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Delivering economic stimulus, addressing rising public debt and avoiding inflation

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  • Richard Wood
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    Abstract

    Purpose – The purpose of this paper is to review monetary policy options in countries assumed to be suffering from two common economic problems: deficient private demand and high and rising public debt. Design/methodology/approach – The analytical approach assumes that relevant authorities have decided that new money creation is necessary to address their economic problems. The paper asks the question: how should this new money creation best be deployed to create the required economic stimulus in the context of rising public debt? Findings – The first finding is that the latest rounds of “quantitative easing” in the USA (QE2) and Japan are likely to be inefficient, largely ineffective and have adverse side-effects, and that in periphery countries the risk of debt default is being increased by current defensive policy settings. The second finding is that the policy of financing budget deficits by printing new money is likely to be more effective (than “quantitative easing” and current Eurozone policy) in raising demand, output and employment without adding unnecessarily to already high levels of public debt. Practical implications – There are very substantial practical policy implications, involving a potential change of monetary policy strategies for two of the world's largest economies and for Eurozone periphery countries. Post-earthquake reconstruction in Japan could be financed in the manner recommended in this paper. Originality/value – The originality/value lies in demonstrating that current monetary policy orthodoxy is misplaced, and that an alternative policy strategy has been overlooked and is likely to be more effective. JEL classification: E5, E52, E58, E6, E63

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    Bibliographic Info

    Article provided by Emerald Group Publishing in its journal Journal of Financial Economic Policy.

    Volume (Year): 4 (2012)
    Issue (Month): 1 (April)
    Pages: 4-24

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    Handle: RePEc:eme:jfeppp:v:4:y:2012:i:1:p:4-24

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    Related research

    Keywords: Central bank policies; Central banking; Comparative or joint analysis of fiscal and moneta; Macroeconomic aspects of public finance; Macroeconomic policy; Macroeconomics; Monetary economics; Monetary policy; Public finance; Stabilization; Supply of money and credit;

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    References

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    1. Claudio Borio & Piti Disyatat, 2009. "Unconventional monetary policies: an appraisal," BIS Working Papers 292, Bank for International Settlements.
    2. Yeva Nersisyan & L. Randall Wray, 2010. "Does Excessive Sovereign Debt Really Hurt Growth? A Critique of This Time Is Different, by Reinhart and Rogoff," Economics Working Paper Archive wp_603, Levy Economics Institute.
    3. John C. Williams, 2011. "Unconventional monetary policy: lessons from the past three years," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue oct3.
    4. James D. Hamilton & Jing Cynthia Wu, 2011. "The Effectiveness of Alternative Monetary Policy Tools in a Zero Lower Bound Environment," NBER Working Papers 16956, National Bureau of Economic Research, Inc.
    5. Daniel Leigh & Andrea Pescatori & Jaime Guajardo, 2011. "Expansionary Austerity New International Evidence," IMF Working Papers 11/158, International Monetary Fund.
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