Modern Central Banking Research Articles

Money and output asymmetry: the unintended consequences of central banks’ obsession with inflation

ABSTRACT The study re-examines the relationship between money and output for the US and the UK using quarterly data up to 2019. Modern central banks are focused on controlling inflation and adjust their monetary policy and liquidity accordingly. However, it is common practice to overlook the precise effects of those actions on other variables. Unlike prior research, which has mainly focused on the linear relationship, this paper examines the asymmetric impact of money on output. The results show that a decrease in the amount of money has a much more adverse impact on output than an increase. Globally, during COVID-19, there was an infusion of liquidity that might have been useful in the short term, but the withdrawal of that excess liquidity, as has been done currently by some major economies, may have long-term effects on those economies’ output.

A two-for-one deal: Targeting nominal GDP to create a supply-shock robust inflation target

A key tenet of modern central banking says that if inflation expectations are anchored then monetary policy should “look through” the inflationary effects of supply shocks that do not permanently affect potential output. However, the inflation surge of 2021–2022 vividly demonstrated that this standard monetary policy prescription is difficult to implement in practice since it requires a real-time knowledge of what shocks are driving changes in inflation while requiring a credible nominal anchor. This paper argues that a workaround solution to these problems is for central banks to stabilize the growth path of nominal GDP. Doing so allows central banks to look through short-term inflation movements caused by temporary supply shocks while still anchoring medium-run inflation. Therefore, central banks that target nominal GDP also are effectively targeting medium-run inflation. This two-for-one targeting deal not only solves the knowledge problem while keeping inflation anchored but can be implemented via standard Taylor-like rules. This paper shows how to operationalize such a framework for the case of the United States.

Развитие коммуникации как инструмента монетарной политики

Modern monetary policy implemented by central banks requires understanding and openness. This is largely due to the transition of central banks to an inflation targeting regime, which is implemented through ensuring transparency and openness of their activities. Understanding and openness of monetary policy are closely interrelated, and the implementation of its openness is focused on the use of such a tool as communication. It is communication as a monetary policy tool that will be able to form a unified basis for ensuring the interconnection of understanding, transparency and openness of the central bank’s monetary policy. Communication will also help increase confidence of both the expert community and the general public in the modern central bank’s activities. Both foreign and Russian economists have paid considerable attention to the development and use of communication within the framework of monetary policy in their research, but, despite this, the stages of its development have not yet been identified and justified. The authors’ use of a systematic approach, as well as logical and situational analysis, in the process of writing the article contributed to the structuring of economic research previously conducted in this area. When studying this topic, the very concept of communication as a central bank’s monetary policy tool was clarified, based on the approaches of foreign and russian economists. The study showed that communication has gone through a long period (certain stages) of its development, from anti-communication to multi-level communication. Modern digital technologies allow central banks to directly and purposefully communicate not only with experts, but also with the general public, actively using communications. The result of the authors’ study of the development of communication as a monetary policy tool was the identification and justification of the stages of its development, the determination of their specifics and key characteristics. The authors of the article also identified the main directions for the development of communication as the central bank’s monetary policy tool, justifying its potential for development.

One future to bind them all? Modern central banking and the limits of performative governability

In this article, I analyse the case of ‘modern’ central banking’s dual failures in effectively containing financial fragilities and inflationary pressures as a cautionary tale about the intrinsic limitations and contradictions of ‘governing through quantified futures’. I construct a genealogy of central banks’ much-vaunted ‘performative art’ of governing the economy through the management of expectations in order to reveal a crucial tension between the control of expectations about the future and controlling the future through (present) expectations of it. I argue that social scientific analyses tend to operate with a truncated understanding of performativity that prevents them from developing sufficiently precise and discerning accounts of the mechanics of performative processes to reveal their (intrinsic) limitations and explain how and why they (may) fail. By dissecting the surprisingly complex mechanics of central banks’ performative agency, I thus contribute towards a more precise theorisation of how governing through quantified futures operates.

Drivers of inflation in the Greek economy

One of the hallmark achievements of modern central banking has been to quell high inflation. However, after over two decades of low inflation, a series of shocks, including the pandemic recession, supply bottlenecks, highly accommodative policy, and, perhaps most saliently, the war in Ukraine, have led to multi-decade inflation highs across most advanced economies. Understanding the ultimate causes of this inflation surge is vital for the proper design of policy, yet disentangling the various shocks is hard, particularly when they affect prices in the same direction. In this paper, we apply the novel shock decomposition framework of Shapiro (2022) to Greek data and estimate the contribution of supply and demand shocks to inflation developments over the recent episode, as well as for the 2001-2019 period. For the recent episode, we find that supply forces were slightly more important for headline inflation, but much more important for underlying inflation.

Trust and Distrust: Corruption in Office in Britain and its Empire, 1600‐1850. By MarkKnights. Oxford: Oxford University Press. 2021. 512 pp. £35. ISBN: 978‐0‐19879‐624‐4.

Trust and Distrust: Corruption in Office in Britain and its Empire, 1600‐1850. By MarkKnights. Oxford: Oxford University Press. 2021. 512 pp. £35. ISBN: 978‐0‐19879‐624‐4.

THE ROLE OF DIGITAL PAYMENTS AND STUDYING THE CURRENT SITUATION IN STRENGTHENING THE FINANCIAL RESOURCES BANK OF BANKS IN AZERBAIJAN

Topicality. In recent decades, radical changes have taken place in the institutional architecture of central banking in the world, and modern central banks have become an important institution of macroeconomic stability. The most important anchor of macroeconomic stability is price stability. The fact that prices are low and less volatile allows business to plan investment decisions more correctly, and to optimize the savings and consumption costs of the population. Price stability is also an important social indicator. Price changes directly affect the budget of 2.1 million families living in Azerbaijan. Currently, with the development of the electronic payment system, high activity of credit organizations in the direction of reducing paper technologies is observed. This process is typical: an increase in the issuance of plastic cards, an increase in the turnover and balance in card accounts, and the expansion of services using bank cards are characteristic of this process. During the development of the plastic market, different types of plastic cards are created, which differ in their purpose and technical characteristics. Transactions with bank plastic cards open up new perspectives for financial services to clients of local banks.Aim and tasks. In connection with the expansion of digital payments in Azerbaijan, it is to investigate the features of financial management in banks and to study the current and prospective effects of digital payments in the formation of financial resources of banks.Research results. During the study, the types, characteristics, and effects of the digital payment system on economic processes were studied.Material and methods. Statistical calculations, sample observation, synthesis, regression analysis were used in the study. Regression analysis consists of steps such as selecting the model type, calculating the parameters, constructing the model, and assessing its suitability and accuracy. The level of accuracy of the model characterizes the degree of deviation of the actual values of the dependent variable from the values obtained on regression models. Estimates such as average relative error, average absolute error, standard error are used to estimate the level of accuracy.Conclusion. It is important to improve and develop the infrastructure of banks in order to present the applications of banks in the field of digital banking to the wider public.

Are Modern Central Banks too Powerful for their Own Good? A Political Economy Approach to the Desirability and Limits of All-Powerful Central Banks

The aim of this article is to examine the level of power enjoyed nowadays by central banks. In a first section I go through the different sources of this power, analyzing their evolution during the first decade following the 2008 global financial crisis. A second section assesses the pros and cons of this new status. Finally, I conclude by offering a political economic account of the overall desirability underpinning the choice of having extremely powerful central banks, a pattern that has been reaffirmed in the 2020 global COVID crisis.

Central bank communication, shadow banking, and bank risk-taking: Theoretical model and PVAR empirical evidence.

The rapid development of Chinese shadow banking, which relies on the banking system, significantly impacts nonneutral bank risk-taking. Central bank communication also plays a vital role in risk prevention and mitigation in the banking system in a modern central banking system. To address the issues of central bank communication, shadow banking, and bank risk-taking, we construct a new theoretical model that includes shadow banking based on the M-S model. Based on the central bank written communication index measured by the Monetary Policy Implementation Report 2009–2019 and balanced panel data of 35 listed banks, we design an empirical PVAR model. This study finds that central bank communication regarding domestic easing economy and policy positively affects bank risk-taking, while central bank communication and mechanism exists in China. Moreover, the growth rate of shadow banking size also positively encourages bank risk-taking. Furthermore, central bank communication regarding foreign policy is negatively related to bank risk-taking in the robustness test, supporting the above findings. The analysis of equity heterogeneity shows that the positive effect of central bank communication on bank risk-taking in shadow banking is more pronounced in small and medium-sized shareholdings. Further analyzing the economic consequences of central bank communication and shadow banking on bank risk-taking, we find that banks’ risk-taking positively affects their share of noninterest income and total asset size.

Novodobá pozice zlata v bilancích centrálních bank

The article focuses on the motives and trends in gold holdings by central banks in recent decades. It examines the correlation between the nominal and real price of gold and selected macroeconomic variables and financial assets over the financial and business cycles. In this context, it outlines gold investment opportunities for central banks and other investors. The paper also highlights differences in gold holdings between the central banks of advanced economies (including those with reserve currencies) and those of emerging market and developing economies. It concludes by presenting a rationale for the position of the Czech National Bank, which ranks among the modern central banks holding minimal amounts of reserve gold.

How ‘Monetization’ Really Works — Examples from Three Asian Nations’ Responses to Covid-19

ABSTRACT The severe economic downturn caused by the COVID-19 pandemic has forced governments worldwide to increase spending while tax revenues simultaneously collapsed. Concurrent with this, central banks in several of these countries are financing a significant percent of their direct income support through direct lending or purchases of government bonds in primary and/or secondary markets. Many oppose this for their alleged negative consequences on the economy, inflation in particular. This paper describes the actual workings of what most people (including many economists) often call monetization of government debt and its major implication, namely, that it leads to printing money and, consequently, to inflation. We show that the reality is very different: once one knows how modern central banks manage monetary policy (i.e. through a corridor interest rate targeting system), and how they coordinate their daily operations with their Treasuries, monetization does not occur as it is often described, and it is not nearly as dangerous as its critics argue (and not as useful as its supporters claim). The examples of the Philippines, Singapore, and the People’s Republic of China clarify this.

Digital currencies: The present and the future

Subject. The article considers digital currencies in the context of global and national financial system development. Objectives. The purpose is to identify and justify the role of digital currencies in the global finance development and the place of modern central bank policies in the development of digital currencies, to underpin the need for changing approaches to digital currencies on the part of central banks, and to predict possible scenarios for the development of digital currencies on the global scale. Methods. The study applies methods of logical and statistical analysis, the comparative approach, and systematization. Results. The paper describes major pros and cons of digital currencies by comparing them with cryptocurrencies; identifies the beneficiaries of the introduction of digital currencies in countries with the most developed strategies for the introduction of national digital currencies. It also unveils barriers to a large-scale introduction of digital currencies to the world market, and highlights the main areas of their use. I developed three scenarios of digital currencies introduction to the world market. Conclusions. A large-scale introduction of digital currencies as a means of international settlements is not possible at the present stage, however, their use as a tool for dealing with financial crises is the most realistic scenario.

Harold James, Making a modern central bank: the Bank of England 1979–2003

Harold James, Making a modern central bank: the Bank of England 1979–2003

The Illusions of Inflation Targeting, With an Application to Ukraine

This article reviews the analytical justification, the theoretical content, and the practical experience of inflation targeting, which has become the standard framework for monetary policy. It shows that due to the inflation-targeting literature’s neglect for the money demand as part of the monetary relation that drives price determination, it provides a distorted theoretical account of the most basic relations in a monetary economy and an illusionary vision of what a modern central bank could achieve. The last section of the article uses the recent monetary history of Ukraine to illustrate the pitfalls and illusions of inflation targeting.

Does Securitisation Make Monetary Policy Less Effective?

ABSTRACT We re-examine the role of monetary policy and its transmission mechanism through the credit channel while focusing on securitisation. We empirically investigate the interactions between securitisation activities and monetary policy using data from 1995 to 2015 for a panel of 10 European countries. We employ a panel VAR model, and estimate it using a GMM system. Our findings indicate that a contractionary monetary policy shock immediately increases securitisation activities and decreases the growth rate of traditional (non-securitised) loans. The evidence supports the argument that merely raising interest rate is not sufficient to control credit booms, but, on the contrary, may induce credit intermediation, which in turn can increase system risk. Any modern central bank should re-examine and redefine its role as a ‘banker’s bank’ taking into consideration the future developments in shadow banking and financial innovation in order to ensure financial stability.

The primary goal of monetary policy: reflections on the nature of the problem

Aim: In this article, the state of the discourse concerning the final goal of the modern central bank is presented, in particular the aim of price stability, understood as low and stable inflation.
 
 Design/Research methods: The article was prepared on the basis of scientific publications in the field of monetary policy as well as materials and documents from different central banks, including the US Federal Reserve System and the European Central Bank.
 
 Conclusions/findings: Low and stable inflation reduces uncertainty about future price developments. This facilitates decision-making for companies concerning production and investment, and for households concerning consumption and saving. From a macroeconomic point of view, price stability is a prerequisite for the efficient functioning of the economy and for achieving high growth rates. In practice, the need for a quantifiable definition has been disregarded, while only a descriptive and qualitative definition of price stability is insufficient for an effective monetary policy and the implementation of the anti-inflationary mission by the central bank.

BVAR models in short-term prediction of modern central banks: empirical evidence of the euro area

It has been more than a decade since central banks, in the face of the global financial crisis, implemented unconventional initiatives. Monetary authorities' actions have led to a reduction of main interest rates to historically low levels and huge expansion of central banks' balance sheet. So far, they still have not returned to the pre-crisis framework and implemented the normalisation process. Nowadays, there is observed a trend to use econometric models in monetary policy to forecast macroeconomic variables and plan normalising activities. The main aim of the study is empirical verification of BVAR model in short-term predicting, that might be used by the European Central Bank in its normalisation process. The conducted research indicate that the large BVAR model for the Eurozone has a significant predictive value in short-term forecasting. At the same time indicating its considerable precision and accuracy in prediction, with a high degree of objectivity and flexibility.

How 'Monetization' Really Works—Examples from Nations’ Policy Responses to COVID-19

The severe economic downturn caused by the COVID-19 pandemic has forced governments worldwide to increase spending while tax revenues simultaneously collapsed. Concurrent with this, central banks in several of these countries are financing a significant percent of their direct income support through direct lending or purchases of government bonds in primary and/or secondary markets. Many oppose this for their alleged negative consequences on the economy, inflation in particular. This paper describes the actual workings of what most people (including many economists) often call monetization of government debt and its major implication, namely, that it leads to printing money and, consequently, to inflation. We show that the reality is very different: once one knows how modern central banks manage monetary policy (i.e., through a corridor interest rate targeting system), and how they coordinate their daily operations with their Treasuries, monetization does not occur as it is often described, and it is not nearly as dangerous as its critics argue (and not as useful as its supporters claim). The examples of the Philippines, Singapore, People’s Republic of China, and US clarify this.

The fiat money illusion: On the cost‐efficiency of modern central banking

AbstractThe traditional argument for unbacked fiat money stresses its potential benefits in terms of production costs. While there is an undeniable grain of truth in the traditional cost‐saving argument, actual fiat money regimes around the world are belying it. The Eurosystem, the Bank of England, the Bank of Japan and the Federal Reserve System all operate under relatively high costs. In fact, their operating expenses exceed the estimated costs of a generic fractional‐reserve gold standard. Even when the reserve ratio of the estimated gold standard is increased up to 100% on M1, the operating expenses of these modern central bank systems remain in a similar range. Hence, the cost‐saving argument is illusory in these cases. These results suggest that a return to a money that is at least partially backed by gold might be more efficient even from the vantage point of the production costs of money. The Eurosystem and the Bank of Japan are particularly expensive institutions. Their annual operating expenses as a fraction of nominal GDP are more than twice as high as those of the Federal Reserve System and the Bank of England.

Una nota sobre los bancos centrales en el centro y en la periferia: estancamiento secular y restricción externa

Históricamente los bancos centrales fueron instrumentos de desarrollo económico, pero en países avanzados su función de guardianes de la ortodoxia macroeconómica y de la estabilidad de precios ha tomado un papel predominante. En un mundo interconectado, eso limita la habilidad de los bancos centrales de los países en desarrollo de cumplir el mismo rol que sus pares de países avanzados cumplieron en el pasado. Los límites de los modernos bancos centrales son discutidos en el contexto del supuesto estancamiento secular y del renovado problema externo que algunos países en desarrollo enfrentan con el final del súper-ciclo de los precios de las commodities. En tiempos recientes, sin embargo, todo se complica en el corto plazo por la crisis del coronavirus (COVID-19).