With interest rates at zero, what else can central banks do?by Kate Barker / June 16, 2016 / Leave a comment
Published in July 2016 issue of Prospect Magazine
In the decade before the financial crisis, world economic growth was 4.2 per cent. In the aftermath it declined to 3.2 per cent and a recent International Monetary Fund analysis predicted that it will stay stuck at this lower pace. In the short-term, prospects are improving in developed economies, but these positive signs are offset by a slowdown in emerging markets.
This is pretty disappointing. Concerns about inequality, low earning power and high unemployment among the young in many developed countries are politically toxic. There are signs of disillusionment with previously dominant political parties in Britain and abroad.
Problems in emerging economies are related to those in the developed world. Continued weak growth in developed countries has produced the low commodity prices depressing several of these economies. China’s rising indebtedness seems to mirror the example of the West.
This is a challenge for policymakers of the political centre, and a challenge to their economic consensus based around fiscal probity, low inflation, competitive markets and liberal trade policies. Yet as major central banks have already reduced interest rates to very low or negative levels, and budget deficits are high in many developed economies the question is whether anything can be done.
There is also disagreement about what the problems are. In the UK, some put slow growth down to a deficiency of demand. Othe…