Money market tensions and international liquidity provision during the crisis
Raphael Auer, Sébastien Kraenzlin 14 October 2009
The world’s major central banks used underpublicised swap agreement to address mismatches in their currency-specific liquidity needs during the crisis. This column says these measures where highly effective and came at a very low cost.
The recent crisis has triggered a wide spectrum of policy responses, including many policies that were unthinkable two years ago. One of these unthinkable policies was the decision of the world's major central banks to engage in reciprocal swap agreements, which involve a central bank handing out liquidity denominated in foreign currencies to its counterparties.
Central Banks, currency markets, swap
'No one saw this coming' – or did they?
Dirk Bezemer 30 September 2009
Did economists not see this crisis coming? This column says that analysts who used models featuring a distinct financial sector issued fairly detailed, well reasoned, and public warnings of imminent finance turmoil. It argues that mainstream models missed the crisis because they use a “reflective finance” view in which financial variables are wholly determined by the real sector. “Flow of funds” models may be the way forward for anticipating finance-induced recessions.
From the very beginning of the credit crisis and the ensuing recession, it has become conventional wisdom that "no one saw this coming". Anatole Kaletsky (2008) wrote in the The Times of “those who failed to foresee the gravity of this crisis - a group that includes Mr King, Mr Brown, Alistair Darling, Alan Greenspan and almost every leading economist and financier in the world.” Glenn Stevens (2008), Governor of the Reserve Bank of Australia, said:
Global crisis Macroeconomic policy
Central Banks, global crisis, flow of funds
Misdiagnosing the crisis: The real problem was not real, it was nominal
Scott Sumner 10 September 2009
Do most macroeconomists hold views of this crisis that are entirely at variance with modern monetary economics? This column says that tight monetary policy caused the crisis. Economists seem not to believe what they teach about the fallacy of identifying tight money with high interest rates and easy money with low interest rates.
Here is a puzzle. Almost everything we have learned from recent research in monetary history, theory, and policy points to the Federal Reserve as the cause of the crash of late 2008. More specifically, an extremely tight monetary policy in the US (and perhaps Europe and Japan) seems to have sharply depressed nominal spending after July 2008. And yet it is difficult to find economists who believe this. More surprisingly, few economists are even aware that their views conflict with the standard model, circa 2009.
interest rates, monetary policy, Central Banks
The crisis and citizens’ trust in central banks
Daniel Gros, Felix Roth 10 September 2009
Most observers agree that central banks can claim partial credit for the stabilisation that have been achieved and the prospect of a recovery. This column warns that the general public seems to hold a completely different opinion; trust in central banks has declined and the reaction of central banks to the crisis is generally judged as unsatisfactory. Central bankers all over the world should redouble their efforts to regain the trust of the people towards their institution.
Central banks seem to be enjoying a “good crisis”. They have lowered interest rates to near zero and used unconventional approaches to stabilise financial systems. Most observers agree that central banks can at least claim partial credit for the stabilisation that now seems to have been achieved and the prospect of a recovery that now seems tangible (see for example Gerlach et al., 2009 and Cecchetti, 2008).
Central Banks, trust
César Molinas 01 April 2009
Deflation risks are more related to very low inter-temporal discount rates than to falling prices. This column argues that long-term pre-emptive action should be channelled through taxation rather than central banks.
In principle, there is nothing wrong with falling prices. As the argument goes, excess supply brings about lower prices, higher real money balances, lower interest rates and higher aggregate spending. The demand curve shifts to the right (responding to the previous shift of the supply curve) and a new equilibrium is reached at a higher level of output and (if the money supply does not grow enough) a lower price level. In order to get persistent deflation from a fall in prices, something has to go wrong in the causal chain.
Central Banks, Gamma discounting, inheritance tax
The Fed, the Eurosystem, and the Bank of Japan: More similarities or differences?
Francesco Paolo Mongelli, Dieter Gerdesmeier , Barbara Roffia 07 February 2009
This column systematically compares the US Federal Reserve System, the Eurozone central banking system, and the Bank of Japan’s institutional structures and monetary policy frameworks.
Central banks have always been important players in financial markets. They set key interest rates, which are at the origination of the monetary transmission process, they are monopoly suppliers of base money, and they perform a number of other tasks and functions. Central banks can better perform their mission and fulfil their goals when they are understood by the public and other policy makers. One of the youngest members of the central banking community is the Eurosystem (a supranational central banking system).
Central Banks, monetary policy frameworks
Central banks and financial crises: Lessons from recent Latin American history
Luis I. Jácome H. 03 January 2009
As the global economic crisis goes south, developing countries' central banks must cope with financial turmoil. Recent experience in Latin America, this column argues, cautions against pouring money into the financial system. Countries that relied on prompt corrective actions managed crises well, while those relying on central bank money suffered greater instability.
Central banks have played an instrumental role in the current financial crisis in mature markets. With the aim of bringing money markets back to normal functioning and stemming financial turmoil, central banks have extended sizable financial assistance to failing banks and other intermediaries – although at the cost of increasing the size of their balance sheets and creating moral hazard and other microeconomic distortions.
Latin America, Central Banks, financial crisis, banking crises
The lender of last resort of the 21st century
Xavier Freixas, Bruno M. Parigi 22 December 2008
This column argues that the financial crisis of 2007 and 2008 redefines the functions of the lender of last resort, placing it at the intersection of monetary policy, supervision and regulation of the banking industry, and the organisation of the interbank market.
Since the creation of the first central banks in the 19th century, the existence of a lender of last resort (LOLR) has been a key issue for the structure of the banking industry. Banks finance opaque assets with a long maturity with short-lived liabilities – a combination that is vulnerable to sudden loss of confidence. To avoid avoidable disasters when confidence evaporates, the classical view (Thornton 1802 and Bagehot 1873) is that the central bank should lend to illiquid but solvent banks, at a penalty rate, and against collateral deemed to be good under normal times.
Central Banks, lender of last resort, systemic crises
Can optimal policy projections in DSGE models be useful for policymakers?
Jesper Lindé, Lars E.O. Svensson, Stefan Laséen, Malin Adolfson 16 September 2008
Over the last couple of years, central banks have started to build and estimate dynamic stochastic general equilibrium models. In this column, Lars Svensson, Deputy Governor of Sweden’s central bank, and coauthors discuss what needs to be taken into account when using such models for policy analysis and forecasting.
Over the last couple of years many central banks, for instance the ECB, the Federal Reserve Board, and Sveriges Riksbank, have started to build and estimate dynamic stochastic general equilibrium (DSGE) models, following the work by Christiano, Eichenbaum, and Evans (2005), and Smets and Wouters (2003). Sveriges Riksbank incorporated its open economy DSGE model, Ramses, into the daily process of forecasting and policy analysis in 2005; see Adolfson, Laséen, Lindé, and Villani (ALLV) (2007).
Central Banks, dynamic stochastic general equilibrium