by Joseph Stiglitz, via Project Syndicate
October 2012
NEW YORK â Central banks on both sides of the Atlantic took extraordinary monetary-policy measures in September: the long awaited âQE3â (the third dose of quantitative easing by the United States Federal Reserve), and the European Central Bankâs announcement that it will purchase unlimited volumes of troubled eurozone membersâ government bonds. Markets responded euphorically, with stock prices in the US, for example, reaching post-recession highs. Others, especially on the political right, worried that the latest monetary measures would fuel future inflation and encourage unbridled government spending.
In fact, both the criticsâ fears and the optimistsâ euphoria are unwarranted. With so much underutilized productive capacity today, and with immediate economic prospects so dismal, the risk of serious inflation is minimal. Nonetheless, the Fed and ECB actions sent three messages that should have given the markets pause. First, they were saying that previous actions have not worked; indeed, the major central banks deserve much of the blame for the crisis. But their ability to undo their mistakes is limited. Second, the Fedâs announcement that it will keep interest rates at extraordinarily low levels through mid-2015 implied that it does not expect recovery anytime soon. That should be a warning for Europe, whose economy is now far weaker than Americaâs.
Finally, the Fed and the ECB were saying that markets will not quickly restore full employment on their own. A stimulus is needed. That should serve as a rejoinder to those in Europe and America who are calling for just the opposite â further austerity. But the stimulus that is needed â on both sides of the Atlantic â is a fiscal stimulus. Monetary policy has proven ineffective, and more of it is unlikely to return the economy to sustainable growth.
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