The Era of Cheap Money Shows No One Knows How Monetary Policy Works

davfor

The evolving and increasingly interdependent relationship between central banks and governments may warrant some ongoing attention. This changing relationship appears likely to alter the way the stock and bond markets behave....

Monetary policy is supposed to work like this: cut interest rates, and you’ll encourage businesses and households to borrow, invest and spend. It’s not really playing out that way.

In the cheap-money era, now into its second decade in most of the developed world (and third in Japan), there’s been plenty of borrowing. But it’s been governments doing it.

....The arms-length relationship between politicians and central bankers “was built when the fat tail was excessively high inflation,” said Paul McCulley, the former Pimco chief economist. “Now the fat tail is excessively low inflation, call it deflation. We need to update our thinking on a more cooperative stance between the fiscal and monetary authorities.”

https://bloomberg.com/news/articles/2019-03-15/cheap-money-era-shows-no-one-knows-how-monetary-policy-works