Chairman Bernanke’s hints about the end of quantitative easing (QE) have produced volatility in financial markets. This column argues that financial markets were startled because an end to QE is likely to cause capital losses for bond holders since term premium is substantially negative. Bank regulators should be alert to the possibility. This fundamental explanation is teamed with widespread confusion among market participants about how quantitative easing actually works.
Stephen Grenville, 22 June 2013
Ambrogio Cesa-Bianchi, Alessandro Rebucci, 11 April 2013
Many economists think that the US Federal Reserve’s loose monetary stance in the 2000s fuelled the US housing bubble. Is the Fed thus responsible for the Global Crisis? This column discusses evidence suggesting that monetary policy was, in fact, not to blame. Rather, it was the absence of an effective regulatory function that created the mess we’re in now. It is not fair to blame the Great Recession only on the Fed’s monetary-policy stance nor is the Fed now breeding the next US financial crisis.
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.
Jeffrey Frankel, 29 January 2013
2013 marks the 100th anniversary of US federal income tax and the establishment of the Federal Reserve. What lessons have we learnt about macroeconomic policy since then? This column assesses the postwar lessons and argues that fiscal expansion is much more likely to be effective in the short term than any monetary expansion stimulus. Indeed, compared with fiscal policy, monetary policy seems more alchemy than science.
David Miles, 27 November 2012
David Miles talks to Viv Davies about the conclusions of his recent research on quantitative easing and unconventional monetary policy. Miles discusses the different types of 'asset purchasing programmes' adopted by the Bank of England, the Fed and the ECB; they also discuss the importance of current research in these areas and the potential risks associated with quantitative easing. The interview was recorded at the Bank of England on 21 November 2012. [Also read the transcript]
Peter Tillmann, 23 February 2012
As the US Federal Reserve starts to increase the transparency of its decision-making process, including the release of economic forecasts and interest-rate projections, this column asks whether these projections reflect strategic motives that might make them less accurate and less useful to those wanting to predict monetary policy.
Olivier Coibion, Yuriy Gorodnichenko, 21 October 2011
The August 2011 meeting of the Federal Reserve's Federal Open Market Committee produced new language describing the expected path of interest rates over a two-year horizon. That language spurred a variety of interpretations, as some saw it as describing what was already expected and others interpreted it as a significant policy shift. This column examines the expected path of future interest rates and says that the new language was wholly consistent with past Fed practice.
Yuriy Gorodnichenko, Olivier Coibion, 28 January 2011
As the US economy recovers in fits and starts, attention is turning to exit strategies. How will the Fed unwind its quantitative easing? This column presents evidence of substantial levels of policy inertia in monetary policy. It says that we should not expect rapid policy changes in the near future – barring clear signs of economic distress.
Pierre-Olivier Weill, Guillaume Rocheteau, Ricardo Lagos, 16 December 2009
Following the last run on a British bank over 130 years ago, Walter Bagehot argued that central banks should act as a lender of last resort. While such policies have been followed by central banks in today’s crisis, this column updates the recommendation by suggesting central banks should also act as a “liquidity provider of last resort”.
Willem Buiter, 04 June 2009
Some economists are arguing that central banks should set negative nominal interest rates. This column explains the basics by describing three ways of removing the zero lower bound on nominal interest rates: abolish currency, tax currency holding, or decouple the unit of account from the currency by introducing a new currency.
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.
Guido Tabellini, 23 June 2008
The ECB and the Fed are pursuing very different policies on inflation fighting and the use of monetary aggregates in guiding policy. One of Italy’s leading economists argues that either the ECB or the Fed is making a mistake.
Francesco Giavazzi, 02 June 2008
Editor's Note: Originally posted 2 June 2008. There has been a persistent spread between the rate at which banks lend each other money and government-backed securities yields in recent months. This column describes hypotheses explaining the spread – including the possibility that banks aren’t lending in order to bankrupt acquisition targets.
Jeffrey Frankel, 29 May 2008
Low inventory levels might seem to belie the theory that soaring commodity prices are attributable to low interest rates. In this column, Jeffrey Frankel defends his argument, pointing to production decisions and cross-country comparisons.
Michael Orlando, 24 May 2008
The financial crisis has put the US Federal Reserve’s performance under the spotlight. As the United States reassesses its financial regulatory system, this column makes the case for central bank independence.
Richard Baldwin, 08 May 2010
This column, first posted 17 May 2008, reviews Willem Buiter's analysis of why the ECB is so hesitant to buy debt. Central banks can go broke – and some in developing countries have done so recently. The ECB is now lending against dubious collateral. An ECB recapitalisation seems unthinkable at the moment, but that’s why it is a good time to think the unthinkable. Willem Buiter considers the question at length in CEPR Policy Insight No. 24 and argues that Eurozone fiscal authorities should, ASAP, agree on a formula for fiscal burden-sharing should an ECB recapitalisation ever be necessary.
Stephen Cecchetti, 10 April 2008
The nature of the ongoing financial turmoil that began in August 2007 has rendered traditional monetary policy responses ineffective. This column summarises the US Federal Reserve’s response to the crisis.
Jon Faust, 31 January 2008
The US Federal Reserve makes monetary policy based on necessarily imperfect economic forecasts. Recent research shows that the Fed is quite adept at assessing current economic conditions, but forecasting the future remains disappointingly difficult.
Michael Woodford, 17 January 2008
Central banks have experimented with ‘forward guidance’ – sending signals about the future path of interest rate policy more than just one decision ahead – as a way of stabilizing medium-to-longer run expectations. Here is a discussion of the phenomenon and some ideas on how the Fed could improve its signalling.