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The Central Banker's Case for Doing More

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  • Adam S. Posen

    ()
    (Peterson Institute for International Economics)

Abstract

Adam S. Posen presents his view on the role of monetary policy in the global economic recovery, in particular in the large Western countries, and whether the major central banks in the United Kingdom and beyond should be doing more in the coming months. Posen argues that monetary policy should continue to be aggressive about promoting recovery, and further quantitative easing should be undertaken. Policymakers face a clear and sustained uphill battle, in which monetary ease has an ongoing role to play, even if it may not deliver the desired sustained recovery on its own. In every major economy, actual output has fallen so much versus where trend growth would have put them, and trend growth has not been above potential for long enough as yet, that there remains a significant gap between what the economy could be producing at full employment and what it currently produces. Thus, policymakers should not settle for weak growth out of misplaced fear of inflation. If price stability is at risk over the medium term, it is on the downside. There are, however, some very serious risks if policy errors are made by tightening prematurely or even by loosening insufficiently. The risks that Posen believes the United Kingdom and other major Western countries face now are those of sustained low growth and near deflation turning into a self-fulfilling prophecy (as in Japan in the 1990s and in the United States and Europe in the 1930s) and/or of inducing a political reaction that could undermine these countries' long-run stability and prosperity. Inaction by central banks could ratify decisions both by businesses to lastingly shrink the economy's productive capacity and by investors to avoid risk and prefer cash. These tendencies are already present, and insufficient monetary response is likely to worsen them. The combination of these risks with the potential attainable gains motivates Posen's call for additional monetary policy stimulus.

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Paper provided by Peterson Institute for International Economics in its series Policy Briefs with number PB10-24.

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Date of creation: Oct 2010
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Handle: RePEc:iie:pbrief:pb10-24

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