Central banks around the world have experienced a “failure to launch”. And by “failure to launch”, I do not mean the decision by some thirty-somethings to remain living with their parents – as parodied in a 2006 movie of the same name. Instead, I mean the inability of central banks in almost all developed countries to launch interest rates off the emergency levels adopted in response to the Global Financial Crisis.
Why are interest rates still near zero in so many countries – even though it has been almost nine years since the peak of the crisis? Why is so much monetary stimulus still believed to be needed – even as global economic growth has been above 3% for 7 years in a row and global inflation expected to pick up to about 3.5% by year end ? Why are central banks so reticent to raise rates given their experience that interest rates at such low levels, especially for a prolonged period of time, can increase risks – such as fostering financial market bubbles and unsustainable borrowing, supporting an inefficient allocation of resources, and creating challenges for pension funds, savers and banks?
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