Independent monetary policies, synchronised outcomes
Espen Henriksen, Finn Kydland, Roman Šustek 02 October 2013
The monetary policy for Eurozone members is one-size-fits-all in an economic area rife with economic differences. Does this really make a difference? This column argues that even if each EZ member state had a fully independent monetary authority, monetary policies would likely still appear highly synchronised across EZ members.
The recession in the Eurozone has given new life to optimal-currency-area thinking. The argument goes that the disadvantages of a single currency come from the loss of flexibility and ability to use monetary policy to respond to “asymmetric shocks” (Krugman and Obstfeld 2009). The often-unarticulated presumption is that countries with independent monetary policies would make different policy decisions as long as contemporaneous shocks to output and employment were asymmetric.
Exchange rates Monetary policy
inflation, monetary policy, EMU, Central Banks, capital controls, exchange-rate policy
Should Brazil’s central bank be selling foreign reserves?
Márcio Garcia 25 September 2013
The recent reversal of capital flows to emerging markets raises the question of whether and how to intervene in currency markets. Brazil’s central bank has intervened heavily, spending more than $50 billion and promising to double that by the end of the year. However, almost all of that intervention has taken place in onshore derivative markets that settle in real. This column argues that such interventions can be effective, but that central banks must stand ready to use their foreign-exchange reserves if necessary.
The US dollar’s rise in August and the Brazilian Central Bank’s (BCB) interventions in forex markets have started a debate about whether the BCB should keep on intervening as it has been doing, mostly via currency derivatives markets, or if it should also be selling its international reserves.
Exchange rates International finance
exchange rates, Central Banks, capital flows, derivatives, Brazil
Enhancing the global financial safety net through central-bank cooperation
Edwin M. Truman 10 September 2013
Should we expect more global financial crises? This column argues that we should. Global financial crises are far from being a thing of the past because they are often caused by buildups of excessive domestic and foreign debt. To successfully address them and to limit negative spillovers, we need coordinated actions that prevent a contraction in global liquidity. Unless we establish this more robust, coordinated global financial safety net centred on central banks (which is where the money is), we may end up being incapable of addressing inevitable future crises.
The prospect that the Federal Reserve will soon ease off on its purchases of long-term assets has increased financial-market uncertainty and contributed to a retrenchment in global capital flows. This turbulence has revived discussion of the need to enhance the global financial safety net –i.e. the set of arrangements to provide international liquidity to countries facing sharp reversals in capital inflows despite following sound economic and financial policies.1
The dominant lessons from the financial crises of the past decade are:
Global crisis International finance
Central Banks, liquidity, banking, debt
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