Although it seems like a world away, the main economic policy argument in the early summer of 2010 was about the effectiveness of fiscal stimulus, in the wake of the Obama administration’s $787bn American Recovery and Reinvestment Act.
Now that the administration is asking for a new $447bn stimulus that question should be back at the top of the agenda – and thanks to two excellent new NBER papers it is going to be a lot harder for people to distort the economic argument.
Most of the new evidence suggests that in today’s specific circumstances – where the zero lower limit means that monetary policy is not as loose as the Fed would like – then fiscal stimulus could be very effective indeed. Read more
The Bank of Israel – one of the first to raise rates following Lehman Brothers’ failure – on Monday became the latest to override domestic price pressures and cut on the back of concern over the global outlook.
Following the lead of the central banks of Turkey and Brazil before him, Stanley Fischer, the Bank’s governor and sole rate-setter, shaved a quarter point off Israel’s benchmark interest rate to leave it at 3 per cent, despite inflation rising by half a percentage point to 3.4 per cent last month, above the 3 per cent upper limit of the inflation target range.
Public outcry at high inflation – particularly food price pressures – has inspired Facebook groups that have attracted over 100,000 members. And rising house prices have prompted more than a quarter of a million Israelis to take to the streets. (The central bank maintains that its measures, along with more house building, will slow the pace of house-price inflation).
Growth – at 2.4 per cent in the second quarter (annualised) – is relatively high, and unemployment – at 5.5 per cent – low.
All of which has meant that analysts – the vast majority of which had forecast a rate hold – were taken aback.
So why has Mr Fischer cut rates? Read more
The need for a second round of quantitative easing, which now appears likely, highlights the Bank of England’s misplaced faith in the stimulative power of a falling pound.
Ben Broadbent, an external member of the Monetary Policy Committee, this morning blamed the “sclerotic” banking industry for the failure of the pound’s depreciation to deliver the impact Threadneedle Street was hoping for.
If Mr Broadbent is right, then the economy’s woes are more serious than previously thought, which makes the case for further QE all the more compelling. Read more