Monday, July 2, 2007

BIS puzzled by world economy (fg)

In her latest annual report, the Bank for International Settlements (BIS) made clear that she is confused about recent world-economic developments. There seems to be increasing imperfect knowledge about market forces in the economy, especially about transmission mechanisms, inflation dynamics, the role for credit aggregates and global imbalances. The insitution of all central banks points out that
  • world economic growth performs on an above-avarage level
  • inflation appears to be (still) moderat
  • real long-term interest rates remain historically low
  • risk spreads in asstet prices are alarmingly low
  • global imbalances are financed without the evolution of currency corrections or crisis

Nonetheless, appearently motivated by Austrian Business Cyclye Theory (see a recent comment of amv) and the macroeocnomic constellation in the face of the 30's, the great inflation or Japan's economic crisis, BIS's economists identify above mentioned developments as stylized facts. Consequently, they demand a thightening of monetary policy in a pre-emptive way and a further consolidation of fiscal policy, especially in those countries accounting for the overall global imbalances (i.e. USA). At the same time, they recommend a strengthening of European domestic demand since it will be Europe to be faced with the adjustment costs related to the appreciation of the single currency.