At the latest since the ECB’s latest loosening package in September, the limits of monetary policy have been the subject of renewed discussion. Because the lower interest rates slide into the red, the more questionable the positive real effects on the economy that the central bank expects them to have. At the same time, the risks to financial stability are increasing, whether due to excessive indebtedness or price exaggerations on the stock, bond or real estate markets.
But the financial markets have long since adjusted to the overabundant supply of liquidity. The hunt for returns leads to increasingly risky investments. And an excessive indebtedness does not seem to represent a large risk with a zero or negative interest rate first of all. This makes it all the more difficult for central banks to get out of low interest rates.
In order to make their task easier for the central banks, they must be supported by politicians. And not by regularly asking them to lower interest rates even further. Rather, the conditions for growth in the national economies must be improved. The recipes for this must be based on specific national requirements. This can include infrastructure investments, but also structural reforms and tax relief.
Monetary policy has reached its limits, partly because it has been the only game in town for too long. Fiscal and structural policy must support them. At the same time, however, the monetary authorities should free themselves from the idea that their policies could ensure a stable inflation rate, robust growth and low volatility financial markets at the same time.