Policymakers who think fiscal policy alone is enough are setting themselves up for a shock
If you ask most central bankers around the world what their plan is for dealing with the next normal-size recession, you would be surprised how many (at least in advanced economies) say “fiscal policy”. Given the high odds of a recession over the next two years – about 40% in the US, for example – monetary policymakers who think fiscal policy alone will save the day are setting themselves up for a rude awakening.
Yes, it is true that with policy interest rates near zero in most advanced economies (and just above 2% even in the fast-growing US), there is little room for monetary policy to manoeuvre in a recession without considerable creativity. The best idea is to create an environment in which negative interest-rate policies can be used more fully and effectively. This will eventually happen, but in the meantime, today’s overdependence on countercyclical fiscal policy is dangerously naïve.
Continue reading...from US news | The Guardian http://bit.ly/2GZPzLL
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