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The Global Economy’s Stealth Resilience

OXFORD – Last week, Christine Lagarde, the International Monetary Fund’s managing director, warned that if countries do not act together, the global economy could be derailed. Likewise, the OECD has warned that countries must move “urgently” and “collectively” to boost global growth prospects. Yet the G-20 finance ministers and central-bank governors to whom these entreaties were directed failed to agree any such action at their recent meeting in Shanghai.

To be sure, the communiqué released after the meeting includes a pledge to use “all policy tools – monetary, fiscal, and structural – individually and collectively” to “foster confidence and preserve and strengthen the recovery.” But the communiqué also reflects distinct divisions – particularly with regard to the role of monetary and fiscal policy in stimulating growth – among the finance ministers and central bankers who agreed on its text.

On monetary policy, the communiqué offers the empty statement that the G-20 would “continue to support economic activity and ensure price stability, consistent with central banks’ mandates.” That avoided the central question: Should central banks be attempting to stimulate growth through “unconventional” monetary policies?

The Bank for International Settlements thinks not, arguing in its 2015 annual report that “monetary policy has been overburdened” in an attempt to reinvigorate growth, a reality that is reflected in “the persistence of ultra-low interest rates.” The result is a vicious cycle of too much debt, too little growth, and too-low interest rates that, to quote the BIS’s Claudio Borio, “beget lower rates.”