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World's central banks should raise not lower rates: Barro Updated: 2016-10-14 04:12:31 KST

Weak investment, stagnant productivity, and lukewarm business and household confidence.
These elements that characterize the trend of low growth continue to weigh down governments and especially central banks pushing them to pump more money into their economies.
Korea's central bank is not a stranger to loose monetary policies.
The key rate stands at a record-low and it's still under mounting pressure to dive even deeper.
But Robert Barro, Professor of Economics at Harvard University, considered one of the founders of new classical macroeconomics, says the focus has to shift.

"The Bank of Korea along with other central banks has made nominal interest rates that they control too low, kind of artificially low, a strange kind of policy you haven't seen before the great recession created in 2008 and 2009. So I think Korea along with other central banks should be moving towards raising nominal rates back to the more nominal range maybe 3 to 4 percent.
A gradual policy of doing that, pre-announced, would be the best way of doing it. (dissolve)
And if the U.S. were to do that, it would be easier for South Korea to follow that.
(dissolve) Maybe the Bank of Korea could pave the lead instead of waiting for the bigger countries like the U.S. to take an appropriate action. So that would be more daring because it's a smaller economy taking the lead.

"Exactly. Do you think that is feasible?"

"I think it could be feasible. But the details have to be thrown out more carefully. I mean I'm making a suggestion. Maybe you could not wait for the United States.

So would that mean Korea also does not have room for more fiscal stimulus, Barro says

"Fiscal discipline is still important.
Korea has room to spend more money from the public sector to the extent that you do that, you want to focus on projects that are actually productive. Some infrastructure investments can be reasonable and one can use fiscal capacity to fund that in terms of maybe borrowing to certain kinds of projects. But what it shouldn't do for its own sake and what it shouldn't do in terms of the demand stimulus I think you have to emphasize productivity.

"Korea also faces longer-term issues like the aging population. What should the government do to raise its growth potential?"

"Flexibility in the labor market is important.
So you don't want to have regulations that inhibit firms moving around labor hiring and firing, for example.
Population growth is of course very low now in Korea which is also a standard part of the growth process. Fertility rates are extremely low. I actually don't think this is necessarily a negative.
Some people have argued that the government should be doing all kinds of things to counter the declining trend of fertility. There are a lot of things you can do, to basically subsidize people having children, in terms of the making it easier to have child care services, educational services.
I don't think that it's a central part of the development strategy and I think mostly fertility reflects choices that people make particularly in the context of more women working full time in the labor market, I don't regard that as a negative. It's partly reflective of people just getting richer, better education."

Al-right, thank you so much for your time professor.
Thank you.
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