Forward guidance in the UK

Spencer Dale, James Talbot 13 September 2013

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At its meeting on 1 August 2013, the Monetary Policy Committee (MPC) agreed to provide state-contingent forward guidance concerning the future conduct of monetary policy. The aim was to provide more information to help financial markets, households and businesses understand the conditions under which the current stance of monetary policy would be maintained.

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Topics:  Monetary policy

Tags:  monetary policy, Central Banks, Bank of England, forward guidance

Influencing household inflation expectations

Alberto Cavallo, Guillermo Crucas, Ricardo Perez-Truglia 10 November 2014

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Expectations about macroeconomic variables play an important role in economic theory and policymaking. Household inflation expectations, in particular, are key to understand consumption and investment decisions, and ultimately, the impact of monetary policies. Although central banks have a natural desire to influence expectations, there is no consensus on how household expectations are formed or what the best way to affect them is (see Bernanke 2007, Bachmann et al. 2012, Coibion and Gorodnichenko 2013, and Armantier et al. 2014).

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Topics:  Monetary policy

Tags:  expectations, beliefs, inflation, inflation expectations, monetary policy, US, Argentina, central bank communication, rational inattention, costly information, learning

How severe has the zero lower bound constraint been?

Eric T Swanson 08 November 2014

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In December 2008, the Federal Reserve’s Federal Open Market Committee lowered the federal funds rate to essentially zero, and has kept it there ever since. Because physical currency earns an interest rate of zero, it is generally impossible for the Open Market Committee to lower the federal funds rate substantially below zero, since banks would opt to hold physical currency rather than earn a significantly negative rate of return on cash balances held at the Fed. This barrier is commonly referred to as the ‘zero lower bound’.

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Topics:  Global crisis Monetary policy

Tags:  zero lower bound, monetary policy, Federal Open Market Committee

How to climb a mountain with both hands tied

Jean Pisani-Ferry 07 November 2014

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Against the background of lacklustre global demand, economic growth in Europe has weakened again. In the Eurozone, a third recession in less than seven years is a distinct possibility. Yet economic policy looks powerless. On the monetary side, although the ECB may still embark on a genuine programme of quantitative easing, such action is unlikely to deliver a major boost because the benchmark 10-year government bonds already yield just 1%.

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Topics:  Environment EU policies Macroeconomic policy Microeconomic regulation

Tags:  Europe, eurozone, recession, stimulus, monetary policy, quantitative easing, fiscal policy, structural reforms, labour market reforms, liquidity trap, investment, Cash for clunkers, scrapping subsidies, environment, regulation, emissions standards

Policy uncertainty spillovers to emerging markets: Evidence from capital flows

Dennis Reinhardt, Cameron McLoughlin, Ludovic Gauvin 05 November 2014

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In the wake of the global financial crisis of 2007–2008, advanced economies experienced heightened levels of uncertainty in macroeconomic policymaking. Against this backdrop, policymakers debated the domestic and global spillover implications of advanced-country policy uncertainty (e.g. IMF 2013). At the same time, the potential for monetary policy settings in advanced countries to spill over to emerging market economies (EMEs) via capital flows was hotly contested in both academic and policymaker circles (e.g. Fratzscher et al. 2013).

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Topics:  International finance Macroeconomic policy Monetary policy

Tags:  capital flows, Capital inflows, emerging markets, policy uncertainty, spillovers, global crisis, monetary policy, macroeconomic policy, risk aversion, home bias

US rate hike fears are unwarranted

Mickey Levy 03 November 2014

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How often have we heard the phrase “If the Fed hikes rates too early, the economic recovery will be derailed”?  It is ingrained in the Fed’s mindset and statements like it appear frequently in the media.  Yet the history of Fed rate hikes during previous economic expansions suggests that such fears are unwarranted, and the current 5½-year-old expansion is on sound footing and would fare just fine, and would even be enhanced, if the Fed began hiking rates.  Normalising interest rates should be welcomed, not feared, by the Fed.

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Topics:  Macroeconomic policy

Tags:  monetary policy, interest rate hikes, forward guidance

Monetary policy and long-term trends

Charles A.E. Goodhart, Philipp Erfurth 03 November 2014

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Introduction

There has been a long-term downward trend in the share and strength of labour in national income, which is depressing both demand and inflation. This has prompted ever more expansionary monetary policies. While understandable, indeed appropriate, within a short-term business cycle context, this has exacerbated longer-term trends, increasing inequality and financial distortions. Perhaps the most fundamental problem has been over-reliance on debt finance (leverage).

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Topics:  Financial markets Macroeconomic policy Monetary policy

Tags:  monetary policy, Inequality, debt, leverage, wages, labour share, globalisation, consumption, propensity to consume, fiscal policy, Ageing, interest rates, investment, asset prices, housing, house prices, exchange rates, global crisis, mortgages, sub-prime crisis, Macroprudential policy, structural reforms, balance sheets, deleveraging, equity, shared-equity mortgages, Help to Buy

The impact of the maturity of US government debt on forward rates and the term premium: New results from old data

Jagjit Chadha 02 November 2014

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Revisiting the supply effect

The question of the impact of the stock and maturity of net government debt on longer-term US Treasury yields, and the potential implications for central bank balance sheet policies, matters for monetary policy.

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Topics:  Financial markets Macroeconomic policy Monetary policy

Tags:  public debt, yield curve, debt maturity, term premia, interest rates, open market operations, monetary policy, QE, US, Federal Reserve, market segmentation, Greenspan Conundrum, debt management, fiscal policy, unconventional monetary policy

“Mensch tracht, und Gott lacht” – what’s the best guidance on monetary policy?

David Miles 22 October 2014

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“Mensch tracht, und Gott lacht” is a Yiddish proverb – men plan and God laughs. Woody Allen puts the same thought this way: “If you want to make God laugh tell him about your plans”. Some people might see these words as a fitting epitaph for forward guidance on monetary policy. The Bank of England has certainly faced a good deal of criticism for the guidance that it has recently been giving, as has the Federal Reserve in the US.

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Topics:  Monetary policy

Tags:  forward guidance, unconventional monetary policy, monetary policy, Central Banks, central bank communication, interest rates, uncertainty

The halo of victory: What Americans learned from World War I

Hugh Rockoff 04 October 2014

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World War I had important consequences for the structure of the US economy and its role in the world economy. This was especially true in the world of finance. The US transitioned from being a debtor nation to a creditor nation, and financial leadership moved from London to New York. But equally important were the lessons that Americans drew from the war. Although the war had much to teach, Americans tended, I will argue below, to learn too much from the war, drawing strong conclusions from a war in which the US was actively engaged for only 19 months.

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Topics:  Competition policy Economic history

Tags:  World War I, WWI, planning, rationing, New Deal, Great Depression, fiscal policy, monetary policy, stimulus, financial crisis, conscription, inflation, unemployment, price controls, Competition policy, antitrust, National Industrial Recovery Act

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