Printing money “doesn’t work:” economists

Can a subdued economy be boosted by printing more money?

That’s a critically important question right now, as the power of conventional monetary policy – based on manipulating official interest rates – is reduced those rates approach zero.

With the Reserve Bank’s cash rate at 4.5 per cent, the issue is not urgent in Australia, at least not directly.

But with official rates already approaching zero in Japan, the United States and several European countries, the question has a lot of kick for the global economy.

What it comes down to, in the real world, is can these economies be revived by printing money?

The chairman of the US Federal Reserve, Ben Bernanke, signalled last week that he might well try some “unconventional” steps, like this,  to revive the US economy, which now has 9.5 per cent unemployment.

Although the Reserve Bank would certainly wish Mr Bernanke every success, if he does go down that path, two of its economists, Stephen Elias and Mariano Kulish, have their doubts.

They acknowledge the problem.

“With little or no room left to lower policy rates, central banks in these economies have moved to purchase a variety of assets with newly created money,” they say in a research discussion paper the Reserve Bank has just published. (see RBA.gov.au)

The two economists admit that there is some econometric evidence which “on the surface”…”often suggests that real, base money growth can  be a significant  determinant of  total output for a number of countries and sample periods.”

The two  economists, though, tested these conclusions, through several models.

They concluded that these apparently positive outcomes, in fact, are “likely to be biased.”

They said, too, that the bias is likely to be either upwards, or downwards, depending on the model chosen.

Their paper is highly technical.

However their  basic conclusion is clear enough.  They says there isn’t yet good evidence to show that these policies actually work.

If they are right, their central conclusion is very significant.

It means that some of the world’s biggest economies are likely to remain subdued, for some time yet.