Where to draw those boundaries is the preoccupation of a recent paper published by BlackRock Inc. and co-written by Fischer, the Fed’s former vice-chair. It argues that monetary stimulus has run out of road as a way to boost economies, while fiscal policy hasn’t been “pulling its weight.’’
One solution is to combine them –- for example, by letting central banks create money to finance government budget deficits. The challenge, say the BlackRock authors, is to encase such “historically unusual’’ measures in explicit rules -- so that central bankers retain their independence, and can apply the brakes if government spending gets out of control.
Their proposal involves an emergency fiscal fund that central banks could activate when inflation is dangerously below-target and there’s no room to cut rates. The money-tap would shut off automatically once prices are back on track.
‘A New Realm’
The details differ, but plenty of others have reached similar conclusions about what central bankers could do next -– provided they have government authorization.
“When you have the next downturn, QE isn’t going to be as effective, interest rates aren’t going to be effective,’’ Dalio, founder of Bridgewater Associates LP, the world’s biggest hedge fund, told Bloomberg TV.
“Then you need fiscal policies and debt monetization,’’ he said. “We’re going to enter a new realm.’’
Modern Monetary Theory, a school that says government spending and taxes are better tools to steer the economy than interest rates, has also been gaining support. MMT is relaxed about monetary financing of budget deficits, and doesn’t see it as much different from selling bonds.
Along with the lack of monetary ammunition, one reason behind the big rethink may be deepening inequality, especially after 2008’s financial crisis.
As central banks shifted from setting rates to seemingly propping up financial assets, they became more vulnerable to the charges that their policies helped the rich most, and went beyond their remits.
A new book by financial commentator Frances Coppola, titled “The Case For People’s Quantitative Easing,” calls for newly minted central-bank money to be funneled straight into the bank accounts of households or small businesses. That kind of stimulus will deliver more growth and better distribution, she argues -- as well as addressing challenges like ageing populations and automation.