October 24, 2016

The Kool-Aid of Negative Rates

Vivek Dehejia, Resident Senior Fellow at IDFC Institute, in this Livemint articlespeaks about the recent trend were central banks adopt unconventional monetary policies (UMPs) like the negative nominal interest rate. 


Vivek argues that "Negative nominal interest rates not only put enormous strain on the banking and financial system, they penalize ordinary savers while enriching (at least temporarily) those who invest in bubble-prone assets."


Expanding on his argument Vivek laments that, "...At present, the policy interest rate is being tasked not only with achieving an inflation target, but also with trying to undo the structural damage caused by the great financial crisis, in a world in which primary structural reforms and countercyclical fiscal policy are notable by their absence. This is a recipe for disaster.

What is needed is some combination of short-run fiscal policy, to revive aggregate demand, and, more importantly, fundamental regulatory reforms which work on the supply side.

..The first set of policies would work to bring output and employment back towards their long run or natural levels; the second set of policies would work towards boosting the long-run level of output itself by increasing productivity growth, at present anaemic in the US and other advanced economies.


We can have a serious debate about the mix of fiscal and structural policies that are needed, and the correct balance between short run and long run. What is not serious is to assert that negative rates are a cure-all."


The full article can be read here



Topic : State Capacity / In : OP-EDS
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