The World Needs Further Monetary Ease, Not an Early Exit
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.
|Date of creation:||Dec 2009|
|Date of revision:|
|Contact details of provider:|| Postal: 1750 Massachusetts Avenue, NW, Washington, DC 20036-1903|
Web page: http://www.piie.com
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Jean Boivin & Michael T. Kiley & Frederic S. Mishkin, 2010.
"How has the monetary transmission mechanism evolved over time?,"
Finance and Economics Discussion Series
2010-26, Board of Governors of the Federal Reserve System (U.S.).
- 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.
- Jean Boivin & Michael T. Kiley & Frederic S. Mishkin, 2010. "How Has the Monetary Transmission Mechanism Evolved Over Time?," NBER Working Papers 15879, National Bureau of Economic Research, Inc.
- 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.
- Kenneth N. Kuttner & Adam S. Posen, 2003. "The Difficulty of Discerning What's Too Tight: Taylor Rules and Japanese Monetary Policy," Working Paper Series WP03-10, Peterson Institute for International Economics.
- Reinhart, Carmen M. & Rogoff, Kenneth S., 2009.
"The Aftermath of Financial Crises,"
11129155, Harvard University Department of Economics.
- Reinhart, Carmen & Rogoff, Kenneth, 2008.
"Las secuelas de las crisis financieras
[The aftermath of financial crisis]," MPRA Paper 13695, University Library of Munich, Germany.
- Reinhart, Carmen M. & Rogoff, Kenneth, 2009. "The Aftermath of Financial Crises," CEPR Discussion Papers 7209, C.E.P.R. Discussion Papers.
- Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "The Aftermath of Financial Crises," NBER Working Papers 14656, National Bureau of Economic Research, Inc.
- Reinhart, Carmen & Rogoff, Kenneth, 2008. "Las secuelas de las crisis financieras
- Greenwood, Robin & Vayanos, Dimitri, 2008.
"Bond Supply and Excess Bond Returns,"
CEPR Discussion Papers
6694, C.E.P.R. Discussion Papers.
- Robin Greenwood & Dimitri Vayanos, 2008. "Bond supply and excess bond returns," LSE Research Online Documents on Economics 24425, London School of Economics and Political Science, LSE Library.
- Robin Greenwood & Dimitri Vayanos, 2008. "Bond Supply and Excess Bond Returns," NBER Working Papers 13806, National Bureau of Economic Research, Inc.
- Dimitri Vayanos & Robin Greenwood, 2008. "Bond Supply and Excess Bond Returns," FMG Discussion Papers dp607, Financial Markets Group.
- 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.
- Agell, J. & Persson, M., 1989. "Does Debt Management Matter?," Papers 442, Stockholm - International Economic Studies.
- Rudebusch, Glenn D., 2000.
"Assessing nominal income rules for monetary policy with model and data uncertainty,"
Working Paper Series
0014, European Central Bank.
- 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.
- Glenn D. Rudebusch, 2000. "Assessing nominal income rules for monetary policy with model and data uncertainty," Working Paper Series 2000-03, Federal Reserve Bank of San Francisco.
- Glenn Rudebusch, 2000. "Assessing Nominal Income Rules for Monetary Policy with Model and Data Uncertainty," Econometric Society World Congress 2000 Contributed Papers 0065, Econometric Society.
- 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.
- Robert N McCauley & Kazuo Ueda, 2009. "Government debt management at low interest rates," BIS Quarterly Review, Bank for International Settlements, June.
When requesting a correction, please mention this item's handle: RePEc:iie:pbrief:pb09-22. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Peterson Institute webmaster)
If references are entirely missing, you can add them using this form.