Central banks inject money into the economy against collateral, but we know little about the terms of the exchange. This column argues that market forces or discipline have little role to play in the central bank collateral frameworks that are the foundation of the monetary and financial system. This distorts the financial system and wider economy – in the Eurozone, for example, political influence on these frameworks has created indirect bailouts of some banks and sovereigns.
Kjell G. Nyborg, 24 January 2017
Morten Ravn, Vincent Sterk, 11 January 2017
Recent economic events cast doubt on the standard macroeconomic models. This column looks at new economic models built on the idea that inequality and income risk matter for the business cycle and long-run outcomes. While still in their infancy, these models show promise in addressing the concerns about the old New Keynesian models, and in bringing about a shift in the way that macroeconomists think about aggregate fluctuations and stabilisation policy.
Kristin Forbes, Dennis Reinhardt, Tomasz Wieladek, 23 December 2016
Globalisation is in retreat, but while the slowdown in trade is widely recognised, what is more striking is the collapse of global trade flows. This column shows how banking deglobalisation is a substantial contributor to the sharp slowdown in global capital flows. It finds that certain types of unconventional monetary policy, and their interactions with regulatory policy, can have important global spillovers. Policies designed to support domestic lending may have had the unintended consequence of amplifying the impact of microprudential capital requirements on external lending.
Richard Barwell, 19 December 2016
It is generally assumed that central bankers often argue over the appropriate conduct of monetary policy. Focusing on the Bank of England’s Monetary Policy Committee, this column argues that based on what policymakers vote for, there is no evidence that they disagree with one another in any meaningful sense. Either policymakers essentially agree all the time, or they do not vote their view.
Alberto Alesina, Gualtiero Azzalini, Carlo Favero, Francesco Giavazzi, Armando Miano, 16 December 2016
When a government wants to cut a deficit, it must decide both how and when to do it. Research has treated the two questions as if they are independent, which risks attributing good policy to good timing, or vice versa. This column argues that when the effects are considered simultaneously, the composition of fiscal adjustments is much more important than the state of the cycle. Fiscal adjustments based upon spending cuts have losses that are on average close to zero, while those based upon tax increases are associated with large and prolonged recessions, regardless of whether or not the adjustment starts in a recession.
Claudia Buch, Matthieu Bussière, Linda Goldberg, 09 December 2016
The Global Crisis has triggered substantive policy responses, but assessing the impacts of these and the effects on the real economy is a challenging task. This column discusses the work of the International Banking Research Network in examining international spillovers of prudential instruments through credit provision by banks. It finds that prudential instruments sometimes spill over across borders through bank lending, and that international spillovers vary across prudential instruments and are heterogeneous across banks. There appears to be no one channel or even direction of transmission that dominates spillovers.
Jon Danielsson, Robert Macrae, 08 December 2016
Political risk is a major cause of systemic financial risk. This column argues that both the integrity and the legitimacy of macroprudential policy, or ‘macropru’, depends on political risk being included with other risk factors. Yet it is usually excluded from macropru, and that could be a fatal flaw.
Stephen Cecchetti, Kim Schoenholtz, 07 December 2016
The Bank of Japan has recently implemented one of the largest central bank policy shifts in modern times, raising its inflation target explicitly to 2% and kicking off the most rapid balance sheet expansion among the leading central banks. This column assesses this policy decision and its potential pitfalls, and compares it to similar policies enacted in the past. Unless policy has a significantly larger impact on financial conditions going forward than it has to date, the revised framework will likely be insufficient to achieve the Bank’s inflation target any time soon.
Marco Buti, Helene Bohn-Jespersen, 25 November 2016
The actions taken in 2008-09 by the G20 avoided an outright depression during the financial crisis, but questions remain over its ability to evolve from a short-term crisis response forum to effectively addressing more long-term challenges. This column argues that to ‘win the peace', G20 members as well as G20 Presidencies have to redesign international economic policy coordination, and ensure that the focus is kept on a limited number of deliverables to which all G20 members can agree.
Michael Bordo, Arunima Sinha, 20 November 2016
In the wake of the Great Recession, the Federal Reserve took unprecedented measures to stem economic decline. This column uses the Fed’s open-market operations in 1932, another period of short-term rates near the zero lower bound, as a comparison for the QE1 operation of 2008-09. Although the 1932 policy boosted output and inflation, if the Fed had announced the operation in advance and carried it out for a full year, the Great Depression could have been attenuated considerably earlier.
Stefan Gerlach, Rebecca Stuart, 17 November 2016
The ‘dot plots’ that the Federal Open Market Committee has been publishing since 2012 have attracted a great deal of attention, but are difficult to interpret because changes in them reflect a combination of new information and changes in the projections horizon. This column addresses how the Committee members’ views of monetary policy have evolved in recent years, and have they have responded to changes in the macroeconomic environment.
Georgios Georgiadis, Arnaud Mehl, 14 November 2016
In theory, financial globalisation has ambiguous effects on monetary policy. It may dampen effectiveness, but it may also amplify it through exchange rate valuation effects. This column shows evidence that the latter effect has dominated since the 1990s. Financial globalisation has increased the output effect of a tightening in monetary policy by as much as 25%. One implication is that monetary policy transmission mechanisms have changed, with the exchange rate channel gaining importance at the expense of the interest rate channel.
Roger Farmer, Pawel Zabczyk, 26 October 2016
Ben Bernanke famously quipped that monetary policy works in practice, but not in theory. This column bridges the gap between practice and theory in assessing how central banks can influence both of them by intervening in asset markets. To the extent that asset market volatility is driven by shifts in beliefs, the central bank should aim to eliminate that volatility by engaging in countercyclical unconventional monetary policy, which would end up reducing the risk premium.
Dirk Niepelt, 19 October 2016
The blockchain technology underlying Bitcoin and other cryptocurrencies is attracting growing interest. This column argues that if transactions facilitated by this technology become pervasive, it will have implications for the conduct (and success) of central bank monetary policy. Central banks should embrace the technologies that underpin cryptocurrencies, or risk being cut out from intermediation and surveillance and also risk payment service providers moving to other currency areas with an institutional environment that is more appealing for buyers and sellers.
Ángel Ubide, 11 October 2016
The pre-crisis consensus was, and remains, very strong – the business cycle would be managed by monetary policy, while fiscal policy would focus solely on debt sustainability. In a world of zero interest rates, however, fiscal policy has to contribute to supporting aggregate demand and protecting against deflationary risks. This column outlines three ways in which a well-designed expansionary fiscal policy stance can contribute to better economic outcomes.
Biagio Bossone, 05 September 2016
Some economists see helicopter money as a free lunch, because it can prompt growth without requiring higher debt financing. This column argues that if there are costs associated with the permanent injection of cash into the economy, they would diminish its effectiveness.
Patrick O'Brien, Nuno Palma, 03 September 2016
Today's unconventional central bank policies have historical precedent. One example is the suspension of convertibility of banknotes into gold by the Bank of England between 1797 and 1821. This column argues that, although there were important differences between then and now, it demonstrates that bank reputation and interaction between bank and state are vital to the success of unconventional policies. Also, short-term unconventional policies may persist long after a crisis has passed.
Hélène Rey, 25 August 2016
Is it possible that the global financial cycle is driven by US monetary policy? In this video, Hélène Rey explains how US monetary policies affect global financial cycles. This video was recorded at the ASSA Meetings in San Francisco in January 2016.
Gaston Gelos, Jay Surti, 19 August 2016
International financial spillovers from emerging markets have increased significantly over the last 20 years. This column argues that growing financial integration of emerging economies is more important than their rising share in global trade in driving this trend, that firms with lower liquidity and higher borrowing are more subject to spillovers, and that mutual funds are amplifying spillover effects. Policymakers in developed economies should pay increased attention to future spillovers from emerging markets, particularly from China.
Tobias Adrian, Nellie Liang, 14 August 2016
Recent research into how monetary policy frameworks incorporate risks to financial stability has shown that policy affects both financial conditions and financial vulnerabilities that amplify negative shocks. This column argues that looser monetary policy improves financial conditions, but can in some situations worsen vulnerabilities through incentives for financial sector risk-taking and non-financial sector borrowing. Policymakers face an intertemporal trade-off between financial conditions and vulnerabilities which may impact a cost-benefit analysis of monetary policy.