US economist Christopher Sims, a joint winner of last year’s Nobel Prize in Economics, yesterday said he was cautious about the global economy next year amid the continuing uncertainties in the US and Europe.
However, the US Federal Reserve’s third round of quantitative easing measures (QE3) might still have a modest effect of boosting demand from the US to offer some positive momentum to the global economy, he told a press conference in Taipei.
“My own outlook for next year is not terribly optimistic,” Sims said.
He said two tremendous uncertainties remain over the near future — the “fiscal cliff” in the US and Europe’s financial problems.
They could make the global economy bottom out, especially the eurozone’s debt problems, which could lead to another financial crisis if it deteriorates further, Sims said.
However, if the fiscal cliff in the US softens, and Europe’s financial problems do not deteriorate further, it might be that the global economy has already reached bottom, he said.
Sims said the US Congress and the next US president would have to work together to solve the problem of the “fiscal cliff” by either increasing tax revenues or lowering spending, as well as creating new stimulus measures to help boost the US economy and then the global economy as a whole.
Last month, central bank Governor Perng Fai-nan (彭淮南) said major global economic powers should be more responsible for their policymaking process, because their decisions may create higher-than-expected spillover effect on other countries, especially for small, open economies, like Taiwan.
Perng’s views indicated the Fed’s QE3 could have a negative impact on Taiwan, in terms of more liquidity and higher inflationary pressure.
“I do not think it is true,” Sims said, adding that he believes the QE3 will have a modest effect in simulating demand from the US and boost export-oriented countries, such as Taiwan.
“The fear I think people have is that the monetary policy’s extension might generate inflation, and hence exchange devaluation, without producing a recovery,” Sims said when asked about the potential inflation in Taiwan that may be caused by QE3.
He said QE3 was unlikely to create inflation unless it produced a recovery. The US has had low inflation and interest rates for a long time, Sims said.
As for the expected inflationary risk in emerging countries driven by the QE3, Sims said he saw no immediate danger under the current economic sentiment.
“I think there is no immediate danger of a sudden strong effect on inflation and exchange rates,” he said.
Sims, 70, is an economics professor at Princeton University. He shared last year’s Nobel with New York University economics professor Thomas Sargent.
Sims is scheduled to give a speech in Taipei on the monetary policy and inflation risk over the global financial crisis this morning, and then attend a forum with local economists and industry leaders in the afternoon.
Additional reporting by CNA