In NYT Upshot, Wolfers discusses difficulty of boosting economy when interest rates stay low
Justin Wolfers’ April 7 column for The New York Times "Upshot" argues: “The economy may be stuck in a near-zero world.”
Wolfers cites a new study claiming near-zero interest rates will become commonplace in the United States, impeding the Federal Reserve’s ability to cut rates and boost the economy during a slowdown.
A conservative prediction, Wolfers says, is that nominal interest rates will fall from about six percent to three percent. With little room to cut rates further, “even a minor slowdown now could require a larger rate cut than is feasible."
If monetary policy fails, he continues, perhaps there’s room for fiscal policy to play a more active role. Wolfers suggests “building in stronger automatic stabilizers, mechanisms to increase spending in bad times, without requiring Congressional action.” One option could be creating a Highway Trust Fund to build more roads when rates hit zero.
Wolfers admits the idea goes against the climate of mistrust against fiscal policy. “But in a world of low interest rates in which the Fed is frequently hamstrung, we may not have that choice.”
Justin Wolfers is a professor of public policy at the Ford School and a professor of economics in the department of economics. Wolfers' research interests include labor economics, macroeconomics, political economy, economics of the family, social policy, law and economics, and behavioral economics.