Monetary policy

Dirk Niepelt, 20 August 2018

The potential benefits and risks of digital central bank money for use by the general public have been widely debated. This column looks at one aspect that has been somewhat overlooked – the consequences of substituting outside for inside money. ‘Reserves for all’ could increase the incentive to extend credit but might undermine political support for implicit financial assistance to banks. However, the effects need not be disruptive. 

Michael Bordo, Klodiana Istrefi, 20 August 2018

US presidents can influence monetary policy through the appointment process of the Federal Open Market Committee members. This column examines the policy preferences of Committee members in relation to the ideology of their appointers. Democratic Board nominees have been mostly perceived to be doves, while the shares of both hawks and doves (as opposed to swingers) appears higher for Republican nominees.In contrast, a high share of doves among Federal Reserve Bank presidents, who are appointed by their bank’s board of directors, is observed irrespective of the president’s party.

Andres Blanco, Javier Cravino, 17 August 2018

Economists have often interpreted the observation that movements in real exchange rates are large, persistent, and closely track movements in nominal rates while cross-country differences in inflation rates are small and stable as direct evidence for nominal price rigidities. This column uses the microdata behind the construction of the consumer price index to isolate the real exchange rate for the subset of goods that change prices. This ‘reset exchange rate’ moves with the real exchange rate, suggesting that sticky prices are not a primary factor in dampening the response of inflation to exchange rate shocks.

Miguel Ampudia, Dimitris Georgarakos, Michele Lenza, Jiri Slacalek, Oreste Tristani, Philip Vermeulen, Gianluca Violante, 14 August 2018

Quantitative easing has recently been shown to affect households differently depending on the composition of their income and wealth. Using euro area data, this column reviews the relevance of the direct and indirect effects of monetary policy on households’ incomes, which varies depending on employment status. The indirect income channel is found to be quantitatively more powerful, and especially beneficial for households holding few or no liquid assets. This implies that expansionary monetary policy in the euro area has led to a reduction in inequality. 

Antoine Levy, 22 July 2018

The euro improved the credibility of monetary policy for many member states, but the downsides of not having monetary autonomy became painfully apparent during the European debt crisis. This column proposes ‘targeted inflation targeting’ as a way to improve stabilisation mechanisms in the euro area, without losing the benefits of integration. The ECB would maintain a rules-based approach that targets countries in a weaker macroeconomic position more aggressively.

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