João Ayres, Pablo Andrés Neumeyer, Andrew Powell, 19 July 2021

The ‘right’ monetary policy response to COVID-19 has depended on any number of factors for central banks across the world. This column argues that some central banks in Latin American and Caribbean went beyond accommodating the increased demand for liquidity, inducing monetary injections that then returned through excess bank reserves and sterilisation liabilities for those central banks that fixed an interest rate, and through sales of international reserves for those that favoured stable exchange rates. The authors also outline some of the risks confronting central banks for the months ahead.

Enrique Alberola, Carlos Cantú, Paolo Cavallino, Nikola Mirkov, 12 July 2021

Textbook models predict that a monetary policy tightening should lift the exchange rate. Yet the empirical evidence for emerging market economies fails to support this prediction. This column uses data from Brazil to show that the exchange rate’s response to monetary policy shocks changes with the fiscal regime. A contractionary monetary surprise leads to an appreciation in normal times. By contrast, a depreciation results when fiscal fundamentals are deteriorating and markets worry about debt sustainability. 

Sebastian Schmidt, 06 July 2021

Inflation shortfalls across the developed world have raised concerns about the possibility of low-inflation traps. This column presents a simple model of inflation to analyse the role of stabilisation policy in preventing them. It suggests that decisive countercyclical fiscal policy can protect economies from falling into a low-inflation trap by offsetting low inflation expectations. 

Philippe Martin, Eric Monnet, Xavier Ragot, Thomas Renault, Baptiste Savatier, 05 July 2021

The pandemic has caused the ECB to push its tools to their extremes. Despite considerably expanding its balance sheet and maintaining negative interest rates, inflation in the euro area remains below target. This column argues that direct transfers by the ECB to individuals, or ‘helicopter money’, should be considered as a viable contingent policy. It estimates that a transfer of 1% of GDP would increase inflation by 0.5 percentage points. A well-communicated policy with a clear exit strategy would be consistent with the ECB’s inflation targeting objective and maintain a clear boundary with fiscal policy. 

Bill English, Ángel Ubide, 04 June 2021

How well has monetary policy coped with the challenge of Covid-19?Central banks get good grades in a new VoxEU ebook. But Bill English and Angel Ubide warn Tim Phillips that success today may lead to problems in future.

Download the new eBook here: Monetary Policy and Central Banking in the Covid Era

Bill English, Kristin Forbes, Ángel Ubide, 03 June 2021

As Covid-19 spread in early 2020, many central banks were still struggling to boost inflation. The abruptness and speed of the economic deterioration, the sharp increase in market volatility, and the blinding uncertainty over the impact of the pandemic motivated a central bank reaction that was unprecedented in terms of size, speed and scope. A new CEPR eBook summarises the responses by sixteen central banks from both advanced and emerging economies – with chapters written by senior central bank officials and economists in each of the countries to explain the actions taken. While responses varied across countries, there are several common threads: the size, speed and breadth of the responses; the reliance on a more multidimensional set of tools; and the ability of emerging markets to behave more like advanced economies.

Stephen Cecchetti, Paul Tucker, 01 June 2021

Since the Global Crisis, the size of central bank balance sheets has grown significantly. Traditional goals of price and financial stability are insufficient for assessing the success of modern central banking operations. This column introduces a new framework for categorising and understanding central bank balance sheet operations. Monetary policy decisions are separated from facilities for lender of last resort, market maker of last resort, providing selective credit, and ensuring emergency government financing. To maintain legitimacy and accountability, central banks should formally distinguish these operations by clearly setting out their purposes, objectives, and constraints. 

Michele Ca' Zorzi, Luca Dedola, Georgios Georgiadis, Marek Jarociński, Livio Stracca, Georg Strasser, 25 May 2021

There is growing need to understand the international dimension of monetary policy. This column argues that ECB and Federal Reserve monetary policy decisions spill over to other countries asymmetrically. At the bilateral level, the Fed’s impact on the euro area is material to firms’ financial conditions and economic activity. Conversely, the impact of the ECB’s actions on the US economy is minimal. On a global scale, both central banks’ monetary policies matter for other countries, but the Fed’s monetary policy has a more sizeable impact, particularly on foreign financial variables, such as corporate bond spreads.

Patrick Bolton, Harrison Hong, Marcin Kacperczyk, Xavier Vives, 25 May 2021

The Covid-19 pandemic and recession have reinforced the need to evaluate the economic and financial impact of natural disasters, providing a pointer to the damaging effects that climate change may induce. This column introduces the third report in the Future of Banking series from the IESE Business School and CEPR, which explores the ways in which natural disaster risks are different from more familiar forms of financial risk – and how banks, asset managers andcentral banks are beginning to grapple with these risks. The authors call for a combination of public interventions and private sector mitigation strategies to reduce the long-term implications of climate-related events.

Niklas Amberg, Thomas Jansson, Mathias Klein, Anna Rogantini Picco, 23 May 2021

Fully understanding the distributional consequences of monetary policy requires looking at its impact over the entire income distribution and not simply at summary inequality measures like the Gini coefficient. Using uncensored administrative income data for Sweden, this column shows that while a monetary policy loosening substantially affects incomes across the entire income distribution, it does so relatively more in the tails, providing a U-shaped response pattern. The effects in the bottom are primarily driven by changes in labour income, whereas the effects in the top are mainly due to disparities in capital income.

Matthieu Darracq Pariès, Christoffer Kok, Matthias Rottner, 02 May 2021

The prolonged period of negative interest rates in advanced economies has raised concerns that further monetary policy accommodation could produce contractionary effects. Using a non-linear macroeconomic model fitted to the euro area economy, this column demonstrates that the risk of hitting the ‘reversal interest rate’ depends on the capitalisation of the banking sector. Consequently, the possibility of the reversal rate creates a novel motive for macroprudential policy, such as a countercyclical capital buffer. The new motive emphasises the strategic complementarities between monetary and macroprudential policy.

Asger Lau Andersen, Niels Johannesen, Mia Jørgensen, José-Luis Peydró, 19 April 2021

Who gains – and by how much ­– when central banks soften their monetary policy regime is a key policy question. This column discusses new evidence on the distributional effects of monetary policy based on detailed administrative household-level data. The authors show that the gains from lower policy rates exhibit a steep income gradient, with the increases in income, wealth, and consumption modest at the bottom of the income distribution and highest at the top. 

Sebastian Edwards, Luis Cabezas, 08 April 2021

The nominal exchange rate plays a dual role in macroeconomic adjustments – it is part of the transmission mechanism of monetary policy, and it also helps accommodate external and domestic shocks through its effect on the real exchange rate. This column uses disaggregated price index data from Iceland to test how exchange rate pass-through varies with the international tradability of goods and with the monetary policy framework. It shows that pass-through is significantly higher for tradables relative to nontradables. In addition, it finds that improvements in the credibility of the central bank are associated with declines in the exchange rate pass-through. 

Yasin Mimir, Enes Sunel, 05 April 2021

Central banks in emerging economies deployed asset purchases for the first time to respond to the Covid-19 shock. Initial studies have found quantitative easing reduced long-term bond yields in these economies without creating bouts of currency depreciation. This column argues that asset purchases ease financial conditions in emerging economies by curbing capital outflows enabled by stronger bank balance sheets upon the asset intermediation by the central bank. If asset purchases cause a de-anchoring in inflation expectations, their effectiveness diminishes. Counterfactual policy experiments reveal that bond yield reductions from asset purchases during the pandemic could have persisted only under large-sized programmes that are representative of advanced economies.

Alexander Dietrich, Gernot Müller, Raphael Schoenle, 22 March 2021

Climate change has emerged as a major challenge for central banks, although its extent and the immediate consequences are highly uncertain. This column uses a survey of over 10,000 US consumers to show that irrespective of when and how climate change actually plays out, what matters for monetary policy is how people expect it to play out. Central bankers ignore the expectations channel of climate change at their peril.

Robin Döttling, Lev Ratnovski, 19 March 2021

Technological progress increases the importance of corporate intangible assets such as research and development knowledge, organisational structure, and brand equity. Using US data covering 1990 to 2017, this column shows that the stock prices and investment of firms with more intangible assets respond less to monetary policy shocks. Similarly, intangible investment responds less to monetary policy compared to tangible investment. The key channel explaining these effects is a weaker credit channel of monetary policy, as firms with intangible assets use less debt.

Stefano Corradin, Marie Hoerova, Glenn Schepens, 12 February 2021

Euro area money markets have gone through substantial changes and turbulent periods over the past 15 years. These have included the global and euro area sovereign debt crises, new liquidity and leverage requirements, and the expansion of the Eurosystem balance sheet through asset purchase programmes. This column discusses the interaction between money markets, new Basel III regulations, and central bank policies. The analysis shows that money market conditions worsen when financial stress increases, or if central bank asset purchases induce scarcity effects. It outlines implications of changing money market conditions for monetary policy implementation and transmission.

Alina Kristin Bartscher, Moritz Kuhn, Moritz Schularick, Paul Wachtel, 10 February 2021

Racial income and wealth gaps in the US are large and persistent. Central bankers and politicians have recently suggested that monetary policy may be used to reduce these inequalities. This column investigates the distributional effects of monetary policy in a unified framework, linking monetary policy shocks both to earnings and wealth differentials between black and white households. Over multi-year horizons, it finds that while accommodative monetary policy tends to reduce racial unemployment and thus earnings differentials, it exacerbates racial wealth differentials, which implies an important trade-off for policymakers.

Ioana Duca-Radu, Geoff Kenny, Andreas Reuter, 09 February 2021

When interest rates cannot go any lower, the economy can be stabilised if consumers expect the rate of inflation to increase. Yet, the evidence for this stabilising effect has been very mixed. This column presents new evidence from a monthly survey of over 25,000 individual consumers across the euro area, showing that consumers are indeed more ready to spend if they expect inflation to be higher in the future. While generalised in the population, the stabilising effect is stronger when nominal interest rates ­are constrained at the lower bound.

David Baqaee, Emmanuel Farhi, Kunal Sangani, 28 January 2021

Monetary policy has ‘supply-side’ effects – in addition to boosting output by increasing employment, a monetary easing boosts output by increasing aggregate productivity. The link between monetary policy and productivity is absent in standard macro models, but arises if one takes into account realistic firm heterogeneity. This column discusses the supply-side transmission channel and the role it plays in flattening the Phillips curve.

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