LONDON – Have central bankers run out of ammunition in their battle against deflation and unemployment? The answer, many policymakers and economists writing for Project Syndicateagree, is clearly No. “Monetary policymakers have plenty of weapons and an endless supply of ammunition at their disposal,” says Mojmír Hampl, Vice-Governor of the Czech National Bank. The real issue is not whether more powerful monetary instruments are still available, but whether using them is necessary – or even threatens to do more harm than good.
There are, in principle, four broad ways to add more stimulus to the world economy. The obvious course is to keep cutting interest rates, if necessary deeper into negative territory, as suggested by Koichi Hamada, economic adviser to Japanese Prime Minister Shinzo Abe. In Hamada’s view, interest-rate cuts work mainly by weakening currencies and so boosting exports. Likewise, Raghuram Rajan, Governor of the Reserve Bank of India, believes that “exchange rates may be the primary channel of transmission” for monetary easing, but worries that currency depreciation is a zero-sum game for the world as a whole.
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