We hadn't included the UK 1930s case in our little overview of how to escape from a liquidity trap (whether a temporary or a semi-permanent one as the secular stagnation theory proposes) but it is fairly consistent with the picture. Some lessons:
- Some kind of 'regime change' is necessary to shift inflationary expectations. This happened in the US, Japan, and the UK in the 1930s, and it's what's being tried in Japan again under Abeconomics.
- Inflationary expectations have to be raised to get real interest rate down. The normal route, lowering nominal rates, doesn't work anymore at the zero lower bound, rates are already zero.
- Fiscal policy can help (as it did in the US under Roosevelt and Japan in the 1930s) but it's not crucial. What's crucial is that it isn't contractionary (basically giving gas with monetary policy and braking with fiscal policy)
- Central bank independence can actually be counterproductive. This is a novel viewpoint. The great benefit from central bank independence was that independent central banks could more credibly commit to anti-inflationary policies (as these can create recessions, like in the early 1980s). But this could work both ways. It's more difficult for independent central banks to credibly commit to creating (mild) inflation, as combatting inflation is their raison d'etre.