The global economy has been growing not far away from historical average rates. Lower oil prices have provided a welcome boost, and dollar appreciation has shifted growth momentum from stronger to weaker economies. But the global expansion remains unbalanced, debt levels and financial risks are still too high, productivity growth is too low, and the room for manoeuvre in macroeconomic policy has continued to narrow.
The most visible symptom of these tensions is that, globally, interest rates have been extraordinarily low for an exceptionally long time, against any benchmark. In particular, the fall of sovereign bond yields into negative territory has been unprecedented and has stretched the boundaries of the unthinkable.
Understanding the underlying causes of these tensions is proving exceedingly difficult. A key reason for these tensions, argue the BIS authors, has been a failure to come to grips with how financial developments interact with output and inflation in a globalised economy. For some time now, policies have proved ineffective in preventing the build-up and collapse of hugely damaging financial imbalances. These have left long-lasting scars in the economic tissue.
The Report also casts light on two underappreciated aspects of the problem. By misallocating resources, financial booms can sap productivity both as booms unfold and following the crisis they leave in their wake. And the international monetary and financial system has amplified financial imbalances by transmitting exceptionally easy monetary and financial conditions to countries that did not need them.
Addressing these deficiencies calls for "a triple rebalancing in national and international policy frameworks", towards policies that pay greater attention to the medium term, to financial factors and to the costly interplay of domestic-focused decisions.
An essential element of this rebalancing is to rely less on demand management policies and more on structural ones, so as to abandon the debt-fuelled growth model that has acted as a political and social substitute for productivity-enhancing reforms. The dividend from the oil price drop provides an opportunity that should not be missed. Monetary policy has been overburdened for far too long. It must be part of the answer but cannot be the whole answer. Otherwise, the danger is that the previously unthinkable becomes accepted as the new normal.
Press release
85th Annual report
Taking a longer-term perspective - Speech by Jaime Caruana
© BIS - Bank for International Settlements
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