(Bloomberg) – The US and the euro area face tremendous economic challenges in a low-inflation, low-interest world, and central banks alone don't have the means to tackle them.
This is the message delivered by former European Central Bank President Mario Draghi and former Federal Reserve Chairman Janet Yellen at the American Economic Association annual meeting on Sunday.
"I believe that there is a certain risk of Japaneseization in the euro area, but it is by no means a matter of course," Draghi said of a video link to the San Diego conference when he takes comprehensive action against a deflationary crisis. "There is still room for this in the euro area, but time is not infinite," he added.
Yellen, who is now at the Brookings Institution in Washington, said she agreed with former Treasury Secretary Lawrence Summers that the United States was stuck in a worldly stagnation – a state where the savings they want are bigger than the investments and interest rates be pressed as a result.
Chronically by nature
It has ticked a number of structural forces that have pushed interest rates down – including an aging population and sluggish productivity – and suggested that they may exist for a while. "These factors can be inherently chronic," she said.
Draghi has instructed the euro area governments to cooperate with the ECB's efforts to support the economy in recent years through restrictive fiscal policies. "That is why the ECB has consistently demanded that fiscal policy play a stronger role and benefit from low interest rates," he said.
He advised political decision-makers in Europe not to put up with slipping into deflation. "It is certainly not too late for the euro area to avoid this," he said, adding: "The euro area is not in a deflationary trap."
do not give up
Yellen said US monetary policy should not be written off as a policy tool to fight recessions just because interest rates are so low. It agreed with its predecessor Ben Bernanke that quantitative easing and interest rate guidelines can give the economy an effective boost.
"While monetary policy plays an important role, it is unlikely to be enough in the coming years," said Yellen. It shouldn't be the only game in town.
"We can afford to increase federal spending and lower taxes" to prop up the economy in a recession, despite the fact that public debt has risen sharply in recent years, the former policy maker said.
However, Yellen expressed concern about the risks of financial stability that result from a long period of low interest rates. She also complained about the lack of macroprudential tools that the United States has to deal with.
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