With global growth stalling, the IMF is calling for more assertive policy action to boost it. In normal times, monetary stimulus is—even for liberal Keynesians like Paul Krugman—sufficient to address deficient demand. But these are most surely not normal times.
As our new CFR Global Monetary Policy Tracker shows, a record 23 countries—accounting for a quarter of world GDP—have central-bank policy rates of zero or less. A further six—including the United States—have policy rates of 1 percent or less. This means that the scope for monetary stimulus using conventional tools, policy-rate cuts towards zero, is—as the graphic above shows—non-existent or limited in nations accounting for 60 percent of the global economy.
What to do? Fiscal stimulus is now the tool of choice for notable centrist Keynesians like Larry Summers. Market monetarists like Scott Sumner, however, continue to argue that negative rates and quantitative easing (via longer-term asset purchases) still offer potentially limitless scope for monetary stimulus.
As a practical matter, fiscal stimulus is off the table in Europe, the United States, and Japan owing to a mix of political resistance and high debt levels. Monetary policy, which is set by politically independent central banks in the developed world, remains the only game in town. Yet given the bitter debates about the efficacy and legality of many unconventional monetary tools, the world may be left simply to hope the storm clouds clear on their own.