http://www.economist.com/news/leaders/21575760-federal-reserve-making-better-job-it-european-central-bank-world-cheap
Over the course of this class we have learned that cheap money (an increase in the nominal money supply) when unaccompanied by rising productivity usually leads to higher inflation. In the US and much of Europe there seems to be a rise in money supply that is unaccompanied by higher productivity (GDP growth estimates are about 1% all round) and this has led to inflation fears from many quarters.
The reason for this sustained money supply is the general ambition of central banks to stimulate economic growth within their regions while keeping both unemployment and inflation low. The Economist article above recommends that to achieve that goal the central banks need to be aggressive in their policies and commends the US federal reserve for their bold and decisive action.
Also, this last Thursday, I had the opportunity to listen live to 2 federal reserve presidents and to ask them questions as part of a conference ( Charles L. Evans - President & CEO Federal Reserve Bank Chicago, and Dennis P. Lockhart - President & CEO Federal Reserve Bank Atlanta.). In their speeches they tried to reassure the audience that the federal reserve was controlling inflation adequately but was more interested in solving unemployment and that once we had sustained strong employment figures (job additions of 200,000 and more for 6 consecutive months) then the fed would raise interest rates.
Unfortunately, later that day the jobs report came out and only 88,000 jobs were added. It looks like low interest rates might remain with us for a while longer.
A very well written article that clearly explains the stance of different banks on monetary policy at this time and their relative effectiveness. On the whole, it appears that aggressive and loose monetary policy has done well in stimulating economies and at the cost of relatively little inflation. The United States has experienced not very much recently and Japan is currently attempting to meet a higher inflation target.
ReplyDeleteAs long as central banks keep a close eye on inflation, this form of loose monetary policy could do well for a lot of countries.
However, lower interest rates can affect the inflow of hot money into US and can reduce foreign direct investment,which is essential for the US,considering its a high consumption economy.
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