As fiscal policy efforts by governments seem to have stalled in stimulating economic growth, central banks worldwide seem more willing to use monetary policy tools to address stagnating economic growth. Countries are also taking actions to restrain their currencies from rising to protect their export sectors. Japan will begin a $60 billion program to buy government bonds, corporate IOUs, real-estate investment trust funds and exchange-traded funds. Officials from the Federal Reserve are signaling that the United States is poised to resume next month the large-scale bond-buying effort it stopped in March of 2010. The Reserve Bank of Australia held rates steady, in contrast to market expectations of a rate increase. The Bank of England suspended its bond-buying in February, but it may resume purchases if economic conditions worsen. Brazil raised a tax on foreign fixed-income investments to try to slow the flow foreign investment which has driven the nation’s currency to 25-month highs. Nations seem reluctant to continue to use fiscal spending to stimulate their economies, due to growing public doubts about the effectiveness of the spending and concerns about government debt levels, but cutting back on fiscal spending while using monetary policy is like having “one engine firing in reverse.”
Date: October 6, 2010
Questions for Discussion:
- How can fiscal and monetary policy tools be used to stimulate an economy?
- Discuss the concerns with using monetary policy to stimulate an economy.
- How does the fact that the world’s emerging economies seem to have recovered faster from the global economic downturn than the economies of the United States, Europe and Japan impact global currency rates?
Related Article: Fujikawa, M., & Wessel, D. (2010, October 6). Central banks open spigot. Wall Street Journal, pp. A1, A12. (Retrievable online at http://online.wsj.com/article/SB10001424052748703298504575534271590665434.html)