I’ve been seeing a lot of this question in my Twitter feed. Here are a few points:
1. If a more expansionary monetary policy helps an economy recover, yes it may well raise the risk of a later bubble. We should then be cautious, but that is no reason to turn down the prospect of a recovery. Anything leading to recovery could have a similar risk.
2. There are already plenty of reserves in the system and there is plenty of room for credit to expand over its current level. Maybe we don’t know what triggers bubble-inducing investment behavior, but why should raising ngdp expectations and realities raise the risk of a bubble, if not for the factor cited in #1?
3. Arguably a flat yield curve induces a quest for higher returns elsewhere or in more dubious investment areas. Yet the flattening yield curve did not follow quickly from the massive injection of reserves. Rather it evolved slowly as prospects for real recovery deteriorated and the long-run outlook for the advanced economies turned down. Real factors drove the flattening, and if monetary expansion brought a bit of recovery it likely would unflatten that curve a bit. That could well lower the risk of a bubble.
4. I may consider Austrian theory, with regard to this question, in a separate post.
Overall I don’t see this as a reason to reject monetary expansion. #1 is a real risk but again I’ll take the recovery every time and a lot of the other arguments boil down to that trade-off.