Monetary policy conduct distorting economy: Stiglitz
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Nobel laureate and economist Joseph E Stiglitz, known for his critical view of the management of globalisation and free-market economists, on Thursday questioned the way monetary policy is conducted and strongly advocated for more accountability from monetary authorities.
Stiglitz, who is a professor at the Columbia University, also said central banks should broaden their objectives beyond inflation and also focus on employment, growth, and financial stability.
"Some parts of the economy are more interest-sensitive than others, and some parts are more sensitive to the availability of bank credit. Hence loosening and tightening of credit induces more volatility in some sectors than others, and because of imperfections in risk markets, it imposes significant costs on these sectors. In a sense, the way monetary policy is conducted distorts the economy," he said while delivering the CD Deshmukh Memorial Lecture.
Stiglitz said fighting inflation by raising interest rates and increasing unemployment also has distributive effects as the costs are borne directly by workers as there is a downward pressure on wages. This would lower tax revenues resulting in cutbacks of welfare schemes.
While monetary policy may be effective at constraining output, it may be far less so in stimulating the economy in a deep downturn, he said.
He said monetary authorities have been engaged in quasi-fiscal operations, in ways that are non-transparent, and often seem capricious.
"The loans by the Fed and ECB to banks at low interest — which they could use to buy high yielding bonds — was, in effect, a gift worth tens of billions of dollars, circumventing the usual public appropriations process. It is unconscionable that such power over the purse be given to a non-elected body," he said.