The third tranche of quantitative easing that the US Federal Reserve undertook to stimulate the economy was not enough and the central bank should look at new tools to achieve its aims, believes Kenneth Rogoff, Professor - Economics, Harvard University.
Rogoff, who co-wrote the bestselling book This Time is Different, was in Mumbai recently where he delivered the LK Jha Memorial Lecture at the Reserve Bank of India.
Speaking with CNBC-TV18, the economist added the US central bank should also consider raising its inflation target to more aggressively target growth.
Also read: India, EMs at risk of FII outflows post taper: Macquarie
Excerpts from the interview below. To see the full interview, watch the video.
Q: We are delighted to have you today because you come fresh off the back of the first taper announcement that the Federal Reserve made. A small one, a USD 10 billion cut in bond buying starting January, is this what you expected and what did you make of the fact that equity markets in the US rallied on the back of that announcement?
A: It is exactly what I expected. They were wrong-footed in May when Ben Bernanke said something without the markets understanding what he meant and we had this panic, people thought that the US was tightening monetary policy.
This time it laid a lot of ground for why they were doing it which is largely because they didn’t think it was working, they thought the risks were building up and the benefits were not and they really decided to go in another direction in easing. It might not work but their intent is not really to tighten, their intent is to shift from quantitative easing (QE), which in my own opinion they weren’t willing to do vigorously enough to be effective therefore it was ineffective. I think the market expected it.
And I said this in my speech in Reserve Bank of India (RBI) that there would be a taper of something like USD 10 billion that we saw and the markets wouldn’t react that much because they were expecting it.
So they were a little prepared for this. I am not sure where it is going because they want to have looser policy but what is the instrument going to be, what are they going to do to convince markets -- that is still up in the air. But there isn’t a panic. They may not know exactly what they are doing but they know what they are trying to do.
Q: You don't think this QE program was enough to help the US economy recover?
A: We are talking about the third tranche of QE. I think the first one was very effective in the middle of the crisis they were buying all sorts of stuff. Academic studies show the second one maybe had some effect but by the third one it just wasn’t vigorous enough. It is not like what is happening in Japan, where we will just do whatever it takes and had they said that, the risks would have been heightened there is no doubt about that but it would have worked in elevating inflation.
But the problem is the governor’s turnover, there are five governors post coming up, who knows who will be the president by 2016 so it is very hard to lock in, it doesn’t really have the credibility.
I think it is a perfectly fine thing to try but how do they convince the markets that they are really committed about what are they going to do. It is an open question. I would like to see them say that they have a more relaxed attitude about inflation so maybe raise the trigger that they are talking about with inflation, something to communicate that they really mean it. I think it will evolve over time. The Fed policy is still a work-in-progress with the zero amount of interest rates.
Q: You are a close friend of Governor Raghuram Rajan, you have watched India closely from many years, what do you make of where we are in the Indian economy? Do you see India recovering from this low-growth-high-inflation situation in the next couple of years to come?
A: I think the India growth story will come back. The first time I came here was in 2002, I was chief economist at the IMF then and growth was around 4.5 percent and it had been lagging for a long time and I said there is so much low-hanging fruit, you can get to 8 percent on a sustained basis, you don't have to do everything right, you just have to do something’s right. India is not in a middle-income trap, it is way far from that and it had a good period after that.
There is still a lot of low-hanging fruit with building infrastructure like the airports, bridges. There is clearly the capacity to do that but there needs to be more of that. There are many blockages in the supply chain around the economic projects that are half finished because there is not an approval somewhere. There is lot of potential in India.
The inflation story is difficult, that is challenging that you are in this position low-growth, high-inflation. No one wants to be in that position. It is much more like the 1970s US than it is really like the 2013 US and it faces some of the same challenges. Inflation is going to come down but it would be nice if some piece of it was that growth was coming up at the same time.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
