Additional policy measures -- beyond monetary policies -- are vital to make a durable exit from the global financial crisis and to safeguard financial stability. Crisis legacies need to be addressed. The traction of monetary policies must be increased with complementary reforms and financial excesses need to be contained.
If the ECB is willing to use all its available tools without limit, there is little reason to doubt that it can hit its inflation target of close to 2%. However, making that policy commitment credible remains a great challenge because of the controversy and dissent about acquiring risky government debt.
As the world struggles to recover from the global economic crisis, the unconventional monetary policies that many advanced countries adopted in its wake seem to have gained widespread acceptance. In those economies, however, where debt overhangs, policy is uncertain, or the need for structural reform constrains domestic demand, there is a legitimate question as to whether these policies' domestic benefits have offset their damaging spillovers to other economies. The disregard for spillovers could put the global economy on a dangerous path of unconventional monetary tit for tat. To ensure stable and sustainable economic growth, world leaders must re-examine the international rules of the monetary game, with advanced and emerging economies alike adopting more mutually beneficial monetary policies.
I believe that the Fed has overreached in its monetary policy not just in response to the latest crisis, but pretty consistently over the 15-20 years. In an effort to lessen the effects of (inevitable) economic downturns, the Fed (and other central banks) has caused extreme financial distortions and dislocations.
In our recent annual review of Turkey's economy, regression analysis suggests that, barring a significant change in policies or the economic environment, the level of growth consistent with a stable current account is in the 2¾ to 3½ percent range. In other words, growth above this speed limit would lead to a wider current account deficit.