Columbia Professor Joseph Stiglitz has called the belief that monetary policy, such as quantitative easing, can support countries while they pursue austerity measures “sheer folly” in the Financial Times.His critique targets the assumption that monetary policy can always work to stimulate an economy when a country is in a recession. Stiglitz says that’s no certainty and that, actually, it can cause damage by stimulating bubbles, like the U.S. did through the early 2000s with housing.
Stiglitz then turns to argue for fiscal stimulus. He defends such policies, saying the, “returns on these investments far, far exceed the government’s cost of capital.”
While Stiglitz has long been a supporter for fiscal stimulus, this may be his most aggressive critique of the threats associated with monetary stimulus. Expect more pro-fiscal stimulus advocates to make the anti-monetary stimulus case in the coming weeks as quantitative easing 2 approaches.
Why doesn’t monetary stimulus and austerity work in this scenario? Check out Richard Koo’s explanation >