Press Release: Central banks can revive the global economy, says economist who inspired QE3

Professor Scott Sumner will be hosted by the Adam Smith Institute from 17th June - 21st June. To arrange an interview with Prof. Sumner, contact Kate Andrews, Communications Manager: / 07584 778 207

Central banks can revive the global economy by targeting spending levels instead of inflation, Prof. Scott Sumner said this evening (TUESDAY 17TH JUNE) at the 2014 Adam Smith Lecture held by the free market Adam Smith Institute in Westminster.

Prof Sumner said that:

  • Cuts and hikes to government spending are economically irrelevant when the central bank is trying to hit a target
  • Central bank policy is highly effective even when interest rates hit zero
  • Central banks should abandon inflation targeting and instead guarantee the stability of the total amount of spending in the economy

Prof Sumner added that nearly all top monetary economists agreed how to deal with recessions in 2008, but they appear to have forgotten what they knew then, despite events since the crisis highlighting the power of monetary policy and the irrelevance of fiscal policy.

Prof Sumner argued that, done right, monetary policy can totally offset the macroeconomic cost of government spending cuts. The Nobel Prize-winning economist Paul Krugman said that the US economy's performance in 2013 was a 'test' of this – Sumner argued that the US's economic revival that year following QE3 was evidence that central banks have enormous power to stabilise the economy, far more than most politicians realise.

The best monetary policy, said Sumner, was for central banks to target nominal GDP instead of inflation. This would mean that after a shock, like an oil crisis, central banks would pledge to keep the level of spending constant along its growth path. Even though the real spending power would fall, it would avoid the 'musical chairs' problem created where spending levels fall and, combined with wages that take time to fall in nominal terms, leads to widespread unemployment.

Sumner, who is a professor of economics at Bentley University in the US, was called 'the blogger who saved the US economy' by The Atlantic (his blogging at was a major factor behind QE3), and in 2012 Foreign Policy ranked him 15th in their Global Thinker index – joint placed with then-Chairman of the US Federal Reserve Ben Bernanke. He is considered the father of the 'Market Monetarist' school of macroeconomics, which argues that economic stability can be safeguarded if central banks target the level of nominal GDP instead of inflation.

Sam Bowman, Research Director of the Adam Smith Institute, said: "If anyone doubts the importance of monetary policy, they should compare the plight of the Eurozone with that of Japan. The Eurozone was driven into a second recession after the ECB raised interest rate hikes, while Japan is booming after Shinzo Abe's government began to pursue a policy of easy money through low rates and quantitative easing.

"Scott Sumner is one of the most brilliant economists of his generation, and his speech last night should be listened to carefully by policymakers around the world."

The Adam Smith Institute is an independent libertarian think tank based in London. It advocates classically liberal public policies to create a richer, freer world.