The Global Crisis has raised concerns over how far ‘lender of last resort’ policies by central banks should go. This column examines the history of the development of these policies throughout the world. Last resort lending is a locus of political power, and as such, its creation should be viewed as the outcome of a political bargain. It is therefore not surprising that countries differed in their propensity to create such policies, and in the powers with which they chose to endow them.
Charles Calomiris, Marc Flandreau, Luc Laeven, 19 September 2016
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.
Wouter den Haan, Martin Ellison, Ethan Ilzetzki, Michael McMahon, Ricardo Reis, 17 May 2016
Quantitative easing is called ‘unconventional monetary policy’, but monetary policy could get much more ‘unconventional’. Things like ‘helicopter money’, abolishing currency and negative nominal interest rates have entered the public policy debate. This column reports the views of leading experts on the future role of unconventional monetary policy, and what might be called ‘unconventional unconventional monetary policies’. Opinions are divided. There is a healthy dose of scepticism on the effectiveness of current and future policies, but also many respondents express urgency that central banks should have more policy tools to affect inflation and real activity when the need arises. Ultimately, the experts’ hesitations match those of central banks.
Nauro Campos, Corrado Macchiarelli, 03 March 2016
There seems to be a robust consensus that the relationship between the countries in the EU that use the euro as their currency (‘euro-ins’) and those that do not (‘euro-outs’) is the most important of the four areas in the ‘new settlement’ between the UK and the EU. This column presents new econometric estimates showing that, after the introduction of the euro, the UK and Eurozone business cycles became significantly more synchronised. It is likely this upsurge in synchronisation increased the costs of a potential UK exit from the EU.
John Vickers, 15 February 2016
Much stronger capital buffers are fundamental to banking reform. But seven years on from the Global Crisis, the question of how much stronger has not been fully decided. This column reviews the Bank of England’s recently published framework for the systemic risk buffer. It is suggested that the Bank should go further than it proposes, and require stronger capital buffers for systemically-important retail banks.
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.
Carlos Garriga, Finn Kydland, Roman Šustek, 01 October 2015
An important channel for monetary policy transmission is through mortgage markets. This column illustrates how the effects of an interest rate lift-off, from the zero lower bound, on homeowners depend on three factors: the prevalent mortgage type in the economy (fixed or adjustable rate), the speed of the lift-off, and the inflation rate during the lift-off. This channel of transmission suggests that if the purpose of the lift-off is to normalise nominal interest rates without derailing the recovery, the Federal Reserve Bank and the Bank of England should wait until the economies show convincing signs of inflation taking off. Furthermore, the lift-off should be gradual and in line with inflation.
Angus Armstrong, Francesco Caselli, Jagjit Chadha, Wouter den Haan, 17 March 2015
Following the Warsh Review, the Bank of England plans to release its policy decisions, ‘enhanced’ meeting minutes and (once a quarter) the Inflation Report all at the same time. This column, which reports the views of the leading UK-based macroeconomists, reveals substantial support for the idea of simultaneously providing the different Monetary Policy Committee (MPC) documents. In order to make this possible, the Bank plans to change the structure of its MPC meetings. When the proposed change in the structure is taken into account, the panel is split on the desirability of the Bank's plans.
Charles Goodhart, 02 March 2015
Following the Warsh Review, the recording, number, and timing of the Bank of England’s Monetary Policy Committee meetings will change. This column argues that the recording may make the decision meeting more formal and could inhibit debate, although the eight-year gap before publishing transcripts ameliorates this concern. Having fewer MPC meetings is a good thing, and reduces ‘noise’ around monetary policy. The revised meeting schedule will not add to transparency and raises the risk of leaks and ‘news shocks’.
Barry Eichengreen, Petra Geraats, 06 January 2015
The Bank of England has been a beacon for openness and transparency. This column argues that proposed changes to its procedures will worsen transparency. The changes would make the policymaking process less efficient in the name of transparency. But transparency is not an end in itself. Rather, it is a tool for enhancing accountability and, just as importantly, advancing the ultimate goal of making monetary policy more efficient and effective.
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.
Jonathan Bridges, David Gregory, Mette Nielsen, Silvia Pezzini, Amar Radia, Marco Spaltro, 02 September 2014
Since the Global Crisis, support has grown for the use of time-varying capital requirements as a macroprudential policy tool. This column examines the effect of bank-specific, time-varying capital requirements in the UK between 1990 and 2011. In response to increased capital requirements, banks gradually increase their capital ratios to restore their original buffers above the regulatory minimum, reducing lending temporarily as they do so. The largest effects are on commercial real estate lending, followed by lending to other corporates and then secured lending to households.
Richard Barwell, Jagjit Chadha, 31 August 2014
In the wake of the crisis, forward guidance has become a prominent tool of monetary policy. This column argues that central banks should go a step further, communicating to the public the internal policy debate that goes into monetary policy formation – especially regarding uncertainty. Since policy is determined contingent on a range of possible outcomes, forward guidance would become more effective by explicitly communicating how policy would respond along this uncertain path.
Jack McKeown, Lea Paterson, 18 July 2014
The Bank of England has introduced a series of changes aimed at enhancing the transparency of its flagship communication vehicle for monetary policy – the Inflation Report. This column by two BoE economists sets the rationale for these changes in the context of the economic literature.
Martin Weale, Tomasz Wieladek, 10 June 2014
After reducing their policy rates close to zero in response to the global financial crisis, the Bank of England and the Federal Reserve began purchasing assets. This column assesses the effect of these asset purchases on output and inflation. In line with previous studies, the authors find that asset purchase announcements are associated with increases in both output and inflation in both countries. They also find that quantitative easing had a larger impact on UK inflation, which suggests that the UK Phillips curve is steeper.
Oliver Harvey, George Saravelos, 28 May 2014
Much ink has been spilled over Scotland’s currency options in the event of independence. This column argues that a breakup of the sterling area would be truly unprecedented. The sterling union is unique because it services a unitary state with a highly integrated and complex financial sector, an indivisible payments system, and an overlapping legal system. Politics aside, neither a unilateral nor a mutual break-up would be credible, leaving a negotiated currency union as the only option. However, as the Eurozone crisis demonstrates, a badly designed currency union could be exceptionally costly.
David Cobham, 16 September 2013
The Bank of England is searching for an alternative activist monetary policy. This column argues that inflation targeting is better than previous frameworks but there is room for improvement. Faced with exchange rate and housing prices problems, the Bank was unable to modify the framework to suit. To avoid such problems, the Bank should be given more goal-independence as well as instrument-independence.
Spencer Dale, James Talbot, 13 September 2013
The Bank of England’s Monetary Policy Committee has recently provided some explicit forward guidance regarding the future conduct of monetary policy in the UK. This column by the Bank's Chief economist explains how the MPC designed its forward guidance to respond to the unprecedented challenges facing the UK economy and argues that forward guidance allows the MPC to explore the scope for economic expansion without putting price and financial stability at risk.
Stephen Hansen, Michael McMahon, 11 August 2013
Markets will be perusing the new Bank of England Governor’s comments for hints on his hawkishness. This column presents evidence showing that Monetary Policy Committee members tend to become more dovish as they become more experienced (i.e. after having participated in 18 or more meetings), with this tendency most marked in members with dovish preferences.