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Lax Monetary Policy May Cause the Next Bubble

 

Kiel Institute for the World Economy (IfW) in cooperation with Leibniz Information Centre for Economics (ZBW)

October 2, 2013

At the Global Economic Symposium (GES) in Kiel, the panelists discussing the future of central banking warned of the next bubble and the consequent next crisis. “The lax monetary policy of the central banks over the last few years was necessary, because the fiscal authorities failed to take action,” said William Rhodes from Citigroup, explaining how the central banks came to be in their current precarious situation. The governments would have needed more time.

Jacob Frenkel from JP Morgan Chase International also sees the negative real interest rate as a consequence of the lax monetary policy and as an inevitable consequence of the past years. According to the panel of experts, the crucial question is that of the exit strategy, as a continuation of the current monetary policy would lead to the next bubble. Frenkel: “The monetary policy of 2007/2008 was meant to be temporary. Nobody would have thought that it would stay. Now, reality has turned it into a new paradigm.”

One of the main problems is that the monetary policy is being overloaded with tasks. A key question in conjunction with the exit strategy is, how this situation can be regulated. Coupling it with the unemployment rate would be problematic, Frenkel believes. Unemployment caused by cyclical phenomena can indeed be fought via monetary policy, however, if unemployment is due to structural effects, the problem would be magnified.

As the central banks nowadays perform hugely comprehensive tasks, Andrew Sheng from the Hongkong-based Fung Global Institute is also worried about who will enforce discipline and clearly demands a rethink: central banks should be in charge of monetary policy, whereas ministers of finance should be responsible for fiscal policy.

 

The Global Economic Symposium (GES) 2013 is being organized by the Kiel Institute for the World Economy (IfW) in cooperation with the German National Library of Economics – Leibniz Information Centre for Economics (ZBW).

Further information is available at http://www.global-economic-symposium.org and on the official GES Blog at blog.global-economic-symposium.org.

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