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The World Needs Further Monetary Ease, Not an Early Exit

Author

Listed:
  • 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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    Cited by:

    1. 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.
    2. Philip Turner, 2013. "Benign neglect of the long-term interest rate," BIS Working Papers 403, Bank for International Settlements.
    3. Adam S. Posen, 2010. "The Central Banker's Case for Doing More," Policy Briefs PB10-24, Peterson Institute for International Economics.
    4. 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.

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