Takeshi Kimura, Teppei Nagano, 30 May 2017

While non-US entities pay dollar funding premiums in the FX swap market, the US earns profits on FX-hedged investments in non-US sovereign securities. This column argues that this new form of the ‘exorbitant privilege’ presents a modern version of the ‘Triffin dilemma’. If the distributional effect of US privilege becomes large enough to induce non-US entities to take excessive risk, the stability of the global financial system will come under threat. 

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. 

Domenico Lombardi, Pierre Siklos, 11 April 2017

Macroprudential policies increasingly lie at the heart of how central banks jointly manage of price and financial stability. However, consensus over best practice has yet to emerge. This column presents an improved indicator to measure individual economies’ macroprudential policy capacity. Improvements include incorporating the shadow banking sector, and distinguishing the types of institutions that wield authority. Results suggest that improvements continue to be made with respect to the development of an international financial system with improved resilience to shocks. 

John Muellbauer, 21 December 2016

The failure of the New Keynesian dynamic stochastic general equilibrium models to capture interactions of finance and the real economy has been widely recognised since the Global Crisis. This column argues that the flaws in these models stem from unrealistic micro-foundations for household behaviour and from wrongly assuming that aggregate behaviour mimics a fully informed ‘representative agent’. Rather than ‘one-size-fits-all’ monetary and macroprudential policy, institutional differences between countries imply major differences for monetary policy transmission and policy.

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.

Carlos Garriga, Finn Kydland, Roman Šustek, 16 October 2016

Central banks responded to the financial crisis by cutting policy rates to prevent deflation and curb the decline in economic activity, but these responses have been anything but temporary. This column explores whether the sticky price channel is still relevant in an environment of persistently low rates. Although the effectiveness of the sticky price channel is limited, monetary policy instead transmits through mortgage debt. The recent period of low rates and low inflation has redistributed income and consumption from savers to mortgage borrowers.

Beatrice Scheubel, Livio Stracca, 04 October 2016

The global financial safety net is one of the key infrastructures of financial globalisation. However, its current constellation does not reflect a coherent design, but rather the interaction of different instruments used for different purposes and developed over time. This column presents the first database that brings together all of the relevant data for assessing the global financial safety net, including foreign exchange reserves, IMF instruments, regional financing arrangements, and central bank swap lines. An analysis shows that the availability of the net helps to cushion the effects of capital flow reversals.

Markus K Brunnermeier, Sam Langfield, Marco Pagano, Ricardo Reis, Stijn Van Nieuwerburgh, Dimitri Vayanos, 20 September 2016

The Eurozone lacks a safe asset that is provided by the region as a whole. This column highlights why and how European Safe Bonds, a union-wide safe asset without joint liability, would resolve this problem, and outlines steps to put them into practice. For given sovereign default probabilities, these bonds would be as safe as German bunds and would approximately double the supply of euro safe assets. Moreover, owing to general equilibrium effects, they would weaken the diabolic loop between sovereign risk and bank risk.

Paul De Grauwe, Yuemei Ji, 07 July 2016

Low inflation targets can cause economies to hit the zero lower bound during deflationary periods caused by even mild shocks. In such circumstances, central banks lose their ability to stimulate the economy. This column assesses the risk of this happening using a model that endogenises self-perpetuating optimism and pessimism in the economy. Given agents’ intrinsic chronic pessimism during times of recession, central banks should raise their inflation targets to 3 or 4% to preserve their ability to stimulate the economy when needed.

Maria Demertzis, Nicola Viegi, 28 June 2016

Both the Fed and the ECB have managed to remain credible since the Global Crisis, but their credibility levels have evolved differently. This column argues that since inflation in the US and the Eurozone has been similar in the past eight years, the difference in the way that credibility has evolved is the result of the different macroeconomic policy mixes applied.

Ippei Fujiwara, Yuichiro Waki, 21 May 2016

Central banks may well possess private information about future economic conditions. This column asks whether such information should be communicated to the public. While it is crucial for the central banks to communicate their policy action plans to the private sector, guidance that helps the private sector form more accurate forecasts of future shocks can be undesirable and destabilising.

Alex Cukierman, 30 March 2016

The quantity theory of money implies that sustained inflation requires a sustained increase in the money supply. It does not, however, imply that the reverse is also true. This column explores and illustrates this issue by comparing inflation in the US following the collapse of Lehman Brothers with Germany’s hyperinflation experience after WWI. A key factor explaining the vastly different inflation experiences is how the monetary expansion translated into demand. The Fed’s base expansion did not translate into demand for goods and services, whereas the German monetary expansion was motivated by the government’s hunger for seigniorage revenues.

Julián Caballero, Ugo Panizza, Andrew Powell, 05 February 2016

The increase in the debt of emerging market non-financial firms has been large. This column argues that to understand the risks, if any, it is important to know the state of corporate balance sheets and what firms have actually been doing. In some cases external debt has been issued to substitute more expensive local debt, in others to finance real investment, and in several countries it has been used to exploit carry trade opportunities. In virtually all cases, however, good information on corporate currency mismatches is hard to obtain. There needs to be better information and better reporting if we are to make headway.

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.

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%.

Refet Gürkaynak, Troy Davig, 25 November 2015

Central banks around the world have been shouldering ever-increasing policy burdens beyond their core mandate of stabilising prices. This column considers the social welfare implications when central banks take on additional mandates that are usually the domain of other policymakers. Additional mandates are shown to worsen trade-offs faced by the central bank, while distorting the incentives of other policymakers. Central bank ‘mandate creep’ may be detrimental to welfare.

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.

Carin van der Cruijsen, David-Jan Jansen, Jakob de Haan, 23 August 2015

Central banks have typically targeted their communication at financial markets. Increasingly, however, many have started actively communicating with the general public. Using Dutch survey data, this column finds that the public’s knowledge of monetary policy objectives is far from perfect, and varies widely across respondents. Those with a greater understanding of ECB objectives tend to form more realistic inflation expectations. Central banks seeking to target the general public must take account of discrepancies in households’ knowledge of and interest in monetary policy.