Source | The Economic Times : By Nishanth Vasudevan
Monetary policy alone cannot be expected to cure economic ailments, said University of Chicago economics professor Lars Peter Hansen, one of the three recipients of the Nobel Prize in 2013, and an expert on linkages between financial markets and the broader macroeconomy. In an interview with Nishanth Vasudevan, Hansen, who was in Mumbai on Monday for an ISB event, said there is some evidence of India being a bright spot globally. Edited excerpts:
There seems to be a growing realisation that zero and negative interest rates are not working after almost 10 years. What next now? The problem is people look up to monetary policy to do too much. They think the interest rate policy can fix the entire economy. There are limits on what the monetary policy in isolation can do. Monetary policy by itself is running out of gas. We cannot expect it to cure the economic ailments. Fiscal challenges remain tremendously important for many of these economies.
Many on Wall Street believe that bond markets are in a big bubble with yields moving into negative territory. Do you agree? There have been interesting discussions about what we mean by a bubble. It is my belief that for an economy like the US, we should start engaging in a very predictable way in increasing short-term interest rates. That can be a productive course of action. That is a little distinct from what is going on with monetary policy, which continues to leave on the table uncertainty, speculation on whether the Fed is going to move this time around or next time. That is something counter-productive.
To what extent is that creating a bubble in the bond market is not very clear. In a bubble, prices build up and then there is a sharp decline. But, I am not willing to say that we know that there is a bubble in the bond market.
Is the US growing enough to see rate increases? The US is seeing a modest round of inflation. I am not sure how the Fed set its target inflation rate to begin with. I would like to see more growth in the US economy. When I am looking at growth, I am looking at how to create more enterprises; how to encourage them to hire the next set of young people; monetary policy is not a way to get to that. We have to look at what are the impediments to creating enterprises and how that can be removed going forward.
Is there a possibility of a Lehman-like situation again? What are the chances of the bond market triggering it? First of all, I did not expect the previous financial crisis to have such dramatic consequences. Many people say I predicted the financial crisis. But, did they really predict the timing and magnitude of the financial crisis? I can sit back and say there are crises down the road and I will be right eventually. So, I do believe there will be future crisis. Will the bond market be the one that triggers it? I am doubtful whether this would be the source of the next big financial crisis.