Monetary policy

Matthieu Bussière, Jakob de Haan, Robert Hills, 20 January 2021

Despite being a central question in international macroeconomic policy debates, there is still only limited empirical evidence on the extent to which macroprudential policy affects the transmission of monetary policy and the propagation of shocks across borders.  This column presents findings from the latest project of the International Banking Research Network. The interactions between monetary and macroprudential policies are shown to significantly alter cross-border bank flows across a wide range of countries, though the magnitudes differ appreciably across countries and instruments.

Olli Rehn, 13 January 2021

Global population ageing will lead to a trend reversal, with saving rates falling, real wages increasing, and greater inflationary pressures. The change in China’s economic model from forced saving towards increased consumption is amplifying this trend. This column reviews a new book by Charles Goodhart and Manoj Pradhan in which the authors examine megatrends reshaping societies and economies. Whether they are proved right or wrong, their arguments should prompt a much-needed reflection on widely held assumptions about future developments.

Moritz Schularick, Lucas ter Steege, Felix Ward, 12 January 2021

The question of whether monetary policymakers can defuse rising financial stability risks by ‘leaning against the wind’ and increasing interest rates has sparked considerable disagreement among economists. This column contributes to the debate by studying the state-dependent effects of monetary policy on financial stability, based on the ‘near-universe’ of advanced economy financial cycles since the 19th century. It shows that deploying discretionary leaning against the wind policies during credit and asset price booms are more likely to trigger crises than prevent them.

Jan Willem van den End, Anna Samarina, 02 January 2021

Policy announcements by a central bank policy can have a significant impact on financial markets. This column examines the sensitivity of various asset prices and other metrics to the ECB’s monetary policy announcements. Bond spreads, stock prices, and the euro-dollar exchange rate became more sensitive to policy announcements over time. But volatility of market ‘surprises’ was significantly higher after easing compared to after tightening decisions. This suggests that the ECB’s monetary policy communication has become an increasingly important market-moving event.

Phurichai Rungcharoenkitkul, Claudio Borio, Piti Disyatat, 22 December 2020

In recent years, a key challenge for central banks has been the shrinking room for policy manoeuvre as interest rates have declined to historical lows in many countries. The Covid-19 pandemic has inevitably exacerbated the problem. Once the worst is over, rebuilding policy space will be critical. This column presents a theoretical model in which the impact of monetary policy on financial vulnerabilities can complicate that challenge by constraining policy choices down the road. The model includes two realistic features typically excluded from standard setups: banks create money, and lending behaviour generates endogenous booms and busts. As it turns out, in such a framework the very notion of a natural rate of interest driven by saving and investment comes into question.

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