Maritta Paloviita, Markus Haavio, Pirkka Jalasjoki, Juha Kilponen, 24 October 2017

Price stability is an explicit target for the ECB, but the definition of the 2% target is less clear in its monetary policy stance over time. This column presents two alternative interpretations of the ECB’s definition of price stability. First, the ECB dislikes inflation rates above 2% more than rates below 2%. Second, the ECB’s policy responses to past inflation gaps are symmetric around a target of 1.6% to 1.7%. Out-of-sample predictions of the reaction function based on the second interpretation track well an estimated shadow interest rate during the zero lower bound period.

Michael Bordo, Pierre Siklos, 18 October 2017

The role of central banks in monetary policy and financial stability has changed radically over time. This examines the similarities and idiosyncrasies of ten central banks, and also considers how inflation might have looked had the central banks been around earlier, or had they adopted different strategies. While important differences between the narrative and statistical analyses of crises indicate that neither is sufficient on its own, small open economies appear to do comparatively well across the various crisis conditions, and inflation is almost always higher in the absence of an inflation target.

Michael Bordo, Andrew Levin, 23 September 2017

Central banks across the world are considering sovereign digital currencies. This column argues that these currencies could transform all aspects of the monetary system and facilitate the systematic and transparent conduct of monetary policy. In particular, a central bank digital currency can serve as a practically costless medium of exchange, a secure store of value, and a stable unit of account. To achieve this, the currency would be account based and interest bearing, and the monetary policy framework would target true price stability.

Yusuf Soner Baskaya, Julian di Giovanni, Sebnem Kalemli-Ozcan, Mehmet Fatih Ulu, 01 September 2017

Most models assume capital flows are endogenous to the business cycle, and that inflows increase during an economy’s ‘boom’ periods. This column shows that the international no-arbitrage condition in fact does not hold, and that capital flows are pushed into an economy due to high global risk appetite. Controlling for domestic monetary policy responses to capital flows and changes in the exchange rate, exogenous capital inflows lower real borrowing costs and fuel credit expansion.

James Bullard, 30 August 2017

Since the financial crisis, we have seen very low interest rates in advanced economies. In this video, James Bullard discusses the concept of prices as neutral objects. This video was recorded in July 2017 at a macroeconomics conference organised by the Bank of England.

Jesús Fernández-Villaverde, 03 August 2017

If the share of payments made by cryptocurrencies increases, government-issued money will face market competition from private issuers. The column argues that, even if this system could maintain price stability in an economy, the market would not provide the socially optimum amount of money. A government could still, however, maximise social welfare using monetary policy in response to peg the real value of money. The threat of competition from private monies may therefore impose welcome market discipline on any government that issues currency.

Asli Demirgüç-Kunt, Bálint Horváth, Harry Huizinga, 06 July 2017

Monetary policies pursued by lending countries may have negative spillovers for financial stability in emerging markets, because monetary policy is transmitted through its effect on the aggregate supply of cross-border loans. This column uses data on the international syndicated loan market to argue that foreign bank ownership in a borrower country reduces the negative impact of lender-country monetary policy on cross-border syndicated loan supply. This suggests that countries could stabilise their cross-border credit supply by reducing restrictions on foreign bank entry into local markets.

Athanasios Orphanides, 06 June 2017

Results of actions taken by central banks across advanced economies in response to the Global Crisis have been uneven in allaying fears regarding debt sustainability. This column compares the cases of Italy and Japan to that of Germany to examine whether monetary policy actions since the crisis have become a more important driver of debt dynamics than fiscal policy actions. In contrast to Japan, where in the past few years decisive monetary policy actions have allayed fiscal concerns, in Italy monetary policy decisions appear to have contributed to debt sustainability concerns.  

Henrike Michaelis, Volker Wieland, 12 May 2017

In recent speeches, Federal Reserve Chair Janet Yellen and ECB President Mario Draghi have attributed the Fed’s and the ECB’s low interest rate environment to low equilibrium rates rather than to Fed or ECB policies. This column argues that estimates of these equilibrium rates are extremely uncertain and sensitive to technical assumptions, and thus should not be used as key determinants of the policy stance. But if used nevertheless, a consistent application together with associated output estimates call for a tightening of the policy stance. 

Atish R. Ghosh, Jonathan D. Ostry, Mahvash S. Qureshi, 12 May 2017

There has been growing recognition that emerging markets may benefit from more proactive management of capital flows, and thus avoid crises when the flows recede. But do they do this in practice? By analysing policy responses in a sample of emerging markets, this column argues that central banks respond to capital inflows through various tools. Ironically, the most commonly prescribed instrument for coping with capital inflows – tighter fiscal policy – is the least-used tool in practice.

Fredrik Andersson, Lars Jonung, 08 May 2017

Inflation-targeting central banks commonly fail to hit their official inflation targets, so targets are combined with a tolerance band which is either implicit or explicit. Taking the Swedish Riksbank as an example, this column argues that adopting an explicit tolerance band would better communicate to the public the central bank’s lack of full control over the rate of inflation and thus foster public confidence in monetary policy, and it would also increase the central bank’s ability to stabilise the economy. The width of the band can be derived from the historical inflation outcome. 

Yan Carrière-Swallow, Bertrand Gruss, Nicolas Magud, Fabian Valencia, 13 March 2017

The rate at which consumer prices rise following a depreciation of the currency, known as the exchange rate pass-through, has been declining. The column uses a decomposition of exchange rate pass-through into the component that can be attributed to pricing of imported goods at the dock, and the second-round effects on domestically produced goods and services, to show that reductions in second-round effects are largely responsible for the decline in pass-through. Enhanced monetary policy credibility is strongly associated with this reduction. 

Luca Benati, Robert Lucas, Juan Pablo Nicolini, Warren E. Weber, 11 March 2017

Most economists and central bankers no longer consider money supply measures to be useful for conducting monetary policy. One reason is the alleged instability of the relationship between monetary aggregates. This column uses data from 32 countries and spanning up to 100 years to argue that the long-run demand for money is alive and well. Results show a remarkable stability in long run money demand, both within and across countries. Nonetheless, short-run departures can be large and persistent, and further research is needed.

Kjell G. Nyborg, 24 January 2017

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.

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 capital 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.

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