Beginning in 1944, the Bretton Woods system played a major role in shaping the global economy in the post-war period. This column describes how although it was successful in bringing about exemplary and stable economic performance in the 1950s and 1960s, familiar confidence and liquidity problems, as well as inflationary pressure and central bankers’ responses to it, ensured that Bretton Woods was short-lived. Nonetheless, legacies of the system, like the dollar standard, remain with us and will likely be with us for some time to come.
Michael Bordo, 23 April 2017
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.
Ansgar Belke, Clemens Domnick, Daniel Gros, 19 January 2017
A high correlation of business cycles is usually seen as a key criterion for an optimum currency area. This column argues that the elasticity with which countries react to the common cycle is equally important. A country with a non-unitary growth elasticity relative to the common area will experience cyclical divergences at the peak and trough of the common cycle. Despite being characterised by highly-correlated business cycles, the Eurozone suffers from widely differing amplitudes.
Carlos Arteta, M. Ayhan Kose, Marc Stocker, Temel Taskin, 26 September 2016
Against a background of persistently weak growth and low inflation expectations, a number of central banks have implemented negative interest rate policies over the past few years. This column argues that such policies could help provide additional monetary policy stimulus, as long as policy interest rates are only modestly negative and do not stay negative for too long to avoid adverse effects on the financial sector. While these policies do have a place in the policymaker’s toolkit, they need to be handled with care to secure their benefits while mitigating risks.
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.
Stefano Ugolini, 30 August 2016
When Mario Draghi famously declared that the ECB was “ready to do whatever it takes to preserve the euro”, he also specified “within our mandate”. This column examines the institutional limitations to central bankers’ actions. It argues that institutional constraints are essential in determining the sustainability of monetary policies, and hence central banks’ ability to pursue their targets. The weakness of the Bank of England in the heyday of the gold standard is a case in point.
Daniel Gros, 27 June 2016
The business of central banks used to be profitable – they issued cash and could invest the proceeds in the assets they liked. This column argues that the ECB has turned the old business model of central banks around. Today, it earns a stream of income on its liabilities, while the returns of an increasing part of its assets go to the national central banks. This cannot be a stable arrangement.
Alex Cukierman, 01 April 2016
Central banks are there to ensure price stability, and economists generally agree that politics and central banking don’t mix well. This column takes us through the inflationary and more controlled history of Israel’s central bank, highlighting the current policy dilemmas facing the country.
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.
Joshua Aizenman, 03 January 2016
The Global Crisis renewed debate on the benefits and limitations of coordinating international macro policies. This column highlights the rare conditions that lead to international cooperation, along with the potential benefits for the global economy. In normal times, deeper macro cooperation among countries is associated with welfare gains of a second-order magnitude, making the odds of cooperation low. When bad tail events induce imminent and correlated threats of destabilised financial markets, the perceived losses have a first-order magnitude. The apprehension of these losses in times of peril may elicit rare and beneficial macro cooperation.
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.
Jakob de Haan, Wijnand Nuijts, Mirea Raaijmakers, 06 November 2015
The Global Crisis revealed serious deficiencies in the supervision of financial institutions. In particular, regulators neglected organisational culture at the institutional level. This column reviews efforts since 2011 by De Nederlandsche Bank to oversee executive behaviour and cultures at financial institutions. These measures aimed at identifying risky behaviour and decision-making processes at a sufficiently early stage for appropriate countermeasures to be implemented. The findings show that regulators can play a larger part in securing the stability of the financial system by taking an active role in shaping institutional cultural processes.
Dirk Niepelt, 21 January 2015
Recent experience with the zero lower bound on nominal interest rates, and the use of high-denomination notes by criminals and tax evaders, have led to revived proposals to phase out cash. This column argues that abolishing cash may be neither necessary nor sufficient to overcome the zero lower bound problem, and would severely undermine privacy. Allowing the public to hold reserves at central banks could reduce the need for deposit insurance, although the transition to the new regime and the effects on credit supply must be carefully considered.
Charles Wyplosz, 12 September 2014
Last week, the ECB announced that it would begin purchasing securities backed by bank lending to households and firms. Whereas markets and the media have generally greeted this announcement with enthusiasm, this column identifies reasons for caution. Other central banks’ quantitative easing programmes have involved purchasing fixed amounts of securities according to a published schedule. In contrast, the ECB’s new policy is demand-driven, and will only be effective if it breaks the vicious circle of recession and negative credit growth.
Karl Walentin, 11 September 2014
Central banks have resorted to various unconventional monetary policy tools since the onset of the Global Crisis. This column focuses on the macroeconomic effects of the Federal Reserve’s large-scale purchases of mortgage-backed securities – in particular, through reducing the ‘mortgage spread’ between interest rates on mortgages and government bonds at a given maturity. Although large-scale asset purchases are found to have substantial macroeconomic effects, they may not necessarily be the best policy tool at the zero lower bound.
Marcus Miller, Lei Zhang, 10 September 2014
During the Great Moderation, inflation targeting with some form of Taylor rule became the norm at central banks. This column argues that the Global Crisis called for a new approach, and that the divergence in macroeconomic performance since then between the US and the UK on the one hand, and the Eurozone on the other, is partly attributable to monetary policy differences. The ECB’s model of the economy worked well during the Great Moderation, but is ill suited to understanding the Great Recession.
Stephen Golub, Ayse Kaya, Michael Reay, 08 September 2014
Since the Global Crisis, critics have questioned why regulatory agencies failed to prevent it. This column argues that the US Federal Reserve was aware of potential problems brewing in the financial system, but was largely unconcerned by them. Both Greenspan and Bernanke subscribed to the view that identifying bubbles is very difficult, pre-emptive bursting may be harmful, and that central banks could limit the damage ex post. The scripted nature of FOMC meetings, the focus on the Greenbook, and a ‘silo’ mentality reduced the impact of dissenting views.
Pierre-Cyrille Hautcoeur, Angelo Riva, Eugene White, 02 July 2014
The key challenge for lenders of last resort is to ameliorate financial crises without encouraging excessive risk-taking. This column discusses the lessons from the Banque de France’s successful handling of the crisis of 1889. Recognising its systemic importance, the Banque provided an emergency loan to the insolvent Comptoir d’Escompte. Banks that shared responsibility for the crisis were forced to guarantee the losses, which were ultimately recouped by large fines – notably on the Comptoir’s board of directors. This appears to have reduced moral hazard – there were no financial crises in France for 25 years.
Stefano Ugolini, 11 December 2011
While many central bankers feel they are now in unchartered territory, this column argues that history may provide guidance. Going back to a time before central banks, it argues that there are long-term cycles in the evolution of monetary policy – governments have alternatively internalised and externalised money creation. The key to success is not who runs monetary policy, but how credible they are.
Barry Eichengreen, Eswar Prasad, Raghuram Rajan, 20 September 2011
Central banks have massively broadened their remit in recent crisis-laden years, but the standard analytic framework – ‘flexible inflation targeting’ – has not changed. This column argues that it is time to properly flesh out an alternative framework. Financial stability should be an explicit mandate of central banks, and international coordination among central banks should be boosted by forming a small group of systemically significant central banks that regularly meets and issues reports to the G20 on their financial-stability policies.