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Sunday, February 16, 2014

The Permanent Scars of Economic Pessimism'

As a follow-up to the post below this one, Antonio Fatas:

The permanent scars of economic pessimism: Gavyn Davies at the Financial Times reflects on the growing pessimism of Central Banks regarding the growth potential of advanced economies. In the US, the Euro area or the UK, central banks are reducing their estimates of the output gap. They now think about some of the recent output losses as permanent as opposed to cyclical.
It output is not far from what we consider to be potential, there is less need for central banks to act and it is more likely that we will see an earlier normalization of monetary policy towards a neutral stance...
But it is important to understand that the permanent effects are the consequence of the recession itself. If we could manage to reduce the length and depth of the recessions we would be minimizing those permanent effects. And in that sense, accepting these changes as structural and unavoidable is too pessimistic, leads to inaction and just makes matters worse. If you read the evidence properly, you want to do the opposite, you want to be even more aggressive to avoid what it looks at a much bigger cost of recessions.

    Posted by on Sunday, February 16, 2014 at 09:31 AM in Economics, Fiscal Policy, Monetary Policy, Unemployment | Permalink  Comments (12)



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