Gita Gopinath, chief economist of the International Monetary Fund (IMF), has urged policymakers to provide more fiscal stimulus to boost the recovery from the Covid-19 pandemic as the global economy is in a liquidity trap.
“For the first time, in 60 per cent of the global economy — including 97 per cent of advanced economies — central banks have pushed policy interest rates below 1 percent. In one-fifth of the world, they are negative,” Gopinath wrote in an op-ed article in the Financial Times, adding central banks have little room to further cut interest rates if another shock strikes, Xinhua news agency reported.
“It has led to the inescapable conclusion that the world is in a global liquidity trap, where monetary policy has limited effect. We must agree on appropriate policies to climb out,” Gopinath said on Monday, noting fiscal policy must play a leading role in the recovery.
Gopinath suggested that fiscal authorities can actively support demand through cash transfers to support consumption and large-scale investment in medical facilities, digital infrastructure and environment protection.
“These expenditures create jobs, stimulate private investment and lay the foundation for a stronger and greener recovery,” she said.
Gopinath noted that “the importance of fiscal stimulus has probably never been greater” because the spending multiplier, the pay-off in economic growth from an increase in public investment, is much larger in a prolonged liquidity trap.
“Monetary policy has and will remain central to this effort, but with the world in a global liquidity trap it is time for a global synchronised fiscal push to lift up prospects for all,” said the IMF chief economist.
In its World Economic Outlook report released last month, the IMF revised up the 2020 forecast for global economy to a contraction of 4.4 per cent. Despite the upward revision, the IMF said the ascent out of this crisis is likely to be “long, uneven and highly uncertain”.