… was illustrated today by Raghuram Rajan, the Reserve Bank of India governor, along these lines:
Rajan also questioned the existing monetary policy stance of industrial countries. Specifically, he asked whether pushing real interest rates lower through forward guidance, asset purchases or nominal rate cuts was “part of the solution, or part of the problem”.
The slow pace of growth, he said, casts doubts over whether the low interest rate environment was really encouraging people to spend and invest more.
He observed that the main spenders before the crisis were typically the people who were hit the hardest, and made the point that people who had borrowed against their houses were now struck with negative equity.
The people who saved before the crisis, he said, were largely saving for their retirements. After the crisis they find themselves needing to save more, a problem that is compounded if the central bank pushes down real interest rates and reduces their income further.
In other words, low interest rates have a contractionary effect.