Too early to exit stimulus, says Krugman
October 15, 2009
By Kelly Olsen Seoul
Central banks should fight the urge to raise interest rates until the global economy showed stronger signs of recovery and joblessness began to decline, Nobel prize-winning economist Paul Krugman said yesterday.
"Under the best of circumstances, we're going to have years before we return to anything that approaches reasonable levels of employment in the major advanced economies," Krugman told the World Knowledge Forum, an annual conference sponsored by a South Korean business newspaper.
"That means staying with these very non-standard policies of keeping interest rates close to zero for an extended period," he said.
Krugman, who teaches at Princeton University in the US, won the Nobel Memorial Prize in Economic Sciences last year for his analysis of how economies of scale can affect international trade patterns. He writes columns for The New York Times.
His remarks come amid a debate over "exit strategies", or when the extraordinary measures, such as ultra low interest rates and other financial and economic support measures put in place to fight the global economic crisis, should start being withdrawn.
Krugman said he was worried by the increasing number of voices calling for an end to the unconventional monetary and fiscal responses, which he credited with saving the world from sinking into depression.
"There have been some amazing statements by members of the Federal Reserve system, saying that we may need to start raising interest rates even before unemployment starts to drop," he said.
He called it "alarming, because it does bring back echoes of the Great Depression".
The Fed, which has pumped over $2 trillion (R14.7 trillion) into the economy to spur lending and boost consumer spending, is not expected to raise the interest rate until sometime next year, at the earliest. The rate is currently at a record low near zero.
Krugman said according to his calculations, the US should avoid exiting from its measures until the unemployment rate fell to "roughly 7 percent, which is a development that is at least two years and probably much longer away".
The US unemployment rate stood at 9.8 percent last month, the highest since 1983.
Krugman said he was "surprised" that Australia's central bank had raised its benchmark rate to 3.25 percent last week. "I don't think its numbers actually warrant a rate hike yet."
That was the first hike by a major central bank since the financial crisis worsened and has spurred speculation over which bank will be next to tighten policy. - Sapa-AP
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