The Global Crisis emphasised the fragility of international financial networks. Despite this, there has been little historical research into how networks propagate financial shocks. This column explores how interbank networks transmitted liquidity shocks through the US banking system during the Great Depression. During banking panics, the pyramided-structure of reserves forced troubled banks to reduce lending, thus amplifying the decline in investment spending.
Kris Mitchener , Gary Richardson, 28 May 2016
Stephen Hansen, Michael McMahon, 03 February 2016
In addition to setting interest rates, central banks also communicate with the public about economic conditions and future actions. While it has been established that communication can drive expectations, less is known about how it does so. This column attempts to shed light on this question. Applying novel measures to the content of Federal Reserve statements, it shows that forward guidance is a more important driver of market variables than disclosure of information about economic conditions.
Yin-Wong Cheung, Sven Steinkamp, Frank Westermann, 27 January 2016
Since the beginning of the Global Crisis, illicit capital flows out of China have been in decline. This column argues that a key factor behind this is the relative money supply between China and the US. China’s rapidly increasing money supply, combined with the Fed’s expansionary monetary policy, prompted investors to reallocate their portfolios between the two countries. Another contributing factor is China’s gradual process of capital account liberalisation. The Fed’s interest rate hike in December may see a resurgence in China’s capital flight.
Dae Woong Kang, Nick Ligthart, Ashoka Mody, 19 January 2016
Although the Great Recession was viewed as a US problem, the Eurozone was affected by it from the start. This column compares the monetary policy responses to the Crisis by the Fed and the ECB. It argues that the US approach has been much more aggressive and proactive. The ECB failed to provide stimulus when needed, and as a result the Eurozone might slip into a low-inflation trap.
John Williams, 26 November 2015
Interest rates have been extremely low since the Global Crisis. This column surveys the recent debate over whether they will remain low, or return to normal. While an unequivocal answer is not possible, the evidence suggests a significant decline in average real rates – perhaps to as low as 1%.
James Hamilton, Ethan Harris, Jan Hatzius, Kenneth West, 15 November 2015
No-one is sure what the Fed’s long-delayed nominal interest rate hikes will bring, and there has been much speculation on what the equilibrium rate might look like when the Fed acts. This column argues that it would be foolish to attempt to pin down a precise value for the steady-state real rate. A better approach is to predict the plausible range of values, and evidence suggests that the equilibrium rate will range from a little above zero up to 2%.
Athanasios Orphanides, 11 November 2015
There is generally consensus among macroeconomists that monetary policy works best when it is systematic. Following the financial crisis, the US Federal Reserve shifted from long-term, systematic policy to short-term goals targeting unemployment. This column argues that, while these were appropriate in the aftermath of the downturn, such policy accommodations have been pursued for too long since. The need for a somewhat accommodative policy cannot be used to defend the current non-systematic policy and excessive emphasis on short-term employment gains.
Matthew Jaremski, David Wheelock, 25 October 2015
The US’s Federal Reserve System was established more than a century ago as a confederation of 12 regional districts. The selection of cities for each region’s Reserve Bank disproportionately favoured the Northeast and the state of Missouri, a fact that remains controversial to this day. This column describes how the existing banking infrastructure and population density at the time, guided the selection of these cities. Modern communication technology has reduced the need for physical proximity between Reserve and commercial banks. Debates about rezoning the Federal districts should therefore focus on the distribution of monetary policymaking authority.
David Martinez-Miera, Rafael Repullo, 12 October 2015
Discussions on the connection between the level of interest rates, incentives to search for yield, and financial stability have been prominent over the last ten years or so. More recently, Larry Summers argued in his 2014 secular stagnation address that the decline in the real interest rates would be expected to increase financial instability. This column addresses the challenging issue of providing an explanation for the connection between these phenomena. An increase in the supply of savings that reduces equilibrium real rates can be associated with an increase in the risk of the banking system. This link can explain the emergence of endogenous boom and bust cycles.
Athanasios Orphanides, 05 December 2014
In the face of the zero lower bound, the ECB’s reduced its balance sheet by a third. This column introduces a new CEPR Policy Insight by former central-bank governor Athanasios Orphanides, which argues that the outcome has been economic stagnation and harmful disinflation. It explores alternative explanations for this policy, including the role of politics in managing the Eurozone crisis and proposes balance-sheet policy to help fulfil the ECB’s mandate in the face of the Fed’s tightening.
Pelin Ilbas, Øistein Røisland, Tommy Sveen, 13 February 2013
Economists everywhere recognise the Taylor rule’s importance in monetary policymakers’ decisions. But exactly how important is it? This column aims to analyse the Taylor rule’s influence on US monetary policy by estimating the policy preferences of the Fed. There is a high degree of reluctance to let the interest rate deviate from the Taylor rule and, contrary to the literature and current policy debates, it seems large deviations from the Taylor rule between 2001 and 2006 were in fact due to negative demand-side shocks. During this period, there is in fact no evidence to support the notion of a decreased weight on the Taylor rule.
Marco Annunziata, 12 February 2013
Economists and policymakers are increasingly concerned that central-bank independence is being threatened. This column argues that central banks are not losing their independence, but that their room for manoeuvre is being eroded by a lack of structural reforms and fiscal adjustment. The financial crisis has caused mission creep, pushing central banks well beyond their comfort zones and as the time comes to pull back, independent monetary policy could still be powerless against fiscal dominance.
Jean Pisani-Ferry, Guntram Wolff, 03 May 2012
The ECB has managed a massive expansion of its balance sheet with long-term refinancing operations. This has been called the equivalent of quantitative easing, as done by the Fed and the Bank of England. This column thus argues that the main obstacle for the ECB is not tight limits on the purchase of government bonds. Rather, it is the absence of a banking and fiscal union and the heterogeneity within the Eurozone that reduces the effectiveness of the ECB instruments.
Thomas Sargent, Martin Ellison, 24 November 2009
The Federal Reserve Open Market Committee has been criticised for making forecasts that are inferior to Federal Reserve staff forecasts. This column argues that FOMC forecasts are worst-case scenarios used to inform policy decisions, rather than best estimates of future events. It says that FOMC forecasts are a rational response to doubts about the staff’s model.
Willem Buiter, 25 March 2009
The last column in this series on fiscal aspects of central banking reviews the differences in fiscal backing for the Bank of England, the US Federal Reserve, and the European Central Bank.
Willem Buiter, 24 March 2009
The second of this four-column series on fiscal aspects of central banking discusses the institutional constraints on quantitative easing. It argues that the ECB can and should engage in quantitative easing since its independence gives it a credible non-inflationary exit strategy. The Fed, however, seems heading for a bout of inflation stemming from Congressional pressure. Buiter argues that the Bank of England’s situation lies between.
Charles Wyplosz, 20 July 2008
Should taxpayers bail out the banking system? One of the world’s leading international macroeconomists contrasts the Larry Summers “don’t-scare-off-the-investors” pro-bailout view with the Willem Buiter “they-ran-into-a wall-with-eyes-wide-open” anti-bailout view. He concludes that either way, taxpayers are always the losers. The best policy makers can do is to be merciless with shareholders and gentle with bank customers.
Mika Widgrén, 25 February 2008
The Fed’s policy changes seem nimble compared to the ECB’s. Here one of Europe’s leading analysts of voting mechanisms argues that the ECB’s institutional design accounts for the difference. Forthcoming ECB reforms are unlikely to alleviate the problem.
Stephen Cecchetti, 15 August 2007
A revised and updated version of the 13 August column on the basic how's and why's of what the Fed has been doing to calm financial markets.
Axel Leijonhufvud, 25 June 2007
An expansionary monetary policy and an historical conjuncture that happens to produce no inflation will lead to asset price inflation and deterioration of credit. At some stage, central banks will have to mop the liquidity or see inflation do it for them.