US stimulus package unlikely to help much

Bangkok Post, February 4, 2008

The US government's $156-billion stimulus package is likely to have little impact on the slowing US economy, according to Prof Finn Erling Kydland, the 2004 Nobel laureate for economics.

"Everything I know about economics, suggests that a temporary change [in household income] won't do much," he said in an interview in Bangkok.

"Consider Japan, whose economy did very poorly through the 199Os. They launched package after package of stimulus programmes and IT did nothing.

Prof. Kydland, who received the Nobel Prize for research on business cycles and macroeconomic policy, was equally critical of the Federal Reserve’s move to cut interest rates in mid-January. “Cuts by the Fed were inevitable. But it looked suspicious, to call a separate meeting out of sync with its schedule. … The timing looks bad that the 75-basis-point cut was to try to save the stock market. And that’s not their business,” he said.

The Fed was already “clearly behind the curve”, as the reduction in the Fed Funds rate only brought rates into balance with short-term market rates.

On Jan 22, the Fed made its biggest rat cut in 23 years in an emergency meeting held in the wake of massive global market volatility over a possible US economic recession and growing losses from the sub-prime crisis. The Fed last week followed with another 50-point cut, bringing the Fed Funds rate - which governs overnight lending between banks - to 3%.

Prof. Kydland said the move raised questions about the credibility of monetary authorities.

"If the Fed provides an environment of stable inflation, that's the best they can do," he said. "Growth is not the role of monetary policy. Economists are having a hard time finding a link between monetary policy to real aggregates. Even if it does have an effect. . . . It would be negative in the long run."
Real interest rates fluctuate in theory with the economic cycle, he said.

"For the Fed, there's much that it can do to affect real rates," he said. "It can affect inflation premiums. But its role is to keep this stable.”

Prof. Kydland is in Bangkok as part of the Bridges programme, an initiative sponsored by the International Peace Foundation. He will speak today at the University of Thai Chamber of Commerce in an address titled, “Peace and Economic Development in the Age of Globalization”.