Monetary policy

Stefan Gerlach, Reamonn Lydon, Rebecca Stuart, 21 July 2015

Despite being a mainstay of macroeconomic theory for the past half century, the Phillips curve often receives the death knell from various commentators. These critiques often rely on results from data samples spanning relatively short periods. Using the case of Ireland, this column argues that short-term idiosyncrasies can explain the failure of the model in these contexts. Taking a longer historical view, the Phillips curve remains a useful macroeconomic model, at least in the Irish context.

Stefano Micossi, 17 July 2015

The ECB’s monetary policy has evolved rapidly over the past decade – from the adoption of the euro to the recent implementation of quantitative easing. This column discusses the effectiveness of the ECB’s policies. The single currency induced pro-cyclicality in the Eurozone periphery. The failure to adequately respond to the Lehman failure placed the burden to stabilise financial markets in the Eurozone onto the ECB, which as a consequence has become the lender of last resort in Eurozone sovereign debt markets. And finally, the persistent deflation and depression convinced the ECB to adopt an expansionary monetary stance.

Carmen M Reinhart, 09 July 2015

Contrary to the intent of the designers of what was to be an irreversible currency union, Greece may well exit the Eurozone. This column argues that default does not inevitably trigger the introduction of a new currency (or the re-activation of an old one). However, if ‘de-euroisation’ is the end game, then a forcible (or compulsory) currency conversion is likely to be a central part of that process, along with more broad-based capital controls. 

Joshua Aizenman, Menzie D. Chinn, Hiro Ito, 09 July 2015

Monetary policies of financial centre countries could have large spillover effects on smaller economies. This column argues that the strength of the links with the centre economies has been the major factor affecting financial conditions in emerging and developing countries. Open macro policies such as the exchange rate regime and financial openness are also important. An economy that pursues greater exchange rate stability and financial openness has a stronger link with the centre economies.  

Clemens Jobst, Stefano Ugolini, 23 June 2015

Central banks today provide liquidity exclusively through purchases of (mostly) government bonds and through collateralised open-market operations. This column considers the evolution of liquidity provision by central banks over the past two centuries, and argues that there are alternative approaches to those that are focused on today. One such alternative is a revival of the 19th century practice of uncollateralised lending. This would discourage market participants from relying on informational shortcuts, and reduce the likelihood that informational shocks trigger collateral crises.

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