False beliefs and unhappy endings – OECD Observer

Could central bank policy be making the economy more vulnerable? A fundamental rethink is in order if worse outcomes are to be avoided. 

(The answer is yes, in fact, massively more vulnerable.) 

Central banks in the major advanced economies have been pursuing unusually lax monetary policies for many years. Moreover, the ways in which they have done this have become increasingly experimental. These expansionary policies bear the risk of ending unhappily. In large part, this single-minded pursuit has reflected the political reality that monetary policy has become “the only game in town”. Yet in no small measure, it also reflects some long-held but false beliefs about how the economy actually works.

Moreover, absent any discipline imposed by an international monetary system, virtually every central bank in the world became engaged in a process of unprecedented monetary easing–the so-called “currency wars”. As a result, the global economy could now be even more vulnerable than it was in 2007.

False beliefs and unhappy endings