No Game in Town?

At a time of slowing global growth and ultra-low interest rates, major central banks continue to “push on the string” of further monetary easing. But what if the same old rules – or even the same old economic theories – no longer apply?

In this Big Picture, Harvard’s Lawrence H. Summers and Anna Stansbury argue that central banks have exhausted their ability to control inflation and unemployment levels through traditional channels, and should admit as much. Roger E.A. Farmer of the University of Warwick agrees, and suggests that it is not just the traditional tools that are broken; it’s the entire underlying theory. Making matters worse, economists Ernest Liu, Atif Mian, and Amir Sufi show that today’s loose monetary policies are not just ineffective, but possibly even contractionary, and thus entirely counter-productive.

In the case of the European Central Bank, which has just loosened monetary policies further, Lucrezia Reichlin of the London Business School worries that the institution’s governance structure offers no way forward under current macroeconomic conditions. And Princeton’s Harold James warns that an era of theoretical confusion and essentially interest-free borrowing will operate as a blank check for the most irresponsible governments.