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The World Needs Further Monetary Ease, Not an Early Exit

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  • Joseph E. Gagnon

    () (Peterson Institute for International Economics)

Abstract

Governments and central banks around the world eased macroeconomic policies aggressively in response to the 2008 financial crisis, arguably forestalling a second Great Depression. More recently, however, policymakers have been talking about when to withdraw the stimulus. This focus on exit is misguided. Current forecasts show an extended period of economic stagnation in the developed world. We need additional stimulus now, argues Joseph Gagnon. In particular, central banks in the main developed economies should push long-term interest rates 75 basis points below the levels they would otherwise be by purchasing a combined $6 trillion in long-term public and private debt securities. Relative to current forecasts, this policy action is expected to boost GDP 3 percent or more over the next eight quarters and to reduce unemployment rates by between 1 and 3 percent. Without additional stimulus, unemployment rates are likely to remain above equilibrium levels for many years at great cost to the world economy in terms of lost income and personal hardship. Moreover, with inflation rates already below desired levels, excess unemployment threatens to cause a fall in prices that would further damp recovery and retard the necessary process of deleveraging. In light of high and rising levels of public debt, additional monetary stimulus is preferable to additional fiscal stimulus. Indeed, monetary stimulus reduces the ratio of public debt to GDP by reducing interest expenses, increasing GDP, expanding tax revenues, and enabling an earlier start to fiscal consolidation.

Suggested Citation

  • Joseph E. Gagnon, 2009. "The World Needs Further Monetary Ease, Not an Early Exit," Policy Briefs PB09-22, Peterson Institute for International Economics.
  • Handle: RePEc:iie:pbrief:pb09-22
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    References listed on IDEAS

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    1. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "The Aftermath of Financial Crises," American Economic Review, American Economic Association, vol. 99(2), pages 466-472, May.
    2. Glenn D. Rudebusch, 2002. "Assessing Nominal Income Rules for Monetary Policy with Model and Data Uncertainty," Economic Journal, Royal Economic Society, vol. 112(479), pages 402-432, April.
    3. Kuttner, Kenneth N. & Posen, Adam S., 2004. "The difficulty of discerning what's too tight: Taylor rules and Japanese monetary policy," The North American Journal of Economics and Finance, Elsevier, vol. 15(1), pages 53-74, March.
    4. Boivin, Jean & Kiley, Michael T. & Mishkin, Frederic S., 2010. "How Has the Monetary Transmission Mechanism Evolved Over Time?," Handbook of Monetary Economics,in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 8, pages 369-422 Elsevier.
    5. Robin Greenwood & Dimitri Vayanos, 2014. "Bond Supply and Excess Bond Returns," Review of Financial Studies, Society for Financial Studies, vol. 27(3), pages 663-713.
    6. Robert N McCauley & Kazuo Ueda, 2009. "Government debt management at low interest rates," BIS Quarterly Review, Bank for International Settlements, June.
    7. Agell, J. & Persson, M., 1989. "Does Debt Management Matter?," Papers 442, Stockholm - International Economic Studies.
    8. David L. Reifschneider & Robert J. Tetlow & John Williams, 1999. "Aggregate disturbances, monetary policy, and the macroeconomy: the FRB/US perspective," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Jan, pages 1-19.
    9. Glenn D. Rudebusch, 2009. "The Fed's monetary policy response to the current crisis," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue may22.
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    Cited by:

    1. Philip Turner, 2013. "Benign neglect of the long-term interest rate," BIS Working Papers 403, Bank for International Settlements.
    2. Tsangarides, Charalambos G., 2012. "Crisis and recovery: Role of the exchange rate regime in emerging market economies," Journal of Macroeconomics, Elsevier, vol. 34(2), pages 470-488.
    3. Christina D. Romer & David H. Romer, 2013. "The Most Dangerous Idea in Federal Reserve History: Monetary Policy Doesn't Matter," American Economic Review, American Economic Association, vol. 103(3), pages 55-60, May.
    4. Charalambos G Tsangarides, 2010. "Crisis and Recovery; Role of the Exchange Rate Regime in Emerging Market Countries," IMF Working Papers 10/242, International Monetary Fund.

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