Are central banks the only game in town?
This passage from Larry Summers' Q&A session at the Peterson Institute is worth quoting in full:
There are people who believe that these [QE efforts] are artificial provisions of liquidity morphine to the economy that creates speculative
bubbles that will be the death of us all. I do not share that view.
There are others who believe that if the zero-bound is important then the obvious thing to do is to just find a way to let interest rates be negative or to let interest rates be lower whether that’s Quantitative Easing that reduces
term and risk premiums, whether that’s moving to negative rates, whether that’s locking in sufficiently committal forward guidance that people believe real rates are low and that that’s all that needs to be done.
I am of a view that is in a sense intermediate. I believe that if the only game in town is monetary policy, the risks of excessive unemployment hardening in to structural non-employment and structural output losses
exceed any risks associated with financial instability. And so, when the only game in town is monetary policy, I tend to be supportive of finding ways for monetary policy to be expansive.
The transcript is here.
Just today, I saw three people make the case for fiscal stimulus: Mario Draghi said at the European Parliament plenary that "fiscal policies should contribute to the economic recovery"; Martin Feldstein suggests that euro area countries need fiscal stimulus to revive their economies; and Angel Ubide argues it is "time for a large global fiscal policy stimulus to contain the deterioration in potential growth". Many others worry that, after the crisis, we have asked central banks to do too much.