Ricardo Caballero, Alp Simsek, 05 October 2020

While the Fed’s massive policy response to the Covid-19 shock was successful in reversing the financial meltdown, it did not prevent a dramatic collapse in the real economy. This column argues that the patterns observed are consistent with optimal monetary policy once the subtleties of the relationship between monetary policy, the stock market, and the economy are considered.

Alicia García-Herrero, Elina Ribakova, 21 May 2020

The spread of COVID-19 and its associated impacts have again brought into focus the dependence of emerging market economies on external financing. This column analyses the factors that put emerging economies at an increased risk of a sudden reduction in dollar liquidity as a consequence of the COVID-19 outbreak. Based on this analysis, it reviews the key tools at the disposal of emerging economies, the Fed, and the IMF to address this problem. It concludes by offering some policy recommendations on the pecking order that could be followed to potentially shield the emerging economies from the dollar shortage problems related to COVID-19.

Andrew Lilley, Kenneth Rogoff, 17 April 2020

In the aftermath of the Global Crisis, conventional monetary policy has been constrained by low interest rates in many major economies. This has spurred debates on the possibility of introducing negative interest rates in the monetary policy toolkit. This column uses evidence from the US to show that not only do the markets expect the low interest rates to persist into the future, but they also expect the use of negative interest rates down the line. Moreover, markets no longer believe that even quantitative easing can bring inflation to target, which leaves very few alternatives for monetary policy apart from negative interest rates.

Robert McCauley, Catherine R. Schenk, 12 April 2020

A major source of vulnerability during global financial crises, both in the past and at present, is the severe shortage of US dollar funding around the world. This necessitates extensive central bank cooperation, in the form of central bank swap lines and other innovative solutions, to relieve the strain on dollar liquidity. This column evaluates the close cooperation between the Fed, BIS and other central banks in response to a strained eurodollar market in the 1960s, and compares this to other episodes in the 1990s, 2008 and 2020. The wide system of swaps that existed in the past amounted to a global financial net aimed at managing dollar liquidity and stabilising exchange rates.

Peter Karadi, Marek Jarociński, 03 October 2018

Central bank announcements simultaneously convey information about monetary policy and the economic outlook. This column uses changes in interest rate expectations and stock prices around the time of policy announcements of the Federal Reserve to disentangle the impact of news about monetary policy from that of news about the economic outlook. It finds that both pieces of information play a significant role in the dynamics of inflation and economic growth. Controlling for news about the economy provides a more accurate measure of the transmission of monetary policy.

Paul Krugman, 30 October 2017

What did we learn from the crisis? In this video, Paul Krugman explains why we might be in a worse situation than we were in 2007. This video was recorded at the "10 years after the crisis" conference held in London, on 22 September 2017.

Henrike Michaelis, Volker Wieland, 03 February 2017

In a recent speech, Janet Yellen, Chair of the Board of Governors of the Federal Reserve System, compared the Fed’s strategy to simple reference rules, including the Taylor rule. This column argues that the comparisons enhance the Fed’s transparency and can help it to stand up to political pressure. However, Chair Yellen also suggests an important role for estimates of medium-run equilibrium real rates. Such estimates are extremely uncertain and sensitive to technical assumptions, and thus should not be used as key determinants of policy stance.

Kris Mitchener, Gary Richardson, 28 May 2016

The Global Crisis emphasised the fragility of international financial networks. Despite this, there has been little historical research into how networks propagate financial shocks. This column explores how interbank networks transmitted liquidity shocks through the US banking system during the Great Depression. During banking panics, the pyramided-structure of reserves forced troubled banks to reduce lending, thus amplifying the decline in investment spending. 

Stephen Hansen, Michael McMahon, 03 February 2016

In addition to setting interest rates, central banks also communicate with the public about economic conditions and future actions. While it has been established that communication can drive expectations, less is known about how it does so. This column attempts to shed light on this question. Applying novel measures to the content of Federal Reserve statements, it shows that forward guidance is a more important driver of market variables than disclosure of information about economic conditions.

Yin-Wong Cheung, Sven Steinkamp, Frank Westermann, 27 January 2016

Since the beginning of the Global Crisis, illicit capital flows out of China have been in decline. This column argues that a key factor behind this is the relative money supply between China and the US. China’s rapidly increasing money supply, combined with the Fed’s expansionary monetary policy, prompted investors to reallocate their portfolios between the two countries. Another contributing factor is China’s gradual process of capital account liberalisation. The Fed’s interest rate hike in December may see a resurgence in China’s capital flight.

Dae Woong Kang, Nick Ligthart, Ashoka Mody, 19 January 2016

Although the Great Recession was viewed as a US problem, the Eurozone was affected by it from the start. This column compares the monetary policy responses to the Crisis by the Fed and the ECB. It argues that the US approach has been much more aggressive and proactive. The ECB failed to provide stimulus when needed, and as a result the Eurozone might slip into a low-inflation trap.

John Williams, 26 November 2015

Interest rates have been extremely low since the Global Crisis. This column surveys the recent debate over whether they will remain low, or return to normal. While an unequivocal answer is not possible, the evidence suggests a significant decline in average real rates – perhaps to as low as 1%.

James Hamilton, Ethan Harris, Jan Hatzius, Kenneth West, 15 November 2015

No-one is sure what the Fed’s long-delayed nominal interest rate hikes will bring, and there has been much speculation on what the equilibrium rate might look like when the Fed acts. This column argues that it would be foolish to attempt to pin down a precise value for the steady-state real rate. A better approach is to predict the plausible range of values, and evidence suggests that the equilibrium rate will range from a little above zero up to 2%.

Athanasios Orphanides, 11 November 2015

There is generally consensus among macroeconomists that monetary policy works best when it is systematic. Following the financial crisis, the US Federal Reserve shifted from long-term, systematic policy to short-term goals targeting unemployment. This column argues that, while these were appropriate in the aftermath of the downturn, such policy accommodations have been pursued for too long since. The need for a somewhat accommodative policy cannot be used to defend the current non-systematic policy and excessive emphasis on short-term employment gains.

Matthew Jaremski, David Wheelock, 25 October 2015

The US’s Federal Reserve System was established more than a century ago as a confederation of 12 regional districts. The selection of cities for each region’s Reserve Bank disproportionately favoured the Northeast and the state of Missouri, a fact that remains controversial to this day. This column describes how the existing banking infrastructure and population density at the time, guided the selection of these cities. Modern communication technology has reduced the need for physical proximity between Reserve and commercial banks. Debates about rezoning the Federal districts should therefore focus on the distribution of monetary policymaking authority.

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.

Athanasios Orphanides, 05 December 2014

In the face of the zero lower bound, the ECB’s reduced its balance sheet by a third. This column introduces a new CEPR Policy Insight by former central-bank governor Athanasios Orphanides, which argues that the outcome has been economic stagnation and harmful disinflation. It explores alternative explanations for this policy, including the role of politics in managing the Eurozone crisis and proposes balance-sheet policy to help fulfil the ECB’s mandate in the face of the Fed’s tightening. 

Pelin Ilbas, Øistein Røisland, Tommy Sveen, 13 February 2013

Economists everywhere recognise the Taylor rule’s importance in monetary policymakers’ decisions. But exactly how important is it? This column aims to analyse the Taylor rule’s influence on US monetary policy by estimating the policy preferences of the Fed. There is a high degree of reluctance to let the interest rate deviate from the Taylor rule and, contrary to the literature and current policy debates, it seems large deviations from the Taylor rule between 2001 and 2006 were in fact due to negative demand-side shocks. During this period, there is in fact no evidence to support the notion of a decreased weight on the Taylor rule.

Marco Annunziata, 12 February 2013

Economists and policymakers are increasingly concerned that central-bank independence is being threatened. This column argues that central banks are not losing their independence, but that their room for manoeuvre is being eroded by a lack of structural reforms and fiscal adjustment. The financial crisis has caused mission creep, pushing central banks well beyond their comfort zones and as the time comes to pull back, independent monetary policy could still be powerless against fiscal dominance.

Jean Pisani-Ferry, Guntram Wolff, 03 May 2012

The ECB has managed a massive expansion of its balance sheet with long-term refinancing operations. This has been called the equivalent of quantitative easing, as done by the Fed and the Bank of England. This column thus argues that the main obstacle for the ECB is not tight limits on the purchase of government bonds. Rather, it is the absence of a banking and fiscal union and the heterogeneity within the Eurozone that reduces the effectiveness of the ECB instruments.

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