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60 seconds with Huw van Steenis on why central banks are getting it wrong

Huw van Steenis explains why he thinks central banks have been struggling with the efficacy of their policies.

22.11.2016

Huw van Steenis

Huw van Steenis

Global Head of Strategy

Contributes to
Unstructured Learning Time

CPD Accredited

Central banks are getting it wrong in part because they have the wrong models. They assume a frictionless economy, where money zips around and no-one ever defaults. Alas, this just is not the case.

This is also why quantitative easing is increasingly a spent force. Take, for example, the recent programme by the European Central Bank (ECB). It has offered to pay banks to lend money to the real economy and yet eurozone banks have taken less than 5% of the €1.6 trillion of loans the ECB has offered to pay.

If low rates are problematic, negative rates are probably even worse and central banks underestimate the negative impacts on the banking system itself. Take, for instance, Switzerland, where the Swiss banks have put up their prices rather than put them down.

So, what do we need to do? We need to put financial frictions into these central bank models. That does not mean going soft on the banks; we think the case for stress testing banks and having a resilient banking system is even stronger. But it means a greater focus on fiscal policy, on infrastructure spending and maybe thinking twice about the negative consequences of quantitative easing.

Huw van Steenis' full analysis is available here.

 

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