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Sunday, December 06, 2015

'Central Bankers Do Not Have as Many Tools as They Think'

Larry Summers:

Central bankers do not have as many tools as they think: ... While recession risks may seem remote.., no postwar recession has been predicted a year ahead... History suggests that when recession comes it is necessary to cut rates more than 300 basis points..., the chances are very high that recession will come before there is room to cut rates enough to offset it. ...
Central bankers bravely assert that they can always use unconventional tools. But there may be less in the cupboard than they suppose. The efficacy of further quantitative easing ... is highly questionable. There are severe limits on how negative rates can become. A central bank forced back to the zero lower bound is not likely to have great credibility if it engages in forward guidance.
The Fed will in all likelihood raise rates this month. ... But the unresolved question that will hang over the economy is how policy can delay and ultimately contain the next recession. It demands urgent attention from fiscal as well as monetary policymakers.

    Posted by on Sunday, December 6, 2015 at 11:05 AM in Economics, Fiscal Policy, Monetary Policy | Permalink  Comments (73)


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