Former chief economist of the International Monetary Fund, Raghuram Rajan, said central banks should eliminate quantitative easing from the monetary policy toolkit because there is no evidence that it leads to better economic outcomes.
“I will put it on the shelf until we find out more about it. I don’t think the benefits outweigh the costs. We need to study this better to understand the positives. There are negatives,” added Rajan, who served as governor of the Reserve Bank of India from 2013 to 2016. Bloomberg, and Al Arabiya.net reviewed it.
Quantitative easing was adopted during the 2008 financial crisis, when interest rates could not be lowered to lower levels than they were, and because the economy needed support. Under the program, the world’s major central banks flooded markets with trillions of dollars to buy bonds, flood the banking sector with liquidity and lower long-term borrowing costs.
Right now, the banks are desperately trying to get rid of the stimulus by selling those bonds at the same time they raise interest rates to curb spiraling inflation, which some argue has been fueled by the money printing.
Rajan, who was one of the few economists who correctly predicted the 2008 financial crisis, said in an interview that he would not use quantitative easing or negative interest rates in a future recession.
He said that the only monetary policy justification for both instruments was to avoid “accelerated deflation,” but that the risks of an accelerated price downward pace had been exaggerated. He claimed there had been no threat since the Great Depression of the 1930s.
Rajan added that Japan was experiencing a mild deflation, but “if you look at things like the average growth rate per capita, the rates were very good.” “So what is the negative impact — other than the economists getting worried?”
In Rajan’s opinion, the problem of moderate deflation in light of high inflation may seem like a small problem, and not so serious.
Central banks are using “quantitative easing” as a solution, after aggressively raising interest rates over the past year and a half to tackle the worst inflationary shock since the 1970s.
Rajan pointed to his biggest concern, for now, which is: “Any signs that current interest rates have peaked could backfire by sparking an early celebration in the markets resulting in looser financial conditions and forcing policy makers to take adverse decisions.”
One of the problems with QE, Rajan said, is that it allows politicians to make weak growth and low inflation a problem for the central bank, when there is little it can do.
There are other things that get in the way of investing other than the cost of financing. Financing is cheaper, just because they (the companies) don’t find the investment worthwhile.
“The big problem when you have low inflation is really a political problem for central banks — there is some stimulus you can do, which you don’t do. So central banks get pressured.”
QE did work at the start of the 2008 financial crisis as a short-term liquidity tool, Rajan said, but in its “current semi-permanent state, it has caused problems.” It has led to “more financial risk rather than real risk, which does not translate into real activity.” more, but it makes the economy more vulnerable.”
“Low long-term rates were supposed to boost investment, but “I don’t think we see that correlation,” he added. He said QE was also bad for public finances by turning cheap long-term debt into expensive short-term borrowing.
The Bank of England currently estimates that QE will ultimately cost the government more than £100 billion ($125 billion) as it has to cover losses in huge holdings held by the central bank.