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.
Ambrose Evans-Pritchard has a negative take on the report.
So does Ryan Avent