The Limits of Global Monetary Policy

The G20 meeting of finance ministers and central bank governors in late February reached a consensus on joint efforts to stabilize economic growth. China's central bank took the lead in lowering the bank reserve requirement ratio,and central banks of the world's developed countries successively sent out signals of further monetary easing. The European Central Bank cut its key interest rates and increased the scale of debt purchases,and the Bank of Japan held fast to its negative interest rate policy,stating it would step up monetary easing when necessary. The U.S. Federal Reserve released a dovish message on interest rate hikes (at least temporarily),and that led to speculation that there would be only two interest rate increases by the year-end,down from estimates of four not long ago. Moreover,the Reserve Bank of Australia,the Bank of Korea,and the Reserve Bank of New Zealand have all expressed similar intentions of maintaining easier monetary policy.

In the context of a continuing economic slowdown and market uncertainties,global central banks are starting a new round of monetary easing,and this is critical to stabilizing the world economy and preventing financial risks. However,there have been a number of unexpected consequences. For example,after the Bank of Japan rolled out negative interest rates and the European Central Bank cut its interest rates,the yen and the euro unexpectedly surged. Global investors showed greater aversion to risk. To truly break free from the lingering effects of the financial crisis,many countries will need to adopt a more active fiscal policy along with deeper structural reforms.

Diminishing Marginal Gains from Monetary Policy

In January,the International Monetary Fund lowered its forecast for 2016 global economic growth to 3.4% from 3.6%,while the Organization for Economic Cooperation and Development cut its estimate to 3.0% from 3.3%. Since the Fed raised interest rates late last year,US economic data have been mixed. Employment has been relatively strong but this tends to be a lagging indicator. US manufacturing and exports have been unable to hold up under the weight of a strong dollar while corporate profits have weakened. Europe and Japan have suffered significant deflationary pressure; German banks have seen new risk concerns and the yen has strengthened despite Japan's negative interest rates. This points to rising worries among global investors over risk.

In the face of a prolonged economic downturn,traditional monetary and fiscal policy means are out of sync. We have greater monetary easing by global central banks,and even negative interest rates,yet we have insufficiently proactive fiscal policies. For example,the US debt ceiling is mainly constrained by political considerations rather than financing concerns. Benefiting from economic growth and tax increases,Germany had a 12.1 billion euro fiscal surplus in 2015 ,making two consecutive years of no increases in federal fiscal debt. Considering the weak economic environment in the eurozone,the emergence of another fiscal surplus was attributed to nothing more than a tighter fiscal policy. I agree that fiscal consolidation is needed over the medium term,but it may be a reasonable policy option to support economic growth by stepping up infrastructure spending with short-term fiscal spending in the currently sluggish economic environment.

More importantly,economic restructuring since the crisis has been woefully inadequate. For example,in the United States,re-industrialization has proceeded slowly,with value-added manufacturing accounting for only 12.1% of GDP in 2014,even less than the 12.8% level in 2007 - just before the financial crisis. The pattern of high consumption and a low savings rate has remained unchanged. Since the financial crisis,the reliance on private consumption in the US has actually risen,topping 68% of GDP for a post-World War II high. The US trade deficit has remained acute,swelling to its highest level in four years in 2015. Meanwhile,needed reforms in taxation and the health sector have been minimal. Asset prices,particularly those for real estate and stocks,have increased markedly. Salary increases in the financial sector far outpaced those of other industries,leading to further imbalances in wealth distribution.

As for the eurozone,the refugee crisis and a spate of terrorist attacks have allowed an upsurge in the popularity of fringe political groups. While there has been growing opposition to monetary easing by the European Central Bank,there are numerous impediments on the fiscal policy environment. Financial integration has a long way to go,for example,while labor and welfare reforms are undergoing a long-term process with little likelihood of immediate results. Currently,the eurozone is generally facing high unemployment. While German unemployment hit a 25-year low of 6.6% in February,jobless levels in France and Italy have exceeded 10%,while Spanish unemployment has remained above 20%,with youth unemployment as high as 50%.

To a certain extent this reflects Germany's achievements in reforms on the labor,welfare spending and taxation fronts. They also suggest that similar reforms in other countries have been lagging. Meanwhile,many European countries have large but inefficien