The Federal Reserve, under political pressure to combat unemployment, risks creating financial instability through its record monetary stimulus, according to University of Chicago Professor Raghuram Rajan. “A more stable and less aggressive U.S. monetary policy will not only lead to more stable U.S. growth; it will also reduce the volatility of capital flows coming into and out of emerging... [more]
The Federal Reserve, under political pressure to combat unemployment, risks creating financial instability through its record monetary stimulus, according to University of Chicago Professor Raghuram Rajan.
“A more stable and less aggressive U.S. monetary policy will not only lead to more stable U.S. growth; it will also reduce the volatility of capital flows coming into and out of emerging markets,” Rajan said in a paper scheduled to be published in the March/April issue of Foreign Affairs. He predicted the financial crisis two years before it hit.
The U.S. central bank is under “enormous” political pressure to be “adventurous with monetary policy” because the unemployment rate is high, yet its policies are unlikely to restore jobs lost as a result of the collapse of the housing market, said Rajan, a former International Monetary Fund chief economist.
“Such pressure can be counterproductive if the Fed’s aggressive policies have little direct effect on employment but instead generate asset price bubbles and risky lending, which eventually impose high costs on the economy, including greater unemployment,” Rajan said.
The Fed’s policies create “very real dangers” around the world because other countries imitate the U.S. central bank by lowering interest rates as they don’t want their currencies to appreciate against the dollar, he said.
http://www.bloomberg.com/news/2011-02-11/rajan-who-predicted-2008-crisis-says-fed-needs-less-aggressive-policy.html[less]
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The Economist asked members of “Economics by invitation”, our online forum of more than 50 prominent economists, to nominate colleagues with the most important ideas for a post-crisis world. The respondents came up with nearly 20 different names. None won an absolute majority, but a few cropped up more often than others (see table).
First among them is Raghuram Rajan of the University of Chicago, whose book “Fault Lines” argues that rising inequality led governments to facilitate credit growth, contributing to the crisis. Robert Shiller of Yale University has long warned of the dangers of irrational exuberance, and urges colleagues to consider “animal spirits” in assessing economic fluctuations. Kenneth Rogoff’s work on debt bubbles with Carmen Reinhart placed the crisis in an 800-year continuum of borrowing and collapse: his papers have earned the most academic citations of the table-toppers in our poll. Barry Eichengreen has written excellent works on the history of the gold standard and the danger of fixed-exchange-rate regimes. Nouriel Roubini earned the nickname “Dr Doom” for warning of an impending global crash.
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The Economist asked members of “Economics by invitation”, our online forum of more than 50 prominent economists, to nominate colleagues with the most important ideas for a post-crisis world. The respondents came up with nearly 20 different names. None won an absolute majority, but a few cropped up more often than others (see table).
First among them is Raghuram Rajan of the University of Chicago, whose book “Fault Lines” argues that rising inequality led governments to facilitate credit growth, contributing to the crisis. Robert Shiller of Yale University has long warned of the dangers of irrational exuberance, and urges colleagues to consider “animal spirits” in assessing economic fluctuations. Kenneth Rogoff’s work on debt bubbles with Carmen Reinhart placed the crisis in an 800-year continuum of borrowing and collapse: his papers have earned the most academic citations of the table-toppers in our poll. Barry Eichengreen has written excellent works on the history of the gold standard and the danger of fixed-exchange-rate regimes. Nouriel Roubini earned the nickname “Dr Doom” for warning of an impending global crash.
Related topics
http://www.economist.com/node/18118985?story_id=18118985&CFID=162172788&CFTOKEN=99062498