William Blair Economist Olga Bitel describes how effective central bank policies have been in the last five years and shares views on how central banks – always the subject of constant scrutiny – may shape the global economy going forward. Watch the video or read the recap below.
Central banks seem to have been playing an increasingly important role in the global economy since the global financial crisis. Will they continue to be as important in the future? How effective will central bank actions be over the next five years?
Bitel: Central banks try to ensure that an economy grows at its potential. They do this by maintaining the cost of money—i.e., interest rates—at a level roughly in line with the structural growth rate of the economy.
When the U.S. mortgage crisis struck—and a repeat of the 1930s domino bankruptcies presented a real risk— central banks around the world turned to extraordinarily stimulative policies.
Whatever the merits of negative real rates and quantitative easing—even if only to ensure that a very steep yield curve helped banks recapitalize their damaged balance—central banks’ policies proved effective in averting financial system meltdown and a multiyear economic depression.
Central banks’ policies proved effective in averting financial system meltdown and a multiyear economic depression.
More recently, even in Japan, the Bank of Japan managed to escape persistent deflation. Since 2014, core inflation in Japan has hovered around 1%, which is in line with most developed economies.
Central bankers, like all other market participants, may make mistakes in interpreting the incoming economic data, assessing an economy’s potential growth, or gauging the impact of their actions on the broad economy. This explains why their actions are the subject of constant scrutiny.
At the same time, in the absence of sustained political pressure or other institutional innovations in the current arrangement, central banks’ actions are likely to continue to be at least as effective as they have been in the past.
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