Monetary policy: Dead economies blow no bubbles

Posted: June 30, 2014 in economy
Tags: , ,

AS MY colleague noted over the weekend, the stopped clock that is the Bank for International Settlements (“the central bank for central banks”) is showing the same face to the world that it has for the last few years. In 2011, when unemployment rates in both Europe and America were above 9%, the BIS argued that global growth needed to slow in order to reduce inflationary pressure. In 2012 it warned that central banks shouldn’t do any more to boost growth lest they create financial instability and discourage structural reform, even as the crisis in the euro area threatened to tip the rich world back into serious recession. Though the BIS’s diagnoses of the global economy’s ills have evolved over time its policy recommendations have not. In its latest annual report, it argues that what the world needs now is higher interest rates. One of these days the BIS may just turn out to be right.Not this year. The BIS reckons central banks need not worry about doing more to support growth, since monetary policy is not particularly effective now anyway and deflation isn’t actually as bad as tales from the Depression would lead one to believe. But its main point in favour of rate rises is that central banks ought to be less focused on business cycles and more concerned with financial cycles: waves of rising indebtedness followed by crises and balance-sheet recessions. Low rates are not …

via Economic Crisis


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