Since the 2008 global financial crisis, expansionary monetary policy has been the order of the day in most of the major advanced economies.

This approach, comprising deep interest rate cuts and large-scale asset purchases (quantitative easing, or QE), has been credited with accelerating the recovery in the United States and the United Kingdom, and pulling the eurozone back from the brink of collapse. As for Japan, which introduced monetary easing in late 2012 as the first “arrow” of Abenomics, Prime Minister Shinzo Abe’s economic reform program, the policy has contributed to the creation of about 2.5 million jobs.

Yet, with low interest rates implying that central banks will have little ammunition to fight the next economic downturn, has reliance on generous monetary conditions to sustain growth gone too far?

The conventional view, in line with textbook Keynesian economics, is that monetary expansion works through the interest rate: by reducing the cost of money, a lower interest rate stimulates domestic investment, spurring growth. Once the interest rate gets too close to zero, below which it usually cannot be reduced, monetary easing is no longer an effective economic stimulus.

By this standard, Japan — with a short-term interest rate of minus 0.1 percent and a 10-year government bond yield target of around zero percent — would seem no longer to be benefiting from its expansionary monetary policy.

Monetarists, however, argue that Keynesian theory fails to account for the “real balance effect”: Given sticky prices, monetary expansion will increase the real value of the money stock, thereby raising household net wealth and stimulating consumption. Moreover, as Harry Johnson pointed out, in a flexible exchange rate system, monetary easing reduces a currency’s value vis-a-vis the rest of the world, thereby boosting external demand.