Friday, February 15, 2013

McKinnon on the Fatal Mistakes of the Federal Reserve

According to Ronald McKinnon, and I fully endorse his views:
US officials point to the stagnant US economy as the reason they want to keep domestic interest rates as low as possible—even zero. They must be convinced that this common view is mistaken, and that raising short-term interest rates on dollar assets from zero to modest levels—say 2%—jointly with their peer central banks in developed countries is in America’s own best interests, as well as that of the rest of the world. The longer the Fed’s zero interest rate policy stays in place, the more difficult it becomes to get out of the resulting liquidity trap and restore a more normal flow of financial intermediation within the USA—so as to avoid the perpetual stagnation we now see in Japan, sometimes called “Japanization.”

No comments: