Practice Of Central Banking Research Articles

Reasserting Monetary Policy: Sumner’s Nominal GDP Targeting and Beyond

Sumner’s (2016) article in Foreign Affairs reasserts the potential of monetary policy to influence economic conditions – following years of suboptimal growth in the US and elsewhere and an unraveling of consensus about central bank practice. This review provides theoretical and economic history context. From the 1960s onward, consideration of money quantity variables was prominent in monetary policy discussion. By the 1990s, central bankers had transferred focus to interest rate or inflation targeting, and sometimes to a combination of the two. Central bankers have proved effective at meeting, or approaching, inflation objectives – and doing so helps to stabilize market expectations for what the future price level will be. Sumner argues that if central bankers can stabilize inflation expectations, then they could also meet nominal GDP (NGDP) targets – and thereby stabilize expectations regarding future growth, unemployment, and interest rates. Also, NGDP targeting is counter-cyclical in its essence. The depth and length of the Great Recession were largely a result of contractionary monetary conditions from the third quarter of 2008 onward. But financial crises, including in that of 2007-2008 in the US, can trigger or contribute to downturns. NGDP trends are not a good predictor of such crises, which often have origins in compromised capital structure. A further limitation is that NGDP targeting emphasizes internal balance (domestic prices and employment) almost to the exclusion of external stability as an aim of monetary policy. Even if the primary goal remains internal balance, data from foreign exchange markets and from non-domestic price changes provide important information about the stance of monetary policy.

From Monetary Policy to Macroprudentials: The Aftermath of the Great Recession

Monetary policy is about the determination of money stock and interest rates to affect economic activity in the short-, medium- and the long-term. Besides helping to eliminate recessionary or inflationary business cycles, controlling interest rates and value of money have important impact on economic prospects by way of affecting domestic and international transaction costs. From a normative perspective, the ultimate goal of monetary policy is to increase allocative and distributional efficiency that are, in theory, consistent with the price stability focus of the modern central banking practice. Low level and variability of inflation rates is necessary for investment and sustainable growth; provided that the benefits of growth are distributed equitably, it also contributes economic development.

The transmission mechanism of unconventional monetary policy

The implementation of unconventional (nonstandard) monetary policy instruments by the leading central banks at the wake of the financial and economic crisis was the most significant shift in the practice of central banking in the recent years. Evaluation of their effects is not feasible without a thorough recognition of the transmission mechanism of various balance-sheet policies, such as quantitative easing. The transmission channels of a standard interest-rate policy are based on a group of theories that are relatively coherent and well-documented. On the contrary, identification of similar framework for unconventional measures proved to be a complicated task. The aim of this paper is to extract and evaluate the theoretical efficiency of particular channels of unconventional monetary policy. This goal requires references to at least several, to some extent mutually exclusive, theories. It is also inevitable to draw one’s attention to the relative significance of identified channels, depending on the nature of used unconventional tools, as well as on reactions of financial institutions and other economic agents to undertaken actions. This paper discusses three broad channel of the unconventional policies transmission mechanism: the signaling channel, the liquidity channel, and the portfolio-balance channel.

The Encyclopedia of central banking

The Encyclopedia of Central Banking provides definitive and comprehensive encylopedic coverage on central banking and monetary theory and policy. Containing close to 200 entries from specially commissioned experts in their fields, elements of past and current monetary policies are described and a critical assessment of central bank practices is presented. Since the financial crisis of 2007, all major central banks have intervened to avert the collapse of the global economy, bringing monetary policy to the forefront. Rochon and Rossi give an up to date, critical understanding of central banking, at both theoretical and policy-oriented levels. This Encyclopedia explains the complexity of monetary-policy interventions, their conceptual and institutional frameworks, and their own limits and drawbacks. The reader is provided with the body of knowledge necessary to understand central banks' decisions in the aftermath of the global financial crisis and controversial explanations of the crisis are illuminated from a historical perspective. Academics and students of economics will find this an indispensible reference tool, offering current and necessary insight into central banking and monetary policy. Practitioners in the financial sector will also benefit from this refreshed insight into this fundamental topic.

The Lender of Last Resort Function after the Global Financial Crisis

The global financial crisis (GFC) has renewed interest in emergency liquidity support (sometimes referred to as “Lender of Last Resort”) provided by central banks to financial institutions and challenged the traditional way of conducting these operations. Despite a vast literature on the topic, central bank approaches and practices vary considerably. In this paper we focus on, for the most part, the provision of idiosyncratic support, approaching it from an operational perspective; highlighting different approaches adopted by central banks; and also identifying some of the issues that arose during the GFC.

The Lender of Last Resort Function after the Global Financial Crisis

The global financial crisis (GFC) has renewed interest in emergency liquidity support (sometimes referred to as 'Lender of Last Resort') provided by central banks to financial institutions and challenged the traditional way of conducting these operations. Despite a vast literature on the topic, central bank approaches and practices vary considerably. In this paper we focus on, for the most part, the provision of idiosyncratic support, approaching it from an operational perspective; highlighting different approaches adopted by central banks; and also identifying some of the issues that arose during the GFC.

Central Banking After the Crisis: No Return to Past Certainties

Before the 2008 crisis, macroeconomic theory and central bank practice regarded low and stable inflation to be a policy objective that was sufficient to ensure macroeconomic and financial stability. There was little concern with the details of the financial system or balance sheet aggregates. This article makes the case that these details are important and that monetary and macroprudential policy must control both the quantity and allocation of credit. This entails a revision of conventional monetary theory as well as policy, particularly to explain the paradox of the precrisis situation of so much credit and so little inflation. The particular role of real estate investment is described as a source of financial instability that can only be addressed by nuanced monetary and macroprudential policy.

Monetary Policy and Central Banking: The Relevance of the Financial Revolution Today

The aim of this article is to provide a discussion interface for historians and those that are in the present world of economics. The Global Financial Crisis set in motion a series of debates on the nature and scope of monetary policy. The role of monetary policy and the central bank since the 1980s has been clear – price stability, interest rate stability, political independence and the effective management of financial crises (mostly manifested as short term liquidity crises). Central banks recently have rediscovered that they are not managers or accountants but actors in a political power play. This manifests itself in the creation of money, the manipulation of interest rates, the changing of exchange rates, the reappraisal of the lender-borrower relationship and the assignment of economic rents to those in a position to be deemed worthy. As a wing of the State central banks are a creature of the executive, despite the need to present distance from the political fray, central bankers are members of a hyper elite where only presidents, prime ministers and finance ministers are invited guests. Financial innovation, whether generated through innovation, circumnavigation of regulations or outright deregulation causes revolutions in central banking practice. While finance remains sedate and the State is not under any form of duress central banking becomes technocratic, waiting and assumed superfluous but as a crisis breaks and the ability of the State to achieve its objectives or its survival is placed in doubt the central bank takes on an active role achieve what no other wing of the State can – create money and with redefine and defend the State.

Central Bank Independence, Transparency and Accountability Indexes: a Survey

Abstract Recently, the remarkable trend upon central bank independence and the efficient monetary policy were seriously highlighted in the monetary economics field. Starting from 1990s’ central bank independence was at the core of policy making and central banking problems, because of the widespread economical, political, personal and budgetary autonomy of the central bank. Nowadays, we can observe an increasing trend upon central bank transparency, for evaluating more accurate the central bank’s performances by the wide public, mass-media and financial markets. Consequently, a central bank must encompass a high degree of accountability and responsibility, because of the final liability in case of failure. In this paper we present, analyze and assess the construction of the most important indices regarding central bank independence, transparency and accountability in a chronological manner, presenting also the advantages and disadvantages of these indices related to actual practices of central banks. Moreover, we analyze the analytical results of the empirical testing of these indices with a considerable impact upon the developed and developing country group. In regard with the empirical results of different authors, we suggest the importance and the necessity for constructing an aggregate index for measuring central bank independence, transparency and accountability, based on de jure stipulations and the actual practices of the central banks.

Basil J. Moore's Horizontalists and Verticalists: an appraisal 25 years later

<section class="abstract"> In 1988 Basil Moore published his book <em>Horizontalists and Verticalists: The Macroeconomics of Credit Money</em>, which this year celebrates its 25th birthday. We discuss this book from today's perspective, and in particular whether Moore's main assertions have been validated or rejected by the development of central bank practice and academic monetary economics. We find that the book has impressively stood the test of time and, despite part of textbook economics still insisting on the money multiplier as an explanation for the money supply, it is not much of an exaggeration to say that we have all become ‘Horizontalists’ in the last 25 years. </section>

Introduction: the role of central banks in economic development with an emphasis on the recent Argentinean experience

Almost all of the papers presented in this special issue were part of the annual conferences of the Banco Central de la Republica Argentina (BCRA) during the last couple of years, or are variations on the topics on which the authors presented during the Bank’s Annual Conference. They share a common theme, one that is relevant for the recent Argentinean experience, but that is also important for many developing countries, since it puts into question the role of central banks in the process of development. The papers suggest that central banks historically were not limited to fighting inflation and have, under certain circumstances, been relevant in promoting a broad process of development with price stability. 1 Throughout the history of central banking both in advanced and developing countries, financing governments, managing exchange rates, and supporting the productive sectors by using direct methods of intervention have been among the most important tasks of central banking and, indeed, in many cases, were among the reasons for their existence. The conventional independent central bank concerned only with inflation is, in a sense, radically out of step with the history and practice of central banking throughout most of its history. TherecentArgentineanexperience,infact,reflectsthisnotionthatcentralbankscanbe instruments of development. It is important to remember that during the Convertibility period (1991–2002) the BCRA was significantly limited in its ability to act as a lender of last resort, and that a process of liberalization, deregulation and privatization, together with the fixed exchange rate, resulted in unsustainable current account deficits and increasing external indebtedness which led to the default. After the crisis, and particularly after 2003, the economy grew at the highest rates in its recorded history, to a great extent as a result of the expansion of domestic demand. Even though the external conditions were favorable, it is important to note that other countries in South America had a more favorable shock to their terms of trade and still grew considerably less than Argentina. Further, the expansion of demand, and the reduction of unemployment rate from more than 22 percent to around 7 percent, went hand in hand with the maintenance of primary fiscal surpluses, 2 and higher real wages that permitted a considerable improvement in income distribution.

The Life Cycles of Competing Policy Norms: Localizing European and Developmental Central Banking Ideas

During the 20th century, the institution called central bank was diffused globally. However, central banking practices differed significantly between European market-based economies and developing economies. This paper traces the ideas and norms that shaped and legitimized central banking practices in the two areas. The paper argues that during the period from the 1940s to the 1970s two central banking policy norms existed: the liberal norm, which emerged in Europe, and the developmental central banking norm, which emerged in Latin America and diffused to East Asia. The paper seeks to trace the life cycles of the two norms: to specify the ideational content of each norm and to identify the actors and networks that produced, promoted and diffused them. The paper makes two contributions. First, theoretically, on the basis of Finnemore and Sikkink’s theory of international norms’ dynamics, it introduces a mechanism that explains the emergence and internationalization of an alternative international norm in the periphery that challenges the standard international norm. Second, it contributes to the literature on comparative re- gionalism by historicizing the liberal/European standard of central banking practices and by identifying the existence of an alternative standard for central banking practices in developing countries. The paper covers the period from the 1940s to the 1970s.

Building the Foundations for a New Central Bank Doctrine: Redefining Central Banks’ Missions in the 21st Century

The 2007-2008 financial crisis demonstrated both the responsibilities that central bankers, alongside other actors, bear for turbulences of this kind as well as how economics can be used to provide central bankers and governments with the understanding and tools that they need to prevent the international financial system from collapsing. At the same time, central banks’ responses to the crisis have taken monetary policy into unknown territory. The paper’s first section diagnoses good and bad practice in post-crisis central banking; assesses the efficiency of pre-crisis doctrines; and identifies the dangers of actions exceeding certain limits. It specifically focuses on the European Central Bank’s much-debated intervention in certain peripheral bond markets, particularly Greece. The second section is more normative and lays the foundations for a social science perspective of how to manage modern central banks, an approach that draws on a variety of disciplines including economics, governance theory and management. This starts with a definition of the new doctrine and its underlying philosophy, followed by an identification of sound central banking practices (revolving around a few key concepts, notably inflation and financial stability). The missions and objectives of these practices are then defined (along with a choice of indicators), culminating in an exploration of which strategies and tools might be used in both normal and turbulent times. Lastly, a few concrete rules of governance are offered, built on the triptych of central banks’ independence, accountability and composition, with specific focus placed on the process for selecting governors fit to handle the new role that modern central banks are destined to assume in developed countries.

Discussion

Discussion

Building the foundations for a new central bank doctrine: Redefining central banks’ missions in the 21st century

The 2007-2008 financial crisis demonstrated both the responsibilities that central bankers, alongside other actors, bear for turbulences of this kind as well as how economics can be used to provide central bankers and governments with the understanding and tools that they need to prevent the international financial system from collapsing. At the same time, central banks’ responses to the crisis have taken monetary policy into unknown territory. The paper’s first section diagnoses good and bad practice in post-crisis central banking; assesses the efficiency of pre-crisis doctrines; and identifies the dangers of actions exceeding certain limits. It specifically focuses on the European Central Bank’s much-debated intervention in certain peripheral bond markets, particularly Greece. The second section is more normative and lays the foundations for a social science perspective of how to manage modern central banks, an approach that draws on a variety of disciplines including economics, governance theory and management. This starts with a definition of the new doctrine and its underlying philosophy, followed by an identification of sound central banking practices (revolving around a few key concepts, notably inflation and financial stability). The missions and objectives of these practices are then defined (along with a choice of indicators), culminating in an exploration of which strategies and tools might be used in both normal and turbulent times. Lastly, a few concrete rules of governance are offered, built on the triptych of central banks’ independence, accountability and composition, with specific focus placed on the process for selecting governors fit to handle the new role that modern central banks are destined to assume in developed countries

The Taylor Rule and the Transformation of Monetary Policy

Preface by Richard W. Fisher Introduction by Evan F. Koenig, Robert Leeson, and George A. Kahn I. TAYLOR’S APPROACH TO MONETARY THEORY AND POLICY 1. Monetary Policy Rules: from Adam Smith to John Taylor by Pier Francesco Asso, Robert Leeson 2. The Taylor Rule and the Practice of Central Banking by George A. Kahn 3. A Comparison with Milton Friedman by Edward Nelson 4. Two Basic Principles by Robert E. Lucas II. FROM THE GREAT MODERATION TO THE GREAT DEVIATION 5. The Great Moderation by Ben S. Bernanke 6. The Great Deviation by John B. Taylor 7. It’s Not So Simple by Donald L. Kohn III. NEW CHALLENGES IN THE DECADE AHEAD 8. Forecast Targeting as a Monetary Policy Strategy: Policy Rules in Practice by Michael Woodford 9. The Dual Nature of Forecast Targeting and Instrument Rules by John B. Taylor 10. Evaluating Monetary Policy by Lars E. O. Svensson IV. TAYLOR’S INFLUENCE ON POLICYMAKING: FIRSTHAND ACCOUNTS 11. Overview by Ben S. Bernanke 12. The View from Inside the Fed by Janet Yellen 13. The View from Inside the European Central Bank by Otmar Issing 14. The View from Central Banks in Emerging Markets by Guillermo Ortiz 15. A View from the Financial Markets by John P. Lipsky APPENDIX The Pursuit of Policy Rules: A Conversation between Robert Leeson and John B. Taylor About the Contributing Authors Index

Inflation Derivatives Under Inflation Target Regimes

Inflation targeting—the central bank practice of attempting to keep inflation levels within fixed bounds around a quantitative target—has been adopted by more than 20 economies. Such practice has an important impact on the stochastic nature of inflation and, consequently, on the pricing of inflation derivatives. We develop a flexible model of inflation targeting in which the central bank's intervention to steer inflation toward the target depends on past deviations and the policymaker's ability and will to enforce the target. We use our model to price inflation derivatives and demonstrate the impact of inflation targeting on derivative pricing.

WHICH INFLATION TO TARGET? A SMALL OPEN ECONOMY WITH STICKY WAGES

There is common agreement on price inflation stabilization being one of the objectives of monetary policy. But, in an open economy, two alternative measures of inflation coexist: domestic inflation and consumer price inflation. Which of the two should be the target variable? Most of the new open economy macroeconomics (NOEM) literature suggests that the monetary authority should stabilize domestic inflation. This is in sharp contrast with the practice of many inflation-targeting central banks that are using consumer price index (CPI) inflation as target variable. The paper shows that the standard result in the NOEM literature is derived under the simplifying assumption of flexible wages. The inclusion of sticky wages in an otherwise standard small open economy model is shown to rationalize CPI inflation targeting. This conclusion is robust to changes in key parameters, including the trade elasticity.

The Effects of the Great Recession on Central Bank Doctrine and Practice

The Effects of the Great Recession on Central Bank Doctrine and Practice

The Forgotten Man: J.M. ‘Pete’ Garland

J.M. ‘Pete’ Garland was an outstanding Australian economist sometimes much overlooked. Despite a promising academic career, as evidenced by his work on land tax, he was lost to Australian universities when the Commonwealth Bank snapped him up on his return to Australia from Cambridge. He became a key figure in the development of Australian central banking practices, establishing a longstanding liquidity convention that the private trading banks upheld for many years. He was also instrumental in building up the economic research department at the Bank. He maintained his links with academe and was considered the man most likely to write the biography of L.F. Giblin.