Active Stocks
Thu Mar 28 2024 15:59:33
  1. Tata Steel share price
  2. 155.90 2.00%
  1. ICICI Bank share price
  2. 1,095.75 1.08%
  1. HDFC Bank share price
  2. 1,448.20 0.52%
  1. ITC share price
  2. 428.55 0.13%
  1. Power Grid Corporation Of India share price
  2. 277.05 2.21%
Business News/ Opinion / Online Views/  The burden of central bankers
BackBack

The burden of central bankers

Can monetary policy, conventional or unconventional, solve the problem the global economy is facing today?

Illustration: Jayachandran/Mint (Jayachandran/Mint)Premium
Illustration: Jayachandran/Mint
(Jayachandran/Mint)

Is the world expecting too much from its top central bankers? Last week expectations were ruling high in the financial markets that Ben Bernanke, chairman of the US Federal Reserve, would in his address at Jackson Hole, Wyoming, indicate another round of quantitative easing (QE3). This week, all eyes are on the European Central Bank, the governing council of which is scheduled to meet on 6 September.

Although Bernanke did not highlight any specifics on further easing in his speech, he did reiterate his promise to provide additional policy accommodation as needed. Markets are now looking forward to the Federal Open Market Committee meeting on 12-13 September.

Things are, however, far more complicated in the case of ECB. Financial markets celebrated after Mario Draghi, president of ECB, declared in late July that it will do whatever it takes to save the euro, effectively meaning the purchase of government paper of large countries with troubled economies such as Spain and Italy in order to bring down borrowing costs. The plan has hit a road block for now due to objections from Germany, which makes the outcome of the Thursday meeting significant.

However, at a fundamental level, and after two rounds of QE by the Fed and other unconventional measures adopted by various central banks, the basic question is, can monetary policy—conventional or unconventional—solve the underlying problem the global economy is facing today, especially in the developed world?

The biggest defence in favour of unconventional means is that things could have been a lot worse had central bankers not used them during the financial crisis, but over-reliance on monetary accommodation, at the moment, poses two big risks.

First, large interventions can have unintended consequences such as higher commodity and unsustainable asset prices with long-term consequences.

Second, there is a possibility that intervention runs out of steam very quickly, as it happened in the case of long-term refinancing operations by ECB, which ended in February 2012, without having any real positive impact on the economy and the financial markets.

Moreover, accommodative monetary policy is no substitute to the painful adjustments that some of the developed economies need to be able to grow again. Bernanke in his Jackson Hole speech rightly pointed out: “Monetary policy cannot achieve by itself what a broader and more balanced set of economic policies might achieve; in particular, it cannot neutralize the fiscal and financial risks that the country faces."

Therefore, central bankers should use accommodative policy with extreme care and avoid any temptation to bring joy to the financial markets at the cost of real economic adjustments.

Can adjustments in the real economy be substituted by accommodative monetary policy? Tell us at views@livemint.com

Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less
Published: 05 Sep 2012, 06:48 PM IST
Next Story footLogo
Recommended For You
Switch to the Mint app for fast and personalized news - Get App