Monetary policy

Carl-Andreas Claussen, Øistein Røisland, 14 May 2015

The so-called ‘discursive dilemma’ in collective decision-making implies that the policy choice of a monetary policy committee depends on whether it votes directly on policy, or whether it votes on the underlying economic judgements – the ‘premises’ for the decision. This column argues that the monetary policy committees should vote on the premises. This gives better decisions, better explanations and better monetary policy communication.

Patrick Minford, 03 May 2015

The financial system – especially banks – is generally blamed for the Great Recession. This notion has been used to justify the adoption by central banks of several new monetary policy functions, such as financial stability and macro-prudential policies. This column argues that the financial crisis was just one component of the Great Recession and that central banks are largely responsible, given their failure to prevent banks’ liquidity difficulties from overflowing into the economy. It suggests that central banks should pay attention to stabilising monetary policy and scale back the new policies of direct regulation.

Sylvester Eijffinger, Ronald Mahieu, Louis Raes, 23 April 2015

Classifying the preferences of members of policy committees has been a topic of intense debate and research. This column presents spatial analysis of the preferences of the Federal Open Market Committee (FOMC) members using transcripts from meetings. The results indicate that a political appointment channel was not active or effective, and there is little effect of career experiences. The overall lack of systemic preference among FOMC members is a reassuring with regard to the institutional design of the FOMC.

Benjamin Nelson, Gabor Pinter, Konstantinos Theodoridis, 16 March 2015

There has been an extensive debate over whether central banks should raise interest rates to ‘lean against’ the build-up of leverage in the financial system. This column reports on empirical evidence showing that, in contrast to the conventional view, surprise monetary contractions have tended to increase shadow bank asset growth, rather than reduce it in the US. Monetary policy had the opposite effect on commercial bank asset growth. These findings cast some doubt on the idea that monetary policy could be used to “get in all the cracks” of the financial system in a uniform way.

Mark Gertler, Peter Karadi, 10 March 2015

Evidence of the impact of monetary policy on economic activity supports conventional models with nominal rigidities. This column highlights the importance of the ‘credit channel’ of monetary policy. Unanticipated tightening produces a significant drop in real activity. However, monetary policy responses produce large movements in credit costs, which are due to the reaction of term premia and credit spreads. Therefore, to account for credit costs, it might be necessary to amend macroeconomic models to control for term premia and credit spreads.

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