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This paper investigates how best to determine time-invariant policy rules in macroeconomic models with forward-looking constraints, where fully optimal policy is known to be time-inconsistent. It proposes a new 'coefficient optimisation' approach that improves upon the timeless perspective method of Woodford (2003) in deterministic problems, and on average in stochastic problems, without resorting to asymptotic ('unconditional') loss comparisons.

I show how the evolution of bank capital depends on the share of non-state-contingent assets in banks’ balance sheets and present the implications for macroeconomic dynamics. State-contingent securities impact on banks’ balance sheets through changes in their returns (and their prices), both of which depend on the current state of the economy. Non-state-contingent assets are signed before shocks are realized and their repayment is guaranteed. For this reason, they insulate banks’ balance sheets from recent economic activity in the absence of defaults. Non-state-contingent assets in banks’ balance sheets attenuate the amplification of shocks resulting from financial frictions. The same effect can be achieved if more weight is placed on the state-contingent assets in the equity related constraint against the costs of long-run output losses.

We estimate the Smets and Wouters (2007) model augmented with the Gertler and Karadi (2011) financial intermediation sector on US data by using real and financial observables. Given the framework of the estimated model, we address the question whether and how standard monetary policy should interact with macroprudential policy in order to safeguard real and financial stability. For this purpose, monetary policy is described by a flexible inflation targeting regime using the interest rate as instrument, while the macroprudential regulator adopts a tax/subsidy on bank capital in a countercyclical manner in order to stabilize nominal credit growth and the output gap. We look at the gains from coordination between the central bank and the macroprudential regulator under alternative assumptions regarding the degree of importance assigned to output gap fluctuations in the macroprudential mandate. The results suggest that there can be considerable gains from coordination if the macroprudential regulator has been assigned a sufficiently high weight on output gap stabilization, i.e. the common objective with monetary policy. If, on the other hand, the main focus of the macroprudential mandate is on credit growth, the macroprudential policy maker can reach better outcomes, while the central bank does worse, in the absence of coordination. Therefore, whether and to which extent monetary policy gains from coordination with the macroprudential regulator depends on the relative weight assigned to output fluctuations in the macroprudential mandate. Our counterfactual analysis further confirms the effectiveness of the countercyclical macroprudential tax/subsidy in containing the amplification effects triggered by a financial shock, and suggests that having a macroprudential regulatory tool at work could have successfully avoided the massive drop in credit such as the one observed at the onset of the Great Recession.

This paper builds on the Lucas' (1973) signal extraction model to study the time-varying effect of uncertainty in the output-inflation trade-off on inflation, using a monetary model with asymmetric central bank preferences whereby deviations of output (relative to target) from above are weighted differently from deviations from below. The model is investigated empirically using data from the South African Reserve Bank (SARB). We show that the implication of the uncertainty element is to cause the authority to change its indirect control, output by less (and hence change it direct control, interest rate by less) whenever inflation is below or above the target, in line with Brainard's attenuation principle. We also find that SARB's asymmetric output stabilization explains inflation movements significantly, and that the monetary authority seems to be more averse to business cycle recessions than expansions, hence more keen to avoid recessions than expansions. Overall, a more transparent and committed monetary policy practice that would reduce uncertainty over the output-inflation trade-off would be helpful for economic stability.

What institutional arrangements for an independent central bank with a price stability mandate promote good policy outcomes when unconventional policies become necessary? Unconventional monetary policy poses challenges. The large scale asset purchases needed to counteract the zero lower bound on nominal interest rates have uncomfortable fiscal and distributional consequences and require central banks to assume greater risks on their balance sheets. Lack of clarity on the precise definition of price stability, coupled with concerns about the legitimacy of large balance sheet expansions, hinders policy: It encourages the central bank to eschew the decisive quantitative easing needed to reflate the economy and instead to accommodate too-low inflation. The experience of the Bank of Japan's encounter with the zero lower bound suggests important benefits from a clear definition of price stability as a symmetric 2% goal for inflation, which the Bank adopted in 2013. Wie muss die Unabhängigkeit einer Notenbank, die das Ziel der Preisstabilität verfolgt, gestaltet sein, damit die Geldpolitik auch beim Einsatz unkonventioneller Maßnahmen erfolgreich ist? Athanasios Orphanides analysiert die Maßnahmen der Bank of Japan (BoJ) seit den späten 1990er Jahren und zeigt auf, worauf bei der Formulierung geachtet werden sollte.

This paper is a review about the book ‘Stress Test: Reflections on Financial Crises’ by Timothy Geithner. The book mainly discusses the policy decisions and implications of T. Geithner during his job as New York FED president and US-Treasury secretary under president Obama. The book reveals some hidden information about the decision-making process in both institutions. But it lacks a scientific foundation in order to explain the financial crisis in more detail. Hence, I think the book is less convincing than recognized in public. No doubt, Geithner crisis response deserves appreciation especially the ‘Stress Test’. However, the overall book does not demonstrate that the response is sustainable in the long run and scientifically sound. Consequently, it is more a book on public policy and governance than economics.Keywords. Financial Crisis, Regulation, Cause of Financial Bubbles.JEL.A30, B31, E58, E61, G18, G38.

The article analyses the interactions and trade-offs between monetary and macroprudential policies. While both policy domains have their respective objectives, i.e., price stability for monetary policy and financial stability for macroprudential policy, they impinge on closely related variables, such as output, inflation and financial variables. Therefore, depending on the circumstances, the strategy of one policy-maker might either reinforce or undermine the effectiveness of the other’s. The article first defines the objectives and describes the transmission channels of both policies, and sets out the institutional framework in Belgium and the euro area. Coordination between the two domains may be advantageous at times when there are strong trade-offs between price and financial stability, for instance when facing a supply shock, making coordination more desirable but also more challenging. In addition, when the available macroprudential instruments are not proven to be sufficiently effective, or when financial imbalances are widespread throughout the economy, monetary policy might have to ´lean against the wind´, i.e., follow a somewhat tighter stance than justified by the price stability objective, in order to avoid the further build-up of financial imbalances. The article concludes with a discussion of the current interaction between monetary and macroprudential policies in the context of low nominal growth and low interest rates. Recent monetary policy measures, including the EAPP, contribute to safeguarding price and macroeconomic stability through the anchoring of inflation expectations. That, in turn, should also support financial stability. Nevertheless, risks to financial stability might emerge in the current prolonged period of low interest rates and abundant liquidity. Targeted sector- (or country-)specific macroprudential measures are to be preferred when dealing with the potential build-up of financial imbalances, such as within the insurance sector.

We describe the origins of inflation targeting in New Zealand, and then use the four key attributes of inflation targeting—independence, the inflation target, transparency, and accountability—as an organizing device to analyze macroprudential policy “institutions”—the rules, regulations, and governance frameworks that implement macroprudential policies.

As the author describes it, the Federal Reserve’s muddled mandate to attain simultaneously the incompatible goals of maximum employment and price stability invites short-term-oriented discretionary policymaking inconsistent with the systematic approach needed for monetary policy to contribute best to the economy over time. Fear of liftoff—the reluctance to start the process of policy normalization after the end of a recession—serves as an example. Drawing on public choice and cognitive psychology perspectives, the author discusses causes of this problem: The Federal Reserve could adopt a framework that relies on a simple policy rule subject to periodic reviews and adaptation. Replacing meetingby- meeting discretion with a simple policy rule would eschew discretion in favor of systematic policy. Periodic review of the rule would allow the Federal Reserve the flexibility to account for and occasionally adapt to the evolving understanding of the economy. Congressional legislation could guide the Federal Reserve in this direction. However, the Federal Reserve may be best placed to select the simple rule and could embrace this improvement on its own, within its current mandate, with the publication of a simple rule along the lines of its statement of longer-run goals.

The fiscal policy environment central banks operate in can be radically different with respect to debt levels, maturity structures and whether or not fiscal adjustments are spending or tax based. Despite this, most analyses of monetary policy delegation schemes typically ignore the behavior of the fiscal policy maker. The paper investigates how monetary price level targeting or monetary nominal income targeting may yield social gains in an economy with government debt and where the fiscal policymaker, acting strategically, may support or undermine the policies of the central bank. We argue that the level of debt, its maturity and choice of fiscal policy instrument play an important role in determining the performance of monetary policy. The gains to price level targeting typically found in the literature can be overturned at empirically relevant debt to GDP ratios, when debt stabilization is achieved through spending cuts. In contrast these gains are retained if the fiscal authorities raise taxes to stabilize debt.

Monetary unions are very particular currency regimes, which aim at lowering transaction costs and annulling infra-union exchange risks. Despite its benefits, this exchange rate arrangement is subject to a plethora of faults and weak points mainly due to its intrinsic ‘one-size-fits-all approach’. In the past and perhaps in the future too, precisely this core aspect has caused breakups of previous historical experiences (cf. the Latin, Scandinavian or Austro-German currency union). Now, the European Monetary Union (EMU) between 17 heterogeneous country members is threatened by the same matters of concern. In the light of the ongoing debt crisis, theoretical as well as empirical evidence proves that at least nine (forgotten or even whitewashed) critical assertions apply to the Euro Area and its durability. As we will endeavor to prove, the Eurozone is seriously endangered by its missing attention to heterogeneity, divergences and plurality of actors as well as economic needs, Las uniones monetarias son regímenes cambiarios que tienen por objeto disminuir los costos de transacción y anular los riesgos de cambio infra-unión. A pesar de sus beneficios, este acuerdo de tipo de cambio está sujeto a una miríada de fallas y puntos débiles debido principalmente a su intrínseco «enfoque único». Tiempo atrás----y quizás también en un futuro----, precisamente este aspecto esencial ha provocado la disolución de experiencias históricas previas (cf. la unión monetaria latina, escandinava o austro-alemana). Actualmente la Unión Económica y Monetaria Europea (UEM), conformada por un grupo heterogéneo de 17 países miembros, es amenazada por las mismas cuestiones preocupantes. A la luz de la actual crisis de la deuda, la evidencia tanto teórica como empírica demuestra que al menos 9 afirmaciones críticas (desatendidas o incluso encubiertas) son aplicables a la zona Euro y su permanencia. Como intentaremos probar, la Eurozona está seriamente en riesgo por su falta de atención a la heterogeneidad, alas divergencias y a la pluralidad de los actores, así como a las necesidades económicas

Monetary policy in Israel during the global crisis used unconventional measures alongside aggressive cuts in the interest rate. The measures included the purchase of foreign currency, the purchase of government bonds in the secondary market, and additional measures. As the economy began to recover, the Bank of Israel gradually reduced the scale of monetary expansion, rolling back the unconventional measures first. However, foreign currency purchases have continued in various schemes up to date, reflecting the importance of exports to the economy and the enduring challenge posed by an appreciated currency. Several lessons arise regarding unconventional measures: they should be considered an integral part of monetary policy at a near-zero interest rate; they enhance the intensity of the monetary policy response, which is crucial at a time of crisis when the risks of underreacting are acute; the variety of these measures allows the pursuit of several goals apart from monetary expansion. Classification JEL: E58, E61, G01, G15.

The recent financial crisis has highlighted the lack of analytical frameworks to help predict the global financial imbalances. The recent financial crisis has determined an increasing number of countries to use macroprudential instruments, in order to avoid systemic risks. According to the policy objective that wants to be achieved, country’s authorities have to choose among several instruments. Work on selecting and applying macroprudential instruments is a priority in the European Union, both at a national and at entire Union. In the case of Eastern Europe countries, the authorities adopted several measures to curb bank lending in foreign currency, subject that will be treated in the present paper.

Although the world’s leading central banks are currently still conducting a decidedly expansionary monetary policy, it can be assumed that, sooner or later, that policy will be tightened. In view of the divergent macroeconomic situations and prospects, the normalisation of monetary policy is likely to be asynchronous. The Federal Reserve’s preparations for this normalisation are now far advanced, with the estimate of excess capacity on the labour market and the likely pressure on wages and prices as crucial elements for determining the timing and pace of the exit. In the euro area, the monetary policy stance is expected to remain extremely accommodative in a climate of very low inflation which appears to be weakening the anchoring of inflation expectations to some extent. A challenge for the exit from the current policy stance is the implementation of a more restrictive monetary policy by means of higher interest rates, while the central bank reserves still contain a substantial liquidity surplus. In that connection, the Federal Reserve has now felt the need to expand its operational framework with a supplementary interest rate floor, namely the overnight reverse repo rate, in order to ensure the optimum transmission of the policy rates to market interest rates. Asynchronous normalisation of monetary policy in the major advanced economies implies risks of undesirable spillover effects. The increased synchronisation in government bond yield movements shows that the euro area could well feel the impact of any potential turmoil associated with the normalisation of monetary policy in the United States. However, it is evident that, since the end of 2013, the Eurosystem has been successful in clearly establishing the independence of its monetary policy and is managing to devise a monetary policy course in line with the euro area’s fundamentals. That is also apparent from the movement in the exchange rate since mid-2014.

The analysis of household foreign currency (FX) lending begins with a short review of the theoretical and empirical literature. I investigate the factors that have helped or hindered such lending, particularly in Central and Eastern Europe. The study goes on to look at the experiences in Poland, Romania and Hungary. The choice is based on the fact that all three countries operate a flexible exchange rate regime and that household FX lending is prevalent in all of them. The analysis of each country touches upon the factors that have contributed to the local development of FX borrowing. However, the study focuses on the regulatory measures taken to curb such lending. The study concludes with a review and critical assessment of the policies that have been adopted with an eye to solving social and economic difficulties arising from FX indebtedness.

This paper studies the links between of financial soundness indicators and financial crisis episodes controlling for several macroeconomic and fiscal variables in 20 OECD countries. We focus our attention on aggregate capital adequacy, asset quality and bank profitability indicators compiled by the IMF. Our key findings suggest that in times of severe financial crisis regulatory capital to risk weighted assets is increased (by about 0.5–0.6 % points; p.p.) to abide by regulatory and supervisory demands, non performing loans (NPLs) to total loans increase dramatically (by about 0.5–0.6 p.p.), but loan loss provisions lag behind NPLs (they fall by about 12.3–18.8 p.p.) and profitability deteriorates dramatically (returns on assets (equity) fall by about 0.3–0.4 (5.0–7.0) p.p.).

The paper provides a simple analytical framework for analyzing the interplay between monetary policy and macroprudential policy. Three questions are analyzed: (i) Under which assumptions is coordination necessary to implement an optimal policy mix? (ii) Are the two policy instruments substitutes or complements, i.e. should they move in opposite or the same direction as response to a shock? (iii) Can "leaning against the wind" in monetary policy lead to a negative inflation bias?

The instruments applied by the ECB and the Fed1 during the crisis were based on similar principles, but as the ECB and the Fed function in different financial intermediary systems, they relied on different tools to respond to different types of challenges. Both institutions increased liquidity substantially and deployed instruments with the aim of alleviating tensions in certain market segments. The ECB faced a somewhat more complex problem, due to the combination of banking system difficulties and uncertainties surrounding fiscal sustainability. The central bank(s) of the euro area attempted to ensure the funding of banks by providing longer-term loans unrestrictedly; securities purchases had smaller limit amounts and were, for the most part, intended to mitigate disturbances in certain market segments and lower excessive yields. The Fed tried to address the root problem of the crisis, the mortgage market. With its asset purchases, it attempted to lower longterm yields and mitigate the disturbances in the market of mortgage-backed securities; in addition, it introduced several targeted loan instruments. According to empirical analyses, the unconventional instruments the two central banks deployed successfully mitigated market tensions, expanded market liquidity and lowered yields. Typically, the studies concluded that the programmes improved the situation of the real economy and that the recession would have been deeper and unemployment higher without them.

This study intends to investigate challenges facing the CBE for adopting IT regime. Through exploiting the experience of Czech Republic, Poland, and Brazil in the early days of their adopting IT the study underscores the following challenges; (i) A more active role to be played by the CBE is needed to convince decision-making circuits inside the government for the adoption of IT. (ii) The CBE should be factually independent. (iii) Coordination between monetary policy and fiscal policy should be established so that the inflation target given to the CBE is determined to ensure the government’s solvency. (iv) A satisfactory level of knowledge has to be acquired by the CBE concerning the following issues; the degree of the exchange rate pass-through effect, the level of real exchange rate, and both timing and effect of monetary transmission mechanisms. (v) Several questions are still unfulfilled concerning many issues (e.g. the measurement of price level that will be targeted, the design of the model that fits the Egyptian economy, variables included in the reaction function of the CBE, the reaction of the CBE to different shocks). (vi) Some institutional arrangements are urgently needed both to implement a household survey of inflation expectations and to improve and update the Egyptian statistics.

In this paper the euro crisis is interpreted as the latest episode in the crisis of finance-dominated capitalism. For 11 initial Euro area countries, the major features of finance-dominated capitalism are analyzed; specifically, the increasing inequality of income distribution and the rising imbalances of current accounts. Against this background, the euro crisis and the economic policy reactions of European governments and institutions are examined. It is shown that deflationary stagnation policies have prevailed since 2010, resulting in massive real GDP losses; some improvement in the price competitiveness of the crisis countries but considerable and persistent current account imbalances; reductions in government deficit–to-GDP ratios but continuously rising trends in gross government debt–to-GDP ratios; a risk of further recession for the euro area as a whole — and the increasing threat of the euro’s ultimate collapse. Therefore, an alternative macroeconomic policy approach tackling the basic contradictions of finance-dominated capitalism and the deficiencies of European economic policy institutions and strategies — in particular, the lack of (1) an institution convincingly guaranteeing public debt and (2) a stable and sustainable financing mechanism for acceptable current account imbalances — is outlined.

The era of US state branching deregulation started in 1970 and ended up with the enactment of the Riegle Neal Act of 1994. One of the purposes of the branching restriction was to avoid bank concentration. The following paper addresses the influence of the state deregulation on commercial banks’ efficiency within the US. We calculate an indicator of bank efficiency using Data Envelopment Analysis (DEA). The efficiency indicator is used as the primary step to analyze the effect of state branching law deregulation on bank’s efficiency. The analysis is complemented with a failure prediction model using these DEA scores., La era de la desregulación para abrir sucursales empezó en 1970 y culminó con el Acta Riegle Neal de 1994. Uno de los propósitos de la regulación para abrir sucursales era evitar la concentración bancaria. El presente trabajo analiza la influencia de la desregulación de sucursales sobre la eficiencia bancaria. Estimamos el indicador de eficiencia mediante la técnica del DEA y lo consideramos como un insumo para nuestro análisis. El estudio se complementa con una evaluación de la probabilidad de quiebra bancaria, utilizando como herramienta el mismo DEA.

A tanulmányban körbejárjuk a devizahitelezés problémakörét. Az első részben az elméleti és az empirikus szakirodalom eredményeit ismertetjük, megvizsgáljuk, milyen tényezők segítik/segítették vagy gátolják/gátolták a devizahitelezés kialakulását, elsősorban a kelet-közép-európai és a balti régióban. Ezek után részletesebben megvizsgáljuk a jelenleg lebegő árfolyamrendszert alkalmazó, devizahitelezésben érintett három ország, Lengyelország, Magyarország és Románia tapasztalatait. Az egyes országoknál csak érintőlegesen térünk ki azokra a tényezőkre, amelyek az empirikus irodalom tükrében a devizahitelezés általános okaiként felmerülnek, vizsgálatunk nagy részében inkább a devizahitelezés meggátolását célzó szabályozások bemutatásával, értékelésével foglalkozunk. A tanulmányt a devizahitelezés jelenlegi és jövőbeli problémáira adott és adható válaszok szkeptikus szemléje zárja. Journal of Economics Literature (JEL) kód: E44, E51, E58, E61, G21, G28., The analysis of household foreign-currency lending begins with a short review of the theoretical and empirical literature. The author investigates the factors that have helped or hindered such lending, particularly in Central and Eastern Europe and the Baltic region. The study goes on to look at the experiences in Poland, Romania and Hungary. The choice is based on the fact that all three countries operate a flexible exchange-rate regime, and in all of them household foreign-currency lending is prevalent. The analysis of each country touches upon the factors that have contributed to the development of foreign-currency borrowing there. However, the study focuses on the regulatory measures taken to curb such lending. The author concludes with a review and assessment of the policies that have been adopted with an eye to solving social and economic difficulties that arise from foreign-currency indebtedness.

A typical feature of an economic crisis, as is the case of the last economic and financial crisis, is the rise in the unemployment. This phenomenon represents one of the most serious aspects of an economic recession implying additional constraints for the policy makers and increased social and economic distress. In this paper we approach the issue of unemployment dynamics for Romanian economy. Modern economies must cope with the challenge of achieving financial stability, given that the globalizing financial environment is becoming more complex due to globalization, to theintersection of the monetary and financial market, and to the financial industry innovativeness. Although this evolution of the markets encourages more efficient allocation of global capital resources, allowing the ways of financing to adapt more quickly to the needs of the real economy, “the financial sector is not exempt from tensions and destabilizing movements, which generate risks not only for the players of the financial sector, but also for the economy as a whole†.

The monetary policy strategies arround the world have been envolving in the last two decades considerable. In the past, central banks’ have been associated with a „veil of mistery” having at their grounds the so-called policy mistique. Nowadays, the new monetary policy strategy – inflation targeting – promoted by many countries established new coordinates for monetary policy. In this paper we focuse upon the monetary policy committee with a special focus upon the Bank of England’s case, because of the special track of this committee in several fields: interest rates expectations, other asset prices, the communication of the central bankers, publishing the minutes of the committees.

In the wake of the two longer-term refinancing operations with a maturity of three years conducted in December 2011 and February 2012, amounts placed on the Eurosystem’s deposit facility surged to unprecedented high levels of around € 800 billion. The article clarifies how this high recourse to the deposit facility should be interpreted. First, daily changes in the amounts being placed on the deposit facility should not necessarily be interpreted as daily changes in stress on the interbank market as there is a seasonal pattern in the use of the deposit facility. That seasonal pattern stems from the fact that Eurosystem counterparties have to meet a reserve requirement on an average basis. Hence, it is better to watch the money market liquidity surplus, defined as the sum of the recourse to the deposit facility and the current account holdings in excess of the required reserves, as a proxy for the central bank’s intermediation role on the money market. Second, high recourse to the deposit facility is an automatic corollary to increased central bank liquidity provision because the relationship between the central bank and commercial banks can be seen as a closed system. Hence, as illustrated by some examples, large amounts being placed on the deposit facility are not informative as to whether or not the liquidity is actually “being put to use”, for instance, to grant credit to the non-financial sector or to pay back maturing bank debt. A number of examples illustrate this.

This article provides an overview of international experiences with the use of unconventional central bank instruments. The application of unconventional instruments may be justified by the existence of financial market friction, turmoil, failure or constraint, when instruments that change the size and/or composition of central bank balance sheets may be more efficient in achieving monetary policy objectives than traditional interest rate policy.

We consider fiscal and monetary policy interactions in a monetary union under monetary leadership, when the common central bank is concerned with the average fiscal stance of the union. We use a static two-country monetary union model to investigate the policy-mix problem under different regimes of noncooperation, cooperation, and enforced cooperation among fiscal authorities. We find that fiscal policy is unambiguously countercyclical, a feature that is more pronounced under fiscal policy cooperation. Monetary policy can be either countercyclical or procyclical. A central bank concerned about the aggregate fiscal stance is effective in stabilizing output and central budget, but at the expense of inflation stabilization.

Las recurrentes entradas de capitales en economías emergentes plantean retos importantes a las autoridades responsables de mantener la estabilidad financiera. El incremento de las tasas de interés para frenar desequilibrios derivados de los flujos de capital puede asimismo atraer capitales adicionales, acentuar presiones apreciatorias y comprometer la estabilidad financiera. Por ello, las autoridades han recurrido a una serie de instrumentos alternativos con el fin de atenuar los efectos de los flujos de capitales. Este artículo examina algunos de estos instrumentos, donde destacan la intervención en el mercado cambiario y la acumulación de reservas internacionales; medidas para fortalecer el capital y los balances bancarios; medidas para mantener la calidad del crédito o influir en su crecimiento o asignación; y controles de capitales. También se analizan aspectos relacionados con su aplicación, como las señales a las que hay que responder, el momento adecuado para implementar las medidas prudenciales, y su carácter procíclico, eficacia y calibrado. Sin embargo, queda por resolver cómo deberán utilizarse los instrumentos descritos en combinación con la política de tasas de interés. A mediano plazo, estos instrumentos suscitan inquietud puesto que podrían afectar al desarrollo del sistema financiero.

The novelty of this article is its theoretical framework, which allows for modeling of an announced change in the type of monetary regime operated. The behavior of a small open economy that has announced the adoption of a monetary policy regime of offsetting nominal exchange rate changes is analyzed. The optimal monetary regime for the transition period and its effects on macroeconomic stability are studied. Moreover, the evolution of business cycle synchronization over the transition is analyzed.

The article examines the link between monetary policy and financial stability in the context of the recent financial and economic crisis. It aims to draw lessons from those recent events and to examine the implications for monetary policy. More specifically, it asks whether, apart from its price stability mandate, monetary policy should play a more significant and pro-active role in safeguarding financial stability. The first section reviews the pre-crisis consensus on monetary policy. Economic developments in recent decades had shifted the focus of monetary policy to the link between price stability and economic growth, while the issue of financial stability had taken a back seat. In the prevailing macroeconomic context, known as “the Great Moderation”, a clear consensus on monetary policy emerged in terms of objectives, strategies and the institutional framework. Moreover, the dominant view was that monetary policy makers should take account of asset prices and other financial variables only in so far as they have implications for the future trend in activity and inflation over a period of approximately two years, typically taken as the relevant period for monetary policy. The monetary policy strategy of the Eurosystem is largely in line with this pre-crisis consensus. Unlike most other central banks, however, the Eurosystem has a unique two-pillar strategy in which the monetary pillar pays explicit attention to financial developments. Although initially aimed at identifying risks to price stability, it gradually focused more on aspects of financial stability. The second section draws a number of provisional lessons from the crisis. First, the recent crisis has provided evidence that price stability is not sufficient to maintain financial stability and macroeconomic stability in general. Second, not only has the continued firm anchoring of inflation expectations enabled monetary policy-makers to respond appropriately during the crisis, but it is also destined to remain one of the key elements of future monetary policy. Furthermore, recent research has revealed recurrent patterns which may help to identify financial vulnerabilities in the run-up to a serious financial crisis. However, it is still hard to identify financial imbalances in real time, and further research in this field is desirable. The debate on whether, in the future, monetary policy should make a greater contribution to financial stability and perhaps be given a broader mandate is still ongoing. However, some key points are already becoming clear. Financial stability should in the first place benefit from a strengthening of prudential policy, and particularly from the conduct of a macro-prudential policy. Moreover, a successful macro-prudential policy makes it easier to conduct monetary policy ; it prevents monetary policy from being over-burdened or confronted by serious policy dilemmas, so that it can continue to focus on the primary goal of price stability. In principle, this does not imply any significant modification of the existing monetary policy frameworks. Nevertheless, it is necessary that monetary policy takes full account of its impact on the risk-taking behaviour of the various economic agents. In addition, greater importance should be attributed to analysis of the formation of financial imbalances. That is not at odds with the priority of the price stability mandate, because the crisis clearly showed that risks to financial stability in the longer term also imply risks to price stability. However, it does assume an extension of the monetary policy horizon. If that horizon is actually extended, that should preferably be made explicit, as it would clarify the monetary policy strategy and increase accountability.

In this paper we analyze macroeconomic interactions between trade unions, the central bank and the fiscal policymaker. We explicitly model unions’ concern for public expenditure, paving the way for an analysis of the potential gains from cooperation between the fiscal policymaker and the unions, i.e. the so-called corporatist or social pacts that have characterized economic policies in a number of European countries in the last few decades. We also highlight the profoundly different incentives generated by institutional arrangements such as the Maastricht criteria and the Stability and Growth Pact. The former has unambiguously induced more efficient outcomes; the latter is likely to backfire.

This paper analyzes the effectiveness of delegation in solving the time inconsistency problem of monetary policy using a microfounded general equilibrium model where delegation and reappointment are explicitly included into the government's strategy. The method of Chari and Kehoe [1990. Sustainable plans. Journal of Political Economy 98 (4), 783–802] is applied to characterize the entire set of sustainable outcomes. Countering McCallum's [1995. Two fallacies concerning central-bank independence. American Economic Review 85 (2), 207–211] second fallacy, delegation is able to eliminate the time inconsistency problem, with the commitment policy being sustained under discretion for any intertemporal discount rate.

This paper probes the limits of transparency in monetary policymaking along two dimensions: feasibility and desirability. It argues that, due to limited knowledge about the economy, even central banks that are considered champions of openness are not very clear about their measures of the output gap and about their beliefs regarding the effect of policy on inflationary expectations. Consequently feasibility constraints on transparency are more serious than stylized models of the transmission mechanism would imply. In addition no central bank has made clear statements about its objective function, including in particular the relative weight on output versus inflation stabilization, the policy discount factor and the shape of losses from the inflation and the output gaps over the possible ranges of realizations of those variables. The paper also argues that there is a trade-off between full transparency and full utilization of information in setting policy and that excessive transparency may facilitate the exertion of political pressures on the central bank. The last section of the paper abstracts from feasibility constraints and discusses the desirable levels of openness in various areas of the policymaking process. It is argued that the strongest case against immediate transparency arises when the CB has private information about problems within segments of the financial system. Premature release of information may, in such a case, destroy efficient risk sharing arrangements and long term investments by triggering a run on the financial system. This is illustrated within the context of the classic Diamond Dybvig model of bank runs. The paper also probes the desirable levels of transparency in other areas of the policymaking process like the bank's objective function, the bank's output target, forecasts of economic shocks, disagreements within the CB board and the bank's own ignorance.

The financial turmoil, which began in the summer of 2007, has developed into one of the most disruptive financial and economic crisis experienced by the world in many decades. At the root of the crisis we find a combination of macroeconomic imbalances and microeconomic factors, including market failures and deficiencies in the design of regulatory and supervisory frameworks. This article analyses the underlying causes which contributed to the crisis and reviews the key measures adopted by public authorities to mitigate its effects as well as some of the lessons learned to make the international financial markets more resilient.

This paper demonstrates that recent influential contributions to monetary policy imply an emerging consensus whereby neither rigid rules nor complete discretion are found optimal. Instead, middle-ground monetary regimes based on rules (operative under 'normal' circumstances) to anchor inflation expectations over the long run, but designed with enough flexibility to mitigate the short-run effect of shocks (with communicated discretion in 'exceptional' circumstances temporarily overriding these rules), are gaining support in theoretical models and policy formulation and implementation. The opposition of 'rules versus discretion' has, thus, reappeared as the synthesis of 'rules cum discretion', in essence as inflation-forecast targeting. But such synthesis is not without major theoretical problems, as we argue in this contribution. Furthermore, the very recent real-world events have made it obvious that the inflation targeting strategy of monetary policy, which rests upon the new consensus paradigm in modern macroeconomics is at best a 'fair weather' model. In the turbulent economic climate of highly unstable inflation, deep financial crisis and world-wide, abrupt economic slowdown nowadays this approach needs serious rethinking to say the least, if not abandoning it altogether. Classification-JEL

Given a monetary Union which is heterogeneous at the level of labour market flexibility, this paper investigates the effects in terms of macroeconomic stabilization of the different degrees of fiscal coordination between governments. We use a static Keynesian model within a closed monetary Union and we introduce an intermediate level of coordination between the national governments, which is the variable geometry coordination between economic clubs consisting of structurally close countries. The distinction between the wide Union's welfare and each country member's individual welfare proves that the effectiveness of a variable geometry fiscal coordination mainly depends on the type of the economic shocks affecting the Union members, the nature of the fiscal spillovers, and the extent of the Union's structural heterogeneity. While this type of game is effective in neutralizing the demand shocks, it doesn't manage to improve the national protection of all the country members against the supply shocks. .

Under ordinary circumstances, the fiscal implications of central bank policies tend to be seen as relatively minor and escape close scrutiny. The global financial crisis of 2008, however, demanded an extraordinary response by central banks which brought to light the immense power of central bank balance sheet policies as well as their major fiscal implications. Once the zero lower bound on interest rates is reached, expanding a central bank’s balance sheet becomes the central instrument for providing additional monetary policy accommodation. However, with interest rates near zero, the line separating fiscal and monetary policy is blurred. Furthermore, discretionary decisions associated with asset purchases and liquidity provision, as well as with lender-of-last-resort operations benefiting private entities, can have major distributional effects that are ordinarily associated with fiscal policy. In the euro area, discretionary central bank decisions can have immense distributional effects across member states. However, decisions of this nature are incompatible with the role of unelected officials in democratic societies. Drawing on the response to the crisis by the Federal Reserve and the ECB, this paper explores the tensions arising from central bank balance sheet policies and addresses pertinent questions about the governance and accountability of independent central banks in a democratic society.

In this paper we consider a standard policy game between the Government and a union. In such a framework, we first investigate the effects of corporatism on macroeconomic performance vis-à-vis different kinds of non-co-operative equilibria. Afterwards, we introduce in the literature the issue of the feasibility of corporatism, i.e., whether and under what conditions it is in the interest of both agents to implement a corporatist approach to economic policies. We find that it is difficult to implement corporatism, although it generally increases social welfare, since it often reduces the union’s utility. In particular, we show that a micro-founded union will never find it profitable to co- operate with the Government, unless side-payments are considered. The study of this last issue is however beyond the scope of this paper.

The three main economic philosophies (Classical, Keynesians and Monetarists) did not help in preventing the 2007-2008 U.S. financial crisis. Why not? The Classical economists focus on free markets, free of government interference and free of monopolies. They missed the point that when about $10 trillion of the funding in the U.S. housing market is based on borrowed funds, the housing market is no longer free, but depend on what happened to the borrowers. The Keynesians emphasized the need for government interference to counteract recessions by increasing government spending above tax receipts. The U.S. experience over 2008-2015 has shown the fastest growth rate of government debt for a long time, but this did not help individual households to repay their mortgages. Keynesians also believe in the control of money supply but they do not link prevailing interest rates with the affordability of such rates to individual households. The Monetarists believe that banks can and should control the supply of money. It will be clear from this paper that banks did not control their mortgage lending levels in the run up to the financial crisis. Monetarist’s emphasis is on supply level of money rather than on the ability of households to repay outstanding loans, especially those of a long-term nature, out of the incomes earned. All in all a major rethink of policies is required. Why was the financial crisis not foreseen? House price inflation based on excessive lending levels was not regarded as a threat to economic growth, contrary to the threat from cost price inflation. The latter occurs when wages growth or costs of raw materials, intermediate goods and imported goods push up inflation levels. The second reason was that it was not recognized that the supply of mortgage funds as provided by the banks and the financial markets does not necessarily match the needs (or demand) of the collective of individual households. The needs are based on population growth levels, changes in family size and changes in accommodation taste patterns. In the U.S. about 1.8 million new homes are needed every year. The needs of the collective of individual households are also based on income growth, the affordability level. The latter is especially important for lower and median income families. Wall Street thinks in terms of profitability, while Main Street thinks in terms of affordability. The third reason was that the level of the Fed’s base rate sets the funding cost base for banks. Competition for customer deposits adds an additional cost level for banks. The price setting for mortgages is a one sided process whereby banks, and indirectly the Fed, decide what to charge to their customers. As set out in this paper mortgage customers need a “dynamic stability” in their mortgage obligations, one that is linked to the annual CPI level and income growth. The paper proposes a scheme to break the link between the cost of mortgages as set by the banking sector and the mortgage interest costs paid by individual households, with the latter instead being based on the CPI level plus a margin. Such a scheme will stabilize the financial position of individual households both at high and low inflation levels. In some years a surplus will be created between what individual households pay and what the banks receive; in other years there will be a shortfall. The U.S. Treasury could accommodate such temporary surplus/shortfall as a tool for creating stable economic growth, in what could amount to a type of individuals’ quantitative easing. As a further tool for putting the collective of individual households first, rather than the financial sector, a traffic light system can be implemented to slow down the volume of mortgage lending when needed. A future financial crash linked to the housing sector can be avoided if the separation of mortgage interest charged by the banking sector and interest levels paid (based on CPI inflation levels) by the household sector is combined with the traffic light system. ‘Collective Households Economics’ may be a new variant of economic thinking. The need for funds approach is based on the different parameters for the collective individual households than the ones that rule the banking sector. It is paramount, if one wants long-term economic growth to continue, that the need for funds approach prevails. It is based on the needs of the individual household customer base, rather than on the profit levels of the financial markets. Bridges can be built!

This paper examines the issues of institutional quality and central bank transparency through the interaction of monetary and fiscal policies. We have found that the effects of transparency and corruption on macroeconomic performance and volatility depend on the relative importance of the marginal supply-side effects of distortionary tax and corruption, the degree of central bank conservativeness and/or the initial degree of opacity about central bank preferences. If the marginal effect of tax is relatively important, more opacity might induce higher level and volatility of inflation when the central bank is sufficiently conservative. Furthermore, opacity and tolerated corruption can mutually reinforce or weaken each other’s effects on the level and volatility of inflation. Transparency is generally a better strategy when the central bank is conservative. However, there could be a case for opacity in order to compensate for the undesirable macroeconomic effects of corruption when the central bank is liberal.

No. And not only for the reason you think. In a world with multiple inefficiencies the single policy tool the central bank has control over will not undo all inefficiencies; this is well understood. We argue that the world is better characterized by multiple inefficiencies and multiple policy makers with various objectives. Asking the policy question only in terms of optimal monetary policy effectively turns the central bank into the residual claimant of all policy and gives the other policymakers a free hand in pursuing their own goals. This further worsens the tradeoffs faced by the central bank. The optimal monetary policy literature and the optimal simple rules often labeled flexible inflation targeting assign all of the cyclical policymaking duties to central banks. This distorts the policy discussion and narrows the policy choices to a suboptimal set. We highlight this issue and call for a broader thinking of optimal policies.

The Federal Reserve System failed to prevent the collapse of intermediation during the Great Depression (1929-1933) and took action as if it was unaware of policies that should have been taken in the event of widespread bank runs. The National Banking Era panics and techniques to alleviate them should have been useful references for how to alleviate a financial crisis. We suggest that the overwhelming effort to finance World War I combined with a perspective held by contemporary Federal Reserve officials that the central bank legislation was sufficient to overcome financial crises are key reasons why the historical experiences were overlooked.

This paper examines the economic effects of forward guidance using a New Keynesian model with a zero lower bound (ZLB) constraint on the short-term nominal interest rate. Forward guidance is modeled with anticipated news shocks to the monetary policy rule. There are five key findings: (1) the stimulative effect of forward guidance falls as the economy deteriorates or as households expect a slower recovery because there is a smaller margin to lower expected policy rates; (2) longer forward guidance horizons do not generate increasingly larger impact effects on output when the total amount of news is fixed, unlike with an exogenous interest rate peg; (3) in steady state, an unanticipated shock has a larger impact effect on output than a news shock, but a news shock has a larger cumulative effect in every state of the economy; (4) at the ZLB, the cumulative effect on output from lengthening the forward guidance horizon increases over short horizons but decreases thereafter, which indicates the central bank faces limits on how far forward guidance can extend into the future and continue to add stimulus; and (5) forward guidance is stimulative in the absence of other shocks, but the observed effect on output is smaller or even negative if another shock simultaneously reduces demand.

We use information on institutional arrangements for macroprudential policy in 66 countries to examine the recent developments in and characteristics on institutional arrangements for macroprudential policy. Then we conduct empirical analyses on drivers behind the choice of institutional arrangements, especially the roles of a central bank and a government. We show that many countries have recently developed their institutional arrangements with respect to the set-up of a mandate for macroprudential policy and a multi-agency communication/coordination framework. In addition, the current arrangements can be largely divided into two types: centralization in the central bank, where the central bank or a committee of the central bank is the sole owner of the macroprudential mandate; and coordination by the government, where the government coordinates views or policies among multiple agencies with the macroprudential mandate as the sole chairperson of the financial stability committee. Our empirical analyses suggest that wide-ranging features including economic and financial characteristics, the exchange rate regime, and the degree of democracy influence the differences in the roles the central bank and the government play in macroprudential policy in each country.

To stimulate and finance investment in Europe the three “policy stars” of Europe need to be aligned: the Capital Markets Union initiative, the €315bn Investment Plan, and the ECB’s €1,100bn asset purchase scheme. They jointly face a unique set of issues. First, the resilience and the cyclical performance of the European bank based system needs to be improved. Second, the “right” markets need to be developed for banks to outsource risks without jeopardising financial stability. Third, cross-border risk-sharing urgently needs to be rebalanced, because it has become, in the wake of the Great Recession, overly reliant on debt instruments as opposed to equity. We argue that to achieve alignment between initiatives, an overall strategic vision could: - Set an explicit, holistic strategy, ensuring that the instruments in the Investment Plan receive appropriate regulatory treatment within the CMU, and are eligible to the ECB’s purchase programme and collateral. - Set a strategic objective for the euro area financial structure. It could be a “spare wheel” model where (i) banks would remain predominant (with capital markets as a countercyclical “spare wheel”), and (ii) banks would outsource risk through covered bonds (with untranched securitisation acting as the “spare wheel”). - Proactively promote equity instruments in all three policy initiatives for more sustainable cross border risk sharing. - Promote a new business model for “credit assessment” with a value chain featuring the credit information collected by commercial and central banks. - Re-orientate the ECB’s purchases away from sovereign debt instruments towards the instruments that will finance the Investment Plan, those of the so-called “agencies”, and private sector assets. - Formally involve NPBs in the Investment Plan, preferably in the equity of the EFSI Fund. - Improve the governance of public investment ex ante via independent, supra-national investment committees, and ex post via strict disciplinary measures. - Be pragmatic but tangible in the objectives set for the Capital Markets Union (focus on cross-border insolvencies and improve national business environments).

The goal of this paper is to analyse the economic development of Poland using the concept of macroeconomic policy regimes (MPRs). Six elements of a MPR will be identified: foreign economic policy, industrial policy, the financial system, wage policy, monetary policy and fiscal policy. Examining the functionality of the development of these elements applied to Poland is a further aim of this paper. The functionality of the development of the MPR elements will be analysed on the basis of the fulfilment of the objectives, as well as the use of the proposed instruments and strategy assigned to every element of MPR. Due to space limits, we are going to focus on the former in this paper. Taking into consideration that Poland is an emerging and a relatively open economy, foreign economic policy and industrial policy play very significant roles in restructuring of the economy towards production and exports of high value-added products, which would enable the country to follow a growth path consistent with an external balance. The financial needs of the manufacturing sector and particularly of the producers and/or exporters of high-end products need to be satisfied by the financial system, whose stability needs to be secured with the help of monetary policy. The latter is, moreover, in charge of providing low-cost finance and maintaining the stability of the exchange rate. Stabilising the inflation rate would be given to wage policy. Fiscal policy’s main tasks would be to correct aggregate demand shocks and reduce income inequality.

Variable and high rates of price inflation in the 1970s and 1980s led many countries to delegate the conduct of monetary policy to "instrument-independent" central banks and to give their central banks a clear mandate to pursue price stability and instrument independence to achieve it. Advances in academic research supported a strong focus on price stability as a means to enhance the independence and credibility of monetary policymakers. An overwhelming majority of these central banks also adopted an explicit inflation target to further strengthen credibility and facilitate accountability. One exception is the U.S. Federal Reserve, which since 1977 has been assigned the so-called "dual mandate," which requires it to "promote maximum employment in a context of price stability." Although the Fed has established credibility for the long-run inflation target, an important question is whether its heavy focus on resource utilization can be justified. The authors' reading of the academic literature is that resource utilization should be assigned a small weight relative to inflation under the reasonable assumption that the underlying objective of monetary policy is to maximize the welfare of households inhabiting the economy. Woodford (1998) showed that the objective function of households in a basic New Keynesian sticky-price model could be approximated as a (purely) quadratic function in inflation and the output gap, with the weights determined by the specific features of the economy. A potential drawback with the large literature that followed is that it focused on relatively simple calibrated (or partially estimated) models. In this paper the authors revisit this issue within the context of an estimated medium-scale model of the U.S. economy, specifically the Smets and Wouters (2007) model.

La teoría del nivel óptimo de reservas internacionales busca asegurar la protección de la economía contra posibles choques externos a la balanza de pagos, garantizando la liquidez internacional en situaciones de emergencia. Las aplicaciones metodológicas de la literatura actual tienen limitaciones que comprometen los resultados de los análisis del nivel óptimo en el caso colombiano. Este artículo presenta una propuesta alternativa sobre reservas internacionales óptimas y un marco metodológico consistente que supere dichas limitaciones y dé mayor confianza a las autoridades monetarias y a los agentes internacionales.

In this paper we compare expected loss minimization to worst-case or minimax analysis in the design of simple Taylor-style rules for monetary policy. To this end we use a small model estimated for the euro area by Orphanides and Wieland (2000). We find that rules optimized under a minimax objective in the presence of general parameter and shock uncertainty do not imply extreme policy activism. Such rules also tend to obey the Brainard principle, which implies that policy responsiveness declines with increasing uncertainty about policy effectiveness. We find that rules derived by means of minimax analysis are effective insurance policies limiting maximum loss over ranges of parameter values to be set by the policy maker. In practice, we propose to set these ranges with an eye towards the cost of such insurance cover in terms of the implied increase in expected inflation variability.

This paper studies the spillover sizes and signs and the institutional design of the co-ordination of macroeconomic stabilisation policies within the European Economic and Monetary Union (EMU). Moreover, in a dynamic setup, the consequences of this institutional design on macroeconomic outcomes and policies are analysed. We distinguish two types of co-ordination: ex-ante - related to the institutional framework; and ex-post concerning the actual policy decisions. The first type is modeled as the result of an endogenous coalition formation process that leads to the formation of policymakers’ coalitions. Ex-post co-ordination implies then the implementation by each coalition of its internally coordinated macroeconomic stabilisation policies in a non-cooperative dynamic game with the other coalitions, and subject to the constraints of the internal dynamics of the EMU economy. The paper shows that the institutional setting of macroeconomic policy co-ordination is of crucial importance in reaching the Pareto-optimal equilibrium of the game, especially when the number and the magnitude of asymmetries increase. The specific recommendations depend on the particular characteristics of the shocks and the economic structure. In the case of a common shock, fiscal co-ordination is counterproductive but full policy co-ordination is desirable. When asymmetric shocks are considered, fiscal co-ordination improves the performance but full policy co-ordination doesn’t produce further gains in policymakers’ welfare. In general, structural asymmetries reduce the gains from co-operation so that in many cases co-operation cannot be supported without introduction of exogenous factors, e.g. a transfer system.