Government spending has a role to play in fostering sustained growth, Fed´s Fischer says

Increased government spending might have a role to play in promoting sustained economic growth in the US, the central bank´s second-highest ranking decision-maker said.

In remarks prepared for a speech at the Council on Foreign Relations, Stanley Fischer said that the response to the above should not be limited to monetary policy, certain fiscal policies could also help.

"Certain fiscal policies, particularly those that increase productivity, can increase the potential of the economy and help confront some of our longer-term economic challenges.

"While there is disagreement about what the most effective policies would be, some combination of improved public infrastructure, better education, more encouragement for private investment, and more effective regulation all likely have a role to play in promoting faster growth of productivity and living standards," he said.

Such policies could also help lift the so-called 'equilibrium' interest rate and reduce the probability that both the Fed and the economy might have to contend more than is necessary with the effective lower bound for interest rates.

He also indicated that low equilibrium interest rates might threaten financial stability, although thus far the Fed had not seen evidence that low rates had notably increased such vulnerabilities.

As an aside, he also highlighted the need for better research between the rate of growth in productivity and the strength of aggregate demand.