The question is whether continued high growth in parts of Asia can sustain activity in the world economy. Four conditions are limiting growth in the western world: 1. Debt among households and banks is high. 2. Interest rates cannot be lowered further. 3. Many countries have high public debt levels and several governments are facing a financial crisis. 4. Real exchange rates are strong. The combination of high household debt and expectations of weak growth is pushing up saving. Low interest rates are not sufficient to boost investment and consumption in an environment of sharply reduced confidence in growth ahead, while both lenders and borrowers are seeking to reduce their debt. Central bank interest rates cannot be lowered further, but it has been communicated that interest rates will be kept low for a long period. Central banks have purchased government securities and private bonds in order to keep long-term interest rates low and are of the view that these quantitative easing measures have been effective. BIS Review 113/2010  1  Sovereign debt to GDP in the G7  As a result of the fiscal policy measures, government debt in major advanced economies is now as high, measured as a percentage of GDP, as in the wake of World War II after a period of debt-financed military spending. The high level of public debt limits the scope for further fiscal impetus to boost economic activity.
Svein Gjedrem: The central bank’s instruments Lecture by Mr Svein Gjedrem, Governor of the Norges Bank (Central Bank of Norway), at the Centre for Monetary Economics (CME)/BI Norwegian School of Management, Oslo, 6 September 2010. Please note that the text below may differ slightly from the actual presentation. The lecture is based on the assessments presented at the Executive Board’s monetary policy meeting on 11 August and Monetary Policy Report 2/10. *  *  *  The international financial crisis revealed weaknesses in the financial system and put economic policy to the test. In order to mitigate the effects of the financial crisis, central banks reduced key rates to low levels and increased liquidity supply sharply. In addition, a number of extraordinary measures were implemented. The economic situation The financial crisis had its origins in an abundant supply of credit, market participants who took increasingly higher risk and a lack of oversight on the part of banks, companies and the authorities. The crisis resulted in a sharp downturn in the world economy. Since the crisis, growth has been vigorous in emerging economies while the recovery in western economies has been moderate. Global economic growth at market prices is now expected to be about 3½ this year, and 4½ per cent in purchasing power parity terms. There have been pressure tendencies in some emerging economies, with higher inflation in India and Brazil and rising asset prices in China.