IMF paper offers ‘fear-based theory’ of economy

Central banks risk distorting the economy if they don’t move interest rates to offset “fear cycle”

International Monetary Fund Headquarters 2, Washington, DC
Photo: John Harrington

The ebb and flow of fear about the possibility of economic crisis can help explain aggregate fluctuations in the economy, research published by the International Monetary Fund finds.

The fear economy, by Ruchir Agarwal, proposes that “fear is a central driver of the economy”. Agarwal describes a mechanism in which a rise in fear leads to higher demand for safe assets, pushing down the neutral rate of interest.

If central banks do not follow this “fear cycle” by adjusting their policy rates

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