Money market freezes and central banks

Max Bruche, Javier Suarez 07 January 2011

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During the peak of the crisis in autumn 2008, spreads in money markets rose sharply and volumes contracted, forcing many banks into difficulties with their standard liquidity management and refinancing strategies. Central banks reacted by taking deposits from some banks (via deposit facilities and excess reserve accounts) and lending directly to other banks (via various lending facilities) at much larger scale than in normal times.

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Topics:  Global crisis Monetary policy

Tags:  monetary policy, Central Banks

Sense and nonsense in the quantitative easing debate

John H Cochrane 07 December 2010

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In November, the Fed started its new “quantitative easing programme”. The Fed will buy up to $600 billion in long-term government bonds, putting $600 billion of extra money in the economy. Defenders think this is the key to reducing unemployment and breaking the economy out of its doldrums. Though the Fed's motives were initially unclear, Chairman Ben Bernanke's 5 December interview on CBS 60 minutes made it clear that fighting unemployment is a crucial motivation.

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Topics:  Monetary policy

Tags:  US, monetary policy, Central Banks

Governments, central bankers, and banking supervision reforms: Does independence matter?

Lucia Dalla Pellegrina, Donato Masciandaro, Rosaria Vega Pansini 12 September 2010

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In response to the global crisis, many countries are implementing – or at least considering – reforms concerning the role of the central bank in banking supervisory regimes.

  • On July 2010 US President Barack Obama signed into law the so-called Dodd-Frank Act.

The Dodd-Frank Act increases the role of the Fed as a banking supervisor. This is despite the fact that during the discussion of the bill US lawmakers debated whether to restrict some of the Fed’s regulatory responsibilities.

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Topics:  Global governance Monetary policy

Tags:  monetary policy, Central Banks, financial regulation, global governance

Strengthening the financial system: The benefits outweigh the costs

Stephen Cecchetti, Benjamin H Cohen 20 August 2010

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Just like an overweight victim recovering from a severe heart attack, the financial system must change its ways. After working tirelessly – and in the end successfully – to stabilise the patient, the world’s central bankers and supervisors are developing a rigorous diet and exercise programme to help avoid a relapse. Yet, now that the immediate danger has passed, a natural scepticism has set in. Does the financial system really need to change its ways? Why bother with all this unpleasant exercise? Are the benefits of more stringent regulation and supervision really worth the cost?

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Topics:  Financial markets Global crisis

Tags:  Central Banks, financial regulation, global crisis

The low-interest-rate trap

Francesco Giavazzi, Alberto Giovannini 19 July 2010

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There is a fundamental flaw in the way central banks set official interest rates. This flaw has created what might be called the “low-interest-rate trap”. Low rates induce excessive risk taking, which increases the probability of crises, which in turn, requires low interest rates to keep the financial system alive. The flaw behind all this is the failure of central banks to take account of the probability of financial crises when setting interest rates.

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Topics:  Global crisis Monetary policy

Tags:  interest rates, inflation targeting, monetary policy, Central Banks, global crisis

We must escape the grip of short-term funding

Enrico Perotti 05 July 2010

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Last week, the banks won but financial stability lost. Heavy lobbying undermined G20 support for proposals by the Basel Committee to plug a major gap in banking regulation. Measures such as “liquidity buffers” were challenged. Yet these are the sort necessary to contain “liquidity risk” – the inability of financial institutions to refinance their positions in times of distress. This failure was a major flaw in the international policy framework known as Basel II.

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Topics:  Financial markets

Tags:  Central Banks, financial regulation, Short-term bank funding

Double targeting for Central Banks with two instruments: Interest rates and aggregate bank equity

Hans Gersbach 01 February 2010

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The current crisis has placed a fundamental question at the centre of policy discussion: “Should monetary policy and banking regulation be conducted separately?” Opinions differ – see Adrian and Shin (2009), Goodhart (2008), and De Larosière et al. (2009).

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Topics:  Monetary policy

Tags:  Central Banks, financial regulation, equity ratio

Liquidity in the financial crisis: New insights on the lender of last resort

Pierre-Olivier Weill, Guillaume Rocheteau, Ricardo Lagos 16 December 2009

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Under every central banker’s bed is a copy of “Lombard Street” by Walter Bagehot. Published in 1873, it argues that the central bank should act as a lender of last resort during crises to ensure that financial intermediaries have the resources to provide liquidity in asset markets. The name comes from the London base of Overend, Gurney and Company who in 1866 were the subject of the last run on a British bank before Northern Rock in 2007.

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Topics:  Monetary policy

Tags:  Central Banks, Federal Reserve, global crisis, ponetary policy

Adjustments to the accountability and transparency of the European Central Bank

Sylvester Eijffinger 24 October 2009

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It is widely agreed that central banking should not be subject to "political business cycles". Consequently, in the last decades, it has become an integral part of modern central banking policy that full operational (or functional) independence of central banks is a welfare-enhancing quality. However, the objectives of the central bank should then be clearly defined from the outset, the bank should be accountable for its actions, and the public should have a solid trust in its actions. The ongoing crisis may well have made central banking more complicated.

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Topics:  EU institutions

Tags:  ECB, Central Banks, financial supervision

The global crisis and central banks in Latin America: Breaking with the past

Luis I. Jácome H. 20 October 2009

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Latin America has a history of recurrent financial crises that took a large toll on economic growth and fuelled social unrest. Frequently, these crises were triggered by exogenous shocks, which unveiled macroeconomic and/or financial weaknesses, leading to simultaneous banking and currency crises. Financial crises, thus, became a primary source of macroeconomic instability and a reason for social frustration, as vast groups of the population, in particular the poorest, often lost their jobs, real income, and savings.

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Topics:  Macroeconomic policy

Tags:  Central Banks, banking crises, global crisis

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