European headwinds: ECB policy and Fed normalisation
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.
The Policy Insight can be found here.
The influence of the Taylor rule on US monetary policy
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.
The Taylor rule has undoubtedly influenced the debate about monetary policy over the last 20 years. But has it directly influenced monetary policy? According to a survey by Kahn (2012), the answer seems to be that it has. The transcripts from the Federal Open Market Committee meetings include several references to the rule.
US, Fed, Federal Reserve, Taylor rule
Misplaced concerns about central-bank independence
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.
Concerns are rising that central-bank independence is at risk, already curtailed by governments eager to control all other levers of growth. The Japanese government’s none-too-subtle strong-arming of the Bank of Japan is one of the most blatant examples (e.g. King 2013).
But the current debate on the risks to central-bank independence misses the point.
Institutions and economics Monetary policy
ECB, Fed, Central Banks, Federal Reserve, fiscal policy, independence
Is LTRO QE in disguise?
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.
With the launching of the three-year longer-term refinancing operations (LTROs) in December 2011, the Eurosystem has entered new territory (see Wyplosz 2012). Its balance sheet (stripped out of foreign-exchange reserves and assets that have no relevance for monetary policy such as legacy assets of the national central banks) has jumped from about 5% of GDP before the crisis to about 10% in 2009–10 and now close to 18%.
ECB, monetary policy, Fed, Bank of England
Bad forecasters can be good policymakers
Thomas J. Sargent, Martin Ellison 24 November 2009
The Federal Reserve Open Market Committee has been criticised for making forecasts that are inferior to Federal Reserve staff forecasts. This column argues that FOMC forecasts are worst-case scenarios used to inform policy decisions, rather than best estimates of future events. It says that FOMC forecasts are a rational response to doubts about the staff’s model.
The value of the Federal Reserve’s Open Market Committee (FOMC)1 has recently been questioned in a highly provocative paper by two professors at the University of California, Berkeley. The two professors are husband-and-wife team Christina and David Romer, who are amongst the most influential economists in the world today. Christina Romer is Chair of the Council of Economic Advisers in the Obama administration and a co-author of Obama’s plan for recovery, and David Romer is the author of a very popular macroeconomic graduate textbook.
monetary policy, Fed, forecast
Fiscal dimensions of central banking: the fiscal vacuum at the heart of the Eurosystem and the fiscal abuse by and of the Fed: Part 2
Willem Buiter 25 March 2009
The last column in this series on fiscal aspects of central banking reviews the differences in fiscal backing for the Bank of England, the US Federal Reserve, and the European Central Bank.
The Bank of England
ECB, Fed, Bank of England, fiscal backing
Fiscal dimensions of central banking: The fiscal vacuum at the heart of the Eurosystem and the fiscal abuse by and of the Fed: Part 2
Willem Buiter 24 March 2009
The second of this four-column series on fiscal aspects of central banking discusses the institutional constraints on quantitative easing. It argues that the ECB can and should engage in quantitative easing since its independence gives it a credible non-inflationary exit strategy. The Fed, however, seems heading for a bout of inflation stemming from Congressional pressure. Buiter argues that the Bank of England’s situation lies between.
Why has there not been quantitative easing in the Eurozone? Good question.
No treaty-based obstacle
There is no treaty-based obstacle to the ECB/Eurosystem buying Eurozone government securities in the secondary markets. Indeed, both the ECB and the 16 national central banks of the Eurosystem hold Eurozone government securities on their balance sheets. Article 101.1 of the Consolidated version of the Treaty Establishing the European Community reads as follows:
ECB, Fed, quantitative easing
Financial crisis resolution: It’s all about burden-sharing
Charles Wyplosz 20 July 2008
Should taxpayers bail out the banking system? One of the world’s leading international macroeconomists contrasts the Larry Summers “don’t-scare-off-the-investors” pro-bailout view with the Willem Buiter “they-ran-into-a wall-with-eyes-wide-open” anti-bailout view. He concludes that either way, taxpayers are always the losers. The best policy makers can do is to be merciless with shareholders and gentle with bank customers.
An old and familiar debate is back. Should taxpayers bail out the US banking system, quite possibly the British and European ones as well?
There are two standard views on the multi-trillion dollar question of who pays for getting us out of the financial crisis
Sweden, Fed, Federal Reserve, subprime crisis, Japan, financial crisis, bailout, Bear Stearns, Fannie Mae, Freddie Mac
No relief for ECB’s status quo headache from rotation
Mika Widgrén 25 February 2008
The Fed’s policy changes seem nimble compared to the ECB’s. Here one of Europe’s leading analysts of voting mechanisms argues that the ECB’s institutional design accounts for the difference. Forthcoming ECB reforms are unlikely to alleviate the problem.
The most recent ECB Governing Council (GC) meeting on 7 February left the key ECB interest rates unchanged. The meeting took place in the aftermath of the Federal Open Market Committee’s (FOMC) hyperactive moves to reduce the target for the federal funds rate 75 basis points to 3.5% at an unscheduled FOMC meeting on 21 January and then another 50 basis points to 3.0% on 30 January.1
ECB, Fed, Governing Council
Federal Reserve policy actions in August 2007: frequently asked questions (updated)
Stephen Cecchetti 15 August 2007
A revised and updated version of the 13 August column on the basic how's and why's of what the Fed has been doing to calm financial markets.
Editors’ note: This column updates the 13 August 2007 column on the same topic and includes a slightly revised version of the content of the earlier column.
ECB, international financial crises, Fed, Subprime, subprime crisis