency, break glass” windowpane. In other words, it was the reverse of Y2K. We knew something would happen but nobody knew what. So when rates did hit zero, expectations became unmoored.
(Note: His argument was developed after reading this post by Evan Soltas.)
It´s true that BB didn´t explicitly write down any of the proposed alternatives for the situation where unemployment is high and interest rates hit zero, which had been discussed for many years under the caption “How to conduct monetary policy in a low inflation environment”. But implicitly he did by writing on alternatives for Japanese monetary policy and on “Deflation, making sure “it” doesn´t happen here”, for which he got nicknamed “Helicopter Ben”!
Evan´s “natural monetary experiment” is Y2K, something that everyone expected but didn´t happen. Another such “experiment”, different because no one expected and it did happen, was 9/11 less than two years later. Interestingly, the Fed reacted in the same way, providing enough excess reserves so that monetary equilibrium and, therefore, stability in nominal spending (NGDP Level) was maintained.
At the end, Matt writes:
I say all this, I note, not to argue that we need to scrap paper money. The point is that it’s very bad for the Fed to have a policy rule that breaks down in moments of severe crisis. It’s like having an umbrella that dissolves in water. We either need to run a background level of inflation that’s high enough to avoid zero bound episodes, or else shift the policy lever to something that’s not affected by these issues.
Instead of explicitly mentioning higher inflation targeting, he could have substituted that for explicitly defining the “policy lever that´s not affected by these issues”. And I bet that what he has in mind is an NGDP Level Target.