Central banks around the world have cut interest rates to near zero via traditional and often unorthodox measures to spur recovery, but the world will remain stuck in the doldrums if fiscal reforms don't follow suit, says Mohamed El-Erian, CEO of Pimco, manager of the world's largest bond fund.

On top of cutting benchmark interest rates to near zero, central banks such as the U.S. Federal Reserve have bought assets from banks such as government debt or bonds, a monetary policy tool known as quantitative easing that pumps liquidity into a respective economy and further ratchets borrowing costs lower.

That won't spark demand from companies worried over their governments' inabilities to pay down debts and make politically tough fiscal adjustments to narrow deficits.

Editor's Note: The Truth About the Economy — Government Documents Lead to Eerie Conclusion

"Simply put, lower borrowing costs are not enough to convince companies to expand given the list of domestic, regional and global uncertainties; indeed, many of these companies are far from credit rationed as they sit on huge cash balances," El-Erian wrote in a CNBC commentary.

Add to that, low interest rates coupled with a lack of action on fiscal reforms in the U.S., Europe and elsewhere are doing more harm than good.

Rate cuts are slow to materialize, meaning a central bank move today won't have any effect on borrowing for several months.

Furthermore, while loose monetary policies are often aimed at encouraging investment and hiring, which would boost stock prices, uncertainty elsewhere keeps capital spending at bay and investors parking their money in government debt, which performs poorly amid times of low interest rates and doesn't spark borrowing and growth as planned.

"What the world economy needs today is a coordinated set of measures to promote growth, allocate financial losses, match healthy balance sheet with those that are challenged and reforming, and improve the functioning of the labor and housing markets," El-Erian said.

"For this to materialize, highly polarized and dysfunctional politics needs to give way to more strategic and constructive interactions across party lines and social segments," El-Erian added.

"There is little to suggest that this will happen any time soon absent yet another major financial crisis. "

The Federal Reserve has been particularly aggressive when it comes to monetary stimulus.

Since the economic downturn, the Federal Reserve has twice intervened in the economy via quantitative easing.

A first round, QE1, saw the Fed snap up $1.7 trillion in mortgage-backed securities from banks, while a second round, QE2, saw the U.S. central bank buy $600 billion in Treasury bonds, which ended in June of last year.

Talk is building that a QE3 will come soon if unemployment rates remain high, and Federal Reserve Bank of San Francisco President John Williams has said unemployment rates that refuse to budge are making "further action" arguably more likely.

A QE3 could come, but this time around, the Fed might mull launching an open-ended and adjustable round of asset purchases.

"The main benefit from my point of view is it will get the markets to stop focusing on the terminal date [when a program of purchases ends] and also focusing on, 'Oh, are they going to do QE3?'" Williams told the Financial Times.

With an open-ended quantitative easing, markets would adjust their expectation of Fed purchases as economic conditions change.

Should the Fed officially agree to juice the economy via a third round of asset purchases, expect monetary policy authorities to buy mortgage-backed securities anew.

“You maybe get a little more bang for the buck,” Williams said.

Editor's Note: The Truth About the Economy — Government Documents Lead to Eerie Conclusion