Political challenges of the macroprudential agenda
Jeffrey Chwieroth, Jon Danielsson 06 September 2013
Central banks frequently lead the macroprudential policy implementation. The hope is that their credibility in conquering inflation might rub off on macroprudential policy. This column argues the opposite. The fuzziness of the macroprudential agenda and the interplay of political pressures may undermine monetary policy.
A key factor in conquering inflation in the 1980s was the doctrine of central-bank independence. Similarly, the success of the macroprudential agenda also has come to depend on an independent central bank with a credible commitment to implement politically unpopular measures. Indeed, one recent IMF study finds that timely macroprudential-policy implementation requires involvement of the central bank (Lim et al. 2013).
Financial markets Politics and economics
credibility, Central Banks, macroprudential
Redesigning the ECB with regional rather than national central banks
Michael Burda 15 July 2013
Eurozone national central banks that take a national perspective risk politicising the ECB’s monetary policy. This column argues that this is a significant risk that should be overcome with a fundamental overhaul of the Eurosystem. A central element would be to take the ‘national’ out of the EZ’s national central banks. Just as US regional Fed banks encompass more than one US state, EZ ‘national’ central banks area of responsibility should be redrawn along economic geography lines rather than nation lines. An example of such a proposal is provided.
The monetary union was always a grand gamble. It established the ECB for an immense region that itself was not a state -- a trans-European institution with governmental duties that does not represent any government in particular.
EU institutions Macroeconomic policy
ECB, monetary union, Central Banks
Integrating monetary policy and macroprudential regulation
Otaviano Canuto, Matheus Cavallari 21 May 2013
The global financial crisis has shattered the confidence of many established principles of monetary policy and financial supervision. This column argues that the two should not remain separate, and maps out the major challenges faced by their complementary implementation.
If the global crisis – and the events that led up to it – have taught us anything, it is that there should be ‘no complacency with asset price booms’. We know first-hand the dire consequences of significant and widespread bubbles, so clearly monetary policymakers can no longer passively observe the evolution of asset prices.
Global crisis Monetary policy
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
Bank capital requirements: Are they costly?
David Miles 17 January 2013
There is a view that banks are using more equity capital – and relatively less debt – to finance the assets they hold, creating substantial costs so great as to make more capital unfeasible. This column argues that these costs are exaggerated, but that the benefits of having banks that are far more robust are likely to be large. The argument that equity capital is costly is more an admittance that banks cannot convince people to provide finance in the knowledge that their returns will inevitably share in the downside and the upside. Worryingly, it is as if banks cannot play by the same rules as other enterprises in a capitalist economy. After all, capitalists are supposed to use capital.
There exists a widespread view that having banks use more equity capital (and relatively less debt) to finance the assets they hold creates substantial costs, costs that may be so great as to make more capital infeasible. I believe that these costs are very substantially exaggerated. But the benefits of having banks that are far more robust – in the sense of having a balance sheet structure that makes them much less likely to come near to insolvency once actual and suspected losses on their assets come along – are likely to be large.
Central Banks, banking, equity capital, debt capital
To cut or not to cut, that is the (central banks') question: In search of neutral interest rates in Latin America
Nicolas Magud, Evridiki Tsounta 16 January 2013
The ‘neutral’ rate is the real interest that is consistent with stable inflation and narrow output gaps. This column discusses the various estimation techniques and presents estimates for a range of Latin American nations. No methodology is fully correct: central banks must still make a subjective judgement, but econometrics can significantly help to inform it.
An increasing number of Latin American countries have been strengthening their monetary policy frameworks, using the monetary policy rate as their main instrument since the late 1990s. To decide whether to ease or tighten monetary conditions, policymakers typically compare the policy rate to the (short-run) neutral-interest rate – the rate that is consistent with stable inflation (at the central bank’s target) and a closed output gap. However, this rate can be time-varying as it is affected by changes in macroeconomic fundamentals and global interest rates.
Institutions and economics Macroeconomic policy Microeconomic regulation
interest rates, Central Banks, Information
True independence for the ECB: Triggering power - no more, no less
Markus K Brunnermeier, Hans Gersbach 20 December 2012
As governments and the EU wring their hands over banking reform, a fragile system remains in place. This column argues that the ECB’s current role undermines its independence. What the Eurozone needs to reduce undue forbearance - while preserving the ECB's independence - is a ‘diarchy’ in which both a newly built Restructuring Authority and the ECB have the power to trigger bank-restructuring.
Governments are hesitating over how to resolve the financial distress of banks, leaving fragile banking structures in place. This problem is particularly pressing in the Eurozone; governments expect the ECB to continue providing cheap funding, undermining the bank’s independence. The ECB is presented with a dilemma; it has to choose between either financial instability if the failure of the respective bank endangers the financial system, or ongoing emergency lending with reduced collateral standards.
EU institutions Europe's nations and regions
ECB, Central Banks, banking regulation, Eurozone crisis, banking union
Monetary policy in Latin America: Where are we going?
Christian Daude 10 December 2012
Latin American central banks are facing new challenges in the form of unprecedented levels of uncertainty and exchange rate appreciation pressures. This column, focusing on Brazil, Chile, Colombia, Peru and Mexico, argues that there is an overestimation of the potential output in several Latin American economies, a lack of an explicit policy direction from central banks, and lacklustre frameworks for macroprudential policy. Although inflation targeting has served countries in Latin America well, significant risks remain.
Inflation targeting has served countries in Latin America well . They have achieved macroeconomic stability by reducing inflation and the pass-through of external shocks such as oil price and exchange rate fluctuations (cf. Mishkin and Schmidt-Hebbel 2007).
Macroeconomic policy Monetary policy
inflation targeting, Latin America, Central Banks, foreign exchange, Brazil, Chile, Mexico, Colombia, Peru
Using changes in auction maturity sectors to help identify the impact of QE on gilt yields
Ryan Banerjee, Sebastiano Daros, David Latto, Nick McLaren 20 August 2012
A central banker's toolkit these days must include a way of estimating the effect of quantitative easing purchases on government bond yields. With markets savvier than ever in anticipating quantitative easing purchases, estimating the effect has become more difficult. This column by four Bank of England economists introduces a novel empirical approach.
The policy decisions of several of the world’s largest central banks turn on a tricky empirical judgement – the effect of quantitative easing purchases on government bond yields. In the UK, the empirics have got much harder.
Central Banks, quantitative easing
The case for ‘deficit monetisation’ and greater cooperation between central banks and ministries of finance
Richard Wood 18 August 2012
Central banks are running out of conventional tools, and the effectiveness of unconventional ones like QE are being questioned. More radical solutions are being considered. This column sets out the case for monetisation of budget deficits.
The Financial Times editorial (12 April 2012, under the heading ‘Waiting for Growth’) pointed to the widespread disappointment with policies of ‘quantitative easing’ (QE). These policies have now been applied in the US, Japan, the UK, and in the Eurozone without substantial evidentiary success on an ongoing basis. G, manufacturing output, and exports are all weakening.
Central Banks, quantitative easing, monetisation of budget deficits