A leading commentator says major economies across the globe are beginning to rethink the effectiveness of setting interest rates in a world of slower growth.
AMP Capital chief economist Shane Oliver says central banks have, in the last two decades, been focused on price stability (using inflation targets) and have played the first line of defence in stabilising the economic cycle, while fiscal policy has played back up, focusing more on fairness and efficiency.
However, there has been increasing talk about whether a new approach is needed to manage macro-economic stability in a world of slower trend growth.
“Key aspects of this debate are about inflation targeting – whether inflation targets need to be set higher or turned into price level or nominal GDP targets – and whether fiscal policy should play a greater role,” Mr Oliver said.
“The debate is arguably not as big an issue for countries like the US and Australia, but it is a big one for countries where deflation is, or risks becoming, entrenched such as Japan and maybe Europe.”
Mr Oliver said Japan ideally needs to combine monetary stimulus and fiscal stimulus – via some form of helicopter money - to have a greater chance of meeting its inflation and growth targets without further blowing out its already huge public debt to GDP ratio.
He said these issues will likely be discussed by central bankers as they gather in Jackson Hole, Wyoming, for the US Federal Reserve’s annual economic policy. The event – “Designing Resilient Monetary Policy Frameworks for the Future” – runs from Thursday to Saturday.
[Related: Cash rate a 'blunt tool' says RBA]