Eichengreen: Asian macro policy is out of kilter

Barry Eichengreen (2008), "Asian macro policy is out of kilter"

What should Asian central banks do now? They should raise rates.... It makes no sense when most Asian countries are growing at or near capacity that they should have negative real interest rates. Negative real rates are an unhealthy subsidy for borrowing by households and firms. They encouraged inefficient investment and excessive leverage in Asia in the first half of the 1990s, and we all know what followed. These negative interest rates and their artificial stimulus to consumption and investment are also why we haven’t seen more of a slowdown in Asia – why we haven’t seen more recoupling.... Critics of inflation targeting will say that central banks have a dual mandate not just to fight inflation but also to foster growth and that Asian central banks have no business raising rates in a deteriorating growth environment. But the fact of the matter is that they now face a very serious test of their credibility, leaving no alternative to tightening. The alternative to painful interest rate increases now will be even more painful increases later...