The Economist: The world economy: In need of new oomph

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#1
Very good thinking:

"Such a strategy would have two elements. One is to boost public investment in infrastructure. From American airports to German broadband coverage, much of the rich world’s infrastructure is inadequate. Borrowing at rock-bottom interest rates to improve it will support today’s growth, boost tomorrow’s and leave the recovery less dependent on private debt. A second element ought to be a blitz of supply-side reforms. In addition to the obvious benefits of freer trade, every rich country has plenty of opportunities for reforms at home, from overhauling the regulations that inhibit house-building in Britain to revamping America’s ineffective system of worker training."


The world economy: In need of new oomph
805 words
24 May 2014
The Economist
EC
English
© The Economist Newspaper Limited, London 2014. All rights reserved
How to make the rich world’s recovery stronger and safer
EconOMISTS expected 2014 to be the year in which the global expansion stepped up a gear. Instead, nearly five years into its recovery from a deep recession, the rich world’s economy still looks disappointingly weak. America’s GDP grew at an annualised rate of only 0.1% in the first quarter. Euro-area growth, at 0.8%, was only half the expected pace. Some of the weakness is temporary (bad weather did not help in America), and it is not ubiquitous: in Britain and Germany, for example, growth has accelerated, and Japan has put on a brief spurt. Most forecasters still expect the recovery to gain momentum during the year.
But there are reasons to worry. The stagnation in several big European countries, notably Italy and France, is becoming more entrenched. Thanks to a rise in its consumption tax in April, Japan’s growth rate is set to tumble, at least temporarily. America’s housing rebound has stalled. And across the rich world yields on long-term government bonds, a barometer of investors’ expectations for growth and interest rates, have fallen sharply. The yield on ten-year Treasuries, at 2.5%, is half a percentage point lower than it was at the end of 2013. Given that American expansions tend to be about five years long, the United States could find itself going into the next downturn without having had a decent upturn at all.
What should be done to forestall that outcome? The standard answer is that central banks need to loosen monetary conditions further and keep them loose for longer. In some places that is plainly true. The euro area’s weakness has a lot to do with the conservatism of the European Central Bank, which has long resisted the adoption of unconventional measures to loosen monetary policy, even as the region has slipped ever closer to deflation. Thankfully, it has signalled that it will take action at its next meeting in June (see "The European Central Bank: Time to be bold").
But if loose monetary conditions are a prerequisite for a more vigorous recovery, it is increasingly clear that on their own they are not enough. Indeed, over-reliance on central banks may be a big reason behind the present sluggishness. In recent years monetary policy has been the rich world’s main, and often only, tool to support growth. Fiscal policy has worked in the opposite direction: virtually all rich-world governments have been cutting their deficits, often at a rapid clip. Few have shown much appetite for the ambitious supply-side reforms that might raise productivity and induce firms to invest. Free-trade deals languish. The much-promised deepening of Europe’s single market, whether in digital commerce or services, remains a hollow pledge.
Against this unhelpful background, central banks have been remarkably successful. Growth has been so stable that economists are beginning to talk, somewhat eerily, of the return of the "Great Moderation", the era of macroeconomic stability that preceded the global financial crisis (see "The return of moderation: Sea of tranquillity"). Sadly, with such stability at a subpar pace of growth, low interest rates and low volatility have a bigger impact on asset prices than on real investment, and risk creating financial bubbles long before economies reach full employment.
Invest and reform
One way to address this risk is for central bankers to use regulatory tools to counter the build-up of asset-price excesses. This is particularly urgent in Britain, where the housing market is showing clear signs of froth (see "House prices: A very British binge"). What is really needed, though, is a more balanced growth strategy that relies less exclusively on central banks.
Such a strategy would have two elements. One is to boost public investment in infrastructure. From American airports to German broadband coverage, much of the rich world’s infrastructure is inadequate. Borrowing at rock-bottom interest rates to improve it will support today’s growth, boost tomorrow’s and leave the recovery less dependent on private debt. A second element ought to be a blitz of supply-side reforms. In addition to the obvious benefits of freer trade, every rich country has plenty of opportunities for reforms at home, from overhauling the regulations that inhibit house-building in Britain to revamping America’s ineffective system of worker training.
Progress on these fronts would lead to stronger, stabler growth and would reduce the odds that the next recession begins with interest rates close to zero (making it particularly hard to fight). But it demands politicians who can distinguish between budget profligacy and prudent borrowing, and who have the courage to push through unpopular reforms. The rich world needs such politicians to step up.

The Economist Newspaper Limited (The Economist)
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#2
Central banks face policy puzzle post-crisis

Traditional monetary policies still relevant, says MAS director
Published on May 26, 2014 1:24 AM

By Yasmine Yahya Finance Correspondent

CENTRAL banks around the world have had to question their practices and come up with innovative ways to restore and maintain financial stability since the 2008 crisis.

But as world economies recover and the dust settles on the crisis, traditional monetary policies might still be the best approach.

Monetary Authority of Singapore managing director Ravi Menon delivered this message last Saturday to about 90 academics, economists and policymakers at the inaugural Asian Monetary Policy Forum.

For two decades before the crisis, Mr Menon noted, monetary policy primarily focused on using interest rates to maintain price stability.

"To be fair, central bankers were not unconcerned about financial stability. But financial stability was seen as the preserve of prudential regulation and supervision," Mr Menon said.

When faced with potential financial vulnerabilities, it was deemed better to clean up after a bubble had burst than to try to lean against suspected bubbles.

But the financial crisis has since thrown this practice into question, as central banks found that the cost of cleaning up can be extremely high.

While there has been growing consensus that it is important for central banks to pay more attention to financial stability, there is no agreement on how they should do so and what role, if any, should be played by monetary policy, Mr Menon added.

Some economists say monetary policy should explicitly take account of financial stability in addition to price stability.

Others believe monetary policy should remain focused on price stability, while financial stability is secured with the help of macroprudential policies. These are rules that target debt and promote financial prudence so as to manage asset prices and prevent credit bubbles.

Singapore in fact has been an early experimenter and practitioner of such policies, Mr Menon noted. These include placing a tenure cap of 35 years on property loans from private banks.

So far, the results for implementing such measures "have not been bad", Mr Menon said. Nonetheless, he added that central banks should not forget the relevance of the traditional approach.

"Just because central bankers had previously ignored financial stability considerations with costly consequences, we must not overcompensate now by placing such an undue burden on monetary policy to secure financial stability, that it becomes detrimental to price and output stability."

Central bankers need not discard most of what they know about monetary policy as much of that knowledge remains relevant.

Policymakers should also bear in mind that the current situation is highly unusual, he added.

"I suspect that when the dust has settled and more normal conditions return, monetary policy regimes will not look drastically different from pre-crisis days.

"I think more central banks will have an eye to financial stability considerations, at least informally, when setting monetary policy."

More central banks are also likely to have macroprudential policy toolkits, which they will use from time to time but perhaps not on the scale that has been used in Asia in recent years, he added.

"But in essence, monetary policy will remain largely focused on price and output stability - as it should be."

yasminey@sph.com.sg
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