The BIS wants to take the world economy down

This little nugget from the just released BIS annual report (Chapter VI – Monetary Policy) really shows they favor economies accepting that the greatly reduced levels of aggregate demand and employment are the ‘new normal’, and there´s nothing one can do about it. What is implicitly proposed is a degree of fiscal and monetary contraction that would make 1937 feel like a ‘walk in the park on a sunny day’.

 “Taken together, central bank actions since the start of the crisis have played a critical stabilising role, by first offsetting the forces of the financial collapse and then supporting a recovery in the real economy. However, economic activity has remained well below its pre-crisis trends in the United States, the euro area and the United Kingdom (Graph VI.4), and unemployment rates have remained stubbornly high, especially when compared with previous cyclical recoveries. This observation in part explains why central banks have taken further actions over the past year, and why even more radical ideas have been entertained, such as the adoption of nominal GDP targeting and monetisation of fiscal deficits.

Despite having succeeded in containing the crisis, monetary policy has fallen short of original expectations for various reasons. In this regard, it may have been inappropriate to regard the previous trajectory of GDP as a benchmark. At least in the countries at the centre of the financial bust, the sustainable path of GDP has arguably been overestimated. Financial booms tend to conceal structural misallocations of resources; these imbalances are only fully revealed in the subsequent busts and the balance sheet recessions that accompany them (see Chapter III). There is also ample evidence that, in the aftermath of financial crises, the path of potential output shifts downwards. In addition, under these conditions monetary policy is likely to be less effective than usual. In balance sheet recessions, private sector retrenching and an impaired financial sector clog the transmission of monetary policy measures to the real economy. In order to lift growth in a sustainable way, appropriate repair and reform measures are necessary.”

The Chart below is a version of their Graph VI.4. How come they don´t see the usefulness, not radical, idea of a NGDP Level Target? And that´s true even if the new level target is below the previous one to take into account any fall in the sustainable level path that the misguided policies of the last five years have brought about.


The BIS view of the world is a mixture of ‘austrianism’ and Koo´s balance sheet recession. On the latter Mark Sadowski has done a detailed ‘take-down’ (here, here, here and here)


Ambrose Evans-Pritchard has a negative take on the report.

So does Ryan Avent

5 thoughts on “The BIS wants to take the world economy down

  1. “In balance sheet recessions, private sector retrenching and an impaired financial sector clog the transmission of monetary policy measures to the real economy.”

    So *the* international organization of central banks has officially adopted the point of view that central banks are totally useless?

    Why don’t they just call it a day and disband?

  2. BIS reflects views of its former head economist W.White who holds this austrian view and who advocates “leaning against the wind” monetary policy; and his disciple, C.Borio who does a nice job explaining liquidity shortages and resulting negative spirals in his works, usually claiming that modern crisis start with an abrupt evaporation of market liquidity (hence “damages” balance sheets idea as with Koo), but believes this happens because of changed risk perceptions, missing the main point of tight money. As always question remains, why did Fed (intervention trough QE with direct purchases) have better results than ECB which “missed” market liquidity question and focused on banks’ funding liquidity while NGDP (AD) keeps falling further 5 years since the beginning of the crisis?


  3. Marcus, by extrapolating from an NGDP trend-line itself based entirely on an interval constituting what many (and not just “Austrian” ones) consider to have been an unsustainable boom during which NGDP grew more rapidly than usual, while in turn implicitly assuming that NGDP level expectations are entirely static, hence incapable of adjusting downward even in the space of four years, you make light work for yourself in sustaining the claim there is still a huge NGDP shortfall, and in demonstrating that the BIS warnings are ludicrous. But it seems to me on the contrary that reasonable people can in fact disagree about the extent to which NGDP remains excessively low. Unless i have misunderstood him Scott Sumner himself, for one, is far from being as certain as you seem to be on this matter.

  4. Pingback: The conservative confusion about the Fed and monetary policy | AEIdeas

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