Olivier Jeanne@ VOX
3 March 2009
With the scope for monetary policy apparently exhausted – policy interest rates have been reduced to very low levels – policymakers seem to have pinned their hopes on fiscal stimulus. The only hope left for monetary policy is that we will avoid deflation. However, it is not clear how central banks would respond if deflationary pressures were to become stronger. The uncertainty resulting from central banks’ failure to clarify their anti-deflation policies is damaging confidence and – as I will argue below – carries risks for the international economic order.
To defuse those risks, I would propose the organisation of a round of “multilateral consultation”, under the auspices of the IMF, on how to avoid deflation. The concept of multilateral consultation was tried in 2006-07, when China, the Eurozone, Japan, Saudi Arabia, and the US discussed the problems posed by global financial imbalances.1 My proposal is to have a second round of consultations focused on the risks of global deflation. This is a modest step, but it would be one in the right direction. Link to article
