Until recently, the independence granted to the Bank of England 20 years ago had gone unchallenged. But the financial crisis has raised questions over whether central bank independence is necessary, feasible, and democratic. This column revisits the relationship between inflation and the operational and political independence of the central bank in advanced economies. The findings support the Bank of England model of monetary policy independence: fully operationally independent, but somewhat politically dependent. To make operational independence work, however, further reforms are needed to the model in both monetary–fiscal coordination and macroprudential policy.
Ed Balls, Anna Stansbury, 01 May 2017
Raphael Auer, Claudio Borio, Andrew Filardo, 28 April 2017
In the past two decades, international trade has been transformed by the rise of global value chains. This column suggests that the rise of global value chains can help resolve the puzzle of the increasingly global nature of domestic inflation. Their expansion has greatly increased international competition for both intermediate and final goods and services, meaning price pressures arising from economic slack in one country become more relevant for others. This may be changing the trade-offs central banks face when managing domestic inflation.
Michael Bordo, 23 April 2017
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.
Laurence Ball, Anusha Chari, Prachi Mishra, 14 April 2017
The inflation rate in India rose from 3.7% to 12.1% between 2001 and 2010, raising concerns that it will rise again. This column separately analyses India's core and headline inflation rates and argues that the average level of core inflation has been consistently less than that of headline inflation. Short-term volatility in prices, especially for food, has driven India’s headline inflation. Estimating a Phillips curve suggests a core inflation–output trade-off in India similar to that of advanced economies during the 1970s and 1980s.
Paul Whelan, 10 February 2017
Investing in stocks instead of bonds is risky. In this video, Paul Whelan discusses the importance of expected inflation. This video was recorded at the Brevan Howard Centre for Financial Analysis in December 2016.
Morten Ravn, Vincent Sterk, 11 January 2017
Recent economic events cast doubt on the standard macroeconomic models. This column looks at new economic models built on the idea that inequality and income risk matter for the business cycle and long-run outcomes. While still in their infancy, these models show promise in addressing the concerns about the old New Keynesian models, and in bringing about a shift in the way that macroeconomists think about aggregate fluctuations and stabilisation policy.
Stephen Cecchetti, Kim Schoenholtz, 07 December 2016
The Bank of Japan has recently implemented one of the largest central bank policy shifts in modern times, raising its inflation target explicitly to 2% and kicking off the most rapid balance sheet expansion among the leading central banks. This column assesses this policy decision and its potential pitfalls, and compares it to similar policies enacted in the past. Unless policy has a significantly larger impact on financial conditions going forward than it has to date, the revised framework will likely be insufficient to achieve the Bank’s inflation target any time soon.
Stefan Gerlach, Rebecca Stuart, 17 November 2016
The ‘dot plots’ that the Federal Open Market Committee has been publishing since 2012 have attracted a great deal of attention, but are difficult to interpret because changes in them reflect a combination of new information and changes in the projections horizon. This column addresses how the Committee members’ views of monetary policy have evolved in recent years, and have they have responded to changes in the macroeconomic environment.
Luca Dedola, Luc Laeven, 15 November 2016
In September 2016, the ECB held its first Annual Research Conference. This column surveys the contributions to the conference, which brought together policymakers and academics from around the world to promote discussion of topics at the forefront of monetary and financial economic research. Nobel laureate Eric Maskin gave the keynote lecture, addressing whether fiscal policy should be set by politicians, and the conference included eight further presentations and a panel discussion on monetary policy and financial stability.
Bruce Kasman, Joseph Lupton, 03 November 2016
Over the past two years, a significant disinflationary impulse has dampened nominal activity around the world. As this disinflationary impulse fades, however, both nominal and real growth should normalise. Indeed, as this column highlights, the latest signs show inflation and inflation expectations rising, profits stabilising, and capital expenditure inching up.
Ricardo Reis, 14 October 2016
Conventional economic theory predicts that, outside of a financial crisis, quantitative easing should have no effect on real outcomes or inflation. This column proposes two theoretical channels through which quantitative easing might also work in a fiscal crisis. In this case, quantitative easing can be a valuable tool because it can control the path of inflation over time and reduce the distortions to the credit flow in the economy.
Gianni La Cava, 08 October 2016
The rising share of income accruing to housing is a key feature of the changing US income distribution. This column examines the determinants of this phenomenon. The rise occurred due to an increasing share of income accruing to owner-occupiers through imputed rent, it is concentrated in states that are constrained in terms of new housing supply, and it is closely associated with the long-run decline in real interest rates and inflation.
Marc Dordal i Carreras, Olivier Coibion, Yuriy Gorodnichenko, Johannes Wieland, 21 September 2016
Models that estimate optimal inflation rates struggle to accurately account for interest rates reaching the zero lower bound, due to the lack of historical data available. This column suggests periods of hitting the zero lower bound are longer than previously thought, and models the optimal inflation rate target on this. Given the uncertainty associated with measuring the historical frequency and duration of such episodes, the wide range of plausible optimal inflation rates implies that any inflation targets should be treated with caution.
Graham Elliott, Allan Timmermann,
Policymakers use forecasting to attempt to assess the impact of major events, such as the recent Brexit vote, on the economy. While forecasting has improved dramatically in recent years, the models can still be greatly improved. This column discusses some of the limitations of forecasting models, and how policymakers can make their predictions more reliable. Key considerations are using more data to generate predictions, and using myriad models to eliminate individual misspecifications.
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.
ADBI invites the submission of theoretical and empirical papers on the implications of negative interest rates for emerging Asia. We are looking for original unpublished research related to, but not limited to, the following topics:
Implication of an extremely low- or negative-yield environment for risk-taking behaviors in Asia and the possibility of financial market dislocations
Side effects of NIRPs on financial markets and real economies of Asia
Transmission channels for the impact of NIRPs on Asian financial markets and exchange rate markets
NIRPs’ challenges in monetary and exchange rate policy and macroprudential policy management in Asia
NIRPs’ potential impact on international reserve holdings in Asia
NIRPs and current account imbalances in Asia
Greater role of international policy coordination in Asia
NIRPs’ impact on banking behavior
Alberto Cavallo, Roberto Rigobon, 24 April 2016
Big Data is changing the world, even economics. This column describes MIT’s Billion Prices Project and discusses key lessons for both inflation measurement and some fundamental research questions in macro and international economics. Online prices can be used to construct daily price indexes in multiple countries and to help avoid measurement biases.
Nick Ligthart, Ashoka Mody, 14 April 2016
Many claim that monetary policy has hit diminishing returns. They use that as an explanation for the slower economic growth and low inflation in the Eurozone. This column argues that the main problem is that the ECB acted late and with half-measures to the Global Crisis, which was seen as falling short of its promises. The real problem is thus not a lack of ammunition, but a lack of credibility.
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.
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.