Are Central Banks Really Out of Ammunition?
The global economy faces a chronic problem of deficient nominal demand. Japan is suffering near-zero growth and minimal inflation. But the debate about which policies could boost demand remains inadequate, evasive, and confused.
LONDON – The global economy faces a chronic problem of deficient nominal demand. Japan is suffering near-zero growth and minimal inflation. Eurozone inflation has again turned negative, and British inflation is zero and economic growth is slowing. The US economy is slightly more robust, although even there recovery from the 2008 financial crisis remains disappointingly slow, employment rates are well below 2007 levels, and annual inflation will not reach the Federal Reserve’s 2% target for several years.
But the debate about which policies could boost demand remains inadequate, evasive, and confused. In Shanghai, the G-20 foreign ministers committed to use all available tools – structural, monetary, and fiscal – to boost growth rates and prevent deflation. But many of the key players are keener to point out what they can’t do than what they can.
Central banks frequently stress the limits of their powers, and bemoan lack of government progress toward “structural reform” – a catch-all phrase covering trade liberalization, labor- and product-market reforms, and measures to address medium-term fiscal challenges, such as pension age increases. But while some of these might increase potential growth over the long term, almost none can make any difference in growth or inflation rates over the next 1-3 years.
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