World Finance

World Finance

September 03, 2013 08:00 ET

Expansionary Monetary Policy Takes Economic Hostages

LONDON, ENGLAND--(Marketwired - Sept. 3, 2013) - Expansionary monetary policy is the hallmark of recovery say some, in particular those who've followed the US's ascent from economic despair by means of excess liquidity supply and record low interest rates. However, there are those who see such schemes as outright unsustainable, believing that expansionary monetary policies are instead holding economies hostage.

"The longer these central banks maintain their expansionary policies, the more difficult it becomes to make an exit," writes Patrick Artus, chief economist at Natixis. Some have been critical of the ECB's refusal to implement expansionary monetary policies, however the likes of the US, UK and Japan "run the risk of inflation returning in the long-term by not correcting the excess liquidity appearing in the capital markets."

Artus argues that increases in global liquidity could give rise to unsustainable international capital, resulting in drastic exchange-rate fluctuations and a gross distortion of competitiveness. "The longer these policies stay in place the greater the ramifications, which in part explains the Fed's possible tapering down of QE3."

In a new World Finance feature, Artus considers the principal reasons behind the so-called 'irreversibility theory' and analyses the long-term consequences of expansionary monetary policy. Available to read online at:
http://www.worldfinance.com/columnists/the-irreversibility-theory-of-expansionary-monetary-policies-is-gaining-credibility

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