* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Download 통화완화정책
Survey
Document related concepts
Nominal rigidity wikipedia , lookup
Fiscal multiplier wikipedia , lookup
Modern Monetary Theory wikipedia , lookup
Foreign-exchange reserves wikipedia , lookup
Nouriel Roubini wikipedia , lookup
Business cycle wikipedia , lookup
Fear of floating wikipedia , lookup
Global financial system wikipedia , lookup
Great Recession in Russia wikipedia , lookup
Quantitative easing wikipedia , lookup
Economic bubble wikipedia , lookup
Early 1980s recession wikipedia , lookup
Interest rate wikipedia , lookup
Monetary policy wikipedia , lookup
Transcript
The State of Economics 통화정책 힘의 과대평가 -Dark Age of Macroeconomics- 금융 과잉 ⇒ 수익성 경쟁 자본과 금융 자유화 + 후발추격자(개도국)의 차입성장전략 • 금융혁신 주기적 부채(외환)위기 달러보유 축적 경향 증대 (글로벌 불균형) (증권화=자산유동화) • 금융의 탈규제 • 과소투자 (+글로벌화) • 경기침체 • 저금리(통화완화정책) • 소유자사회 정책 • 통화정책 무력화 • 자산시장 왜곡 <자산-상품> 가격↑ ⇒ 금 리↑ ⇒ Bust 금융위기의 충격과 여파 가공스러운 자산 피해 규모 2008년부터 2009년 봄 까지 기준(골드만삭스 추정) 41조 달러(부동산 11조 달러+ 주식 30 조 달러) 이는 전 세계 GDP의 75%에 해당하는 규모 Balance-Sheet Recession 위기 이전 은행과 가계가 소유한 자산가격의 과대평가 부분은 부채로 전환 MEW(Mortgage Equity Withdrawl) 보유주택 담보로 창출된 현금 주택가격에서 차입액을 뺀 순자산의 증가 와 이를 담보로 추가 차입하여 주택 개량 이나 기타 생활용도에 지출하는 경향 2001~06년간 미국에서 MEW로 인한 소비 증대 효과를 연간 GDP의 2~3%로 추산 MEW 규모의 추이 금융가속기(Financial Accelerator) 이론 • 개념 : Adverse shocks to the economy may be amplified by worsening credit-market conditions. • 신용시장의 ‘주인-대리인’ 관점 : 침체 시작 ⇒ 차입자는 높은 대리인비용 직면, 즉 안전자산(the flight to quality) 확대와 신용비중의 축소에 직면 ⇒ 지출과 생산과 투자 축소 ⇒ 침체 충격의 효과를 악화 • 결론 : Financial accelerator effects should be stronger, the deeper the economy is in recession and the weaker the balance sheets of borrowers. Downturns differentially affect both the access to credit and the real economic activity of high-agency-cost borrowers. (Nonlinearity) 금융가속기론 차입자의 대차대조표 측면 = 신용경색 과 정에서 자산가격의 하락 ⇒ 가계나 기업의 순자산 감소 ⇒ 담보 및 차입 여력의 약화 와 그에 따른 투자나 소비의 위축 금융기관의 대차대조표 측면 = 금융기관 의 대규모 손실과 리스크 회피 ⇒ 가계, 기 업, 금융기관 등에 대한 대출이나 투자의 축소나 기피 미국의 부문별 부채 -http://www.bcg.com/documents/file36762.pdf- 위기에 대한 대응 금융불안에 따른 신용경색의 문제 제로금리와 양적 완화(Quantitative Easing) 정책 → 일정한 효 과 은행의 건전성 제고와 자금중개기능의 정상화 → 제한적 효과 * 지난해 11월말 IMF 총재 도미니크 스트로스-칸(Dominique Strauss-Kahn)은 은행들의 손실 가능액 3.5조 달러 중 절반가량이 대 차대조표에 드러나지 않고 숨겨져 있다는 사실을 인정 실물부문 정상화와 재정정책 → 일시적 효과†와 재정건전성 악화 † 미국 3분기 GDP 성장의 ½~⅔는 정부지출에서 비롯, GDP의 11.2%(1.4조 달러)라는 재정적자보다 재정지출 효과가 훨씬 작은 이유 는 증세와 지출 삭감의 결과 실제 재정지출은 GDP의 4%에 불과하기 때 문 남겨진 과제들 재정건전성 문제와 급진적 해결책 요구(“다음 경제위기는 정부재정 파산?”) 그린 뉴딜, 희망과 환상 배경 ~ 세 가지 위기(경제, 에너지자원, 기후변화)에 대한 대응과 또 하나의 ‘거품’ 가능성 불가피한 금융 축소와 새로운 성장동력 확보(실물과 금융의 불균형 해소) 고용 없는 경기회복 글로벌 불균형 해소 달러본위제의 문제와 환율시스템의 개편 국제 금융개혁=금융개혁의 국제적 협력 What went wrong with economics Economist, July 16th 2009 • Paul Krugman argued that much of the past 30 years of macroeconomics was “spectacularly useless at best, and positively harmful at worst.” • Barry Eichengreen, a prominent American economic historian, says the crisis has “cast into doubt much of what we thought we knew about economics.” • Too many people, especially in Europe, equate mistakes made by economists with a failure of economic liberalism. Three main critiques • macro and financial economists helped cause the crisis; they failed to spot it; and they have no idea how to fix it. • Macroeconomists, especially within central banks, were too fixated on taming inflation and too cavalier about asset bubbles. • Financial economists, meanwhile, formalised theories of the efficiency of markets, fuelling the notion that markets would regulate themselves and financial innovation was always beneficial. The efficient market hypothesis • Few financial economists thought much about illiquidity or counterparty risk, for instance, because their standard models ignore it; and few worried about the effect on the overall economy of the markets for all asset classes seizing up simultaneously, since few believed that was possible. • Macroeconomists also had a blindspot: their standard models assumed that capital markets work perfectly. Synthesis? • An uneasy truce between the intellectual heirs of Keynes, who accept that economies can fall short of their potential, and purists who hold that supply must always equal demand. • Synthesis refers only to imperfections in labour markets (“sticky” wages, for instance, which allow unemployment to rise), but make no room for such blemishes in finance. By assuming that capital markets worked perfectly, macroeconomists were largely able to ignore the economy’s financial plumbing. But models that ignored finance had little chance of spotting a calamity that stemmed from it. What about trying to fix it? • The fragile consensus between purists and Keynesians that monetary policy was the best way to smooth the business cycle. • In many countries short-term interest rates are near zero and in a banking crisis monetary policy works less well. • Keynesians, such as Mr. Krugman, have become uncritical supporters of fiscal stimulus. Purists are vocal opponents. To outsiders, the cacophony underlines the profession’s uselessness. Today’s dilemmas • Which form of fiscal stimulus is most effective? • How do you best loosen monetary policy when interest rates are at zero? • Macroeconomists must understand finance, and finance professors need to think harder about the context within which markets work. • Everybody needs to work harder on understanding asset bubbles and what happens when they burst. • For in the end economists are social scientists, trying to understand the real world. And the financial crisis has changed that world. 통화정책 힘의 과대평가 -Dark Age of Macroeconomicsby R. Lucas • Classical mode of thought • Full employment would prevail because supply created its own demand. • Whatever people earn is either spent or saved; and whatever is saved is invested in capital projects. Nothing is hoarded, nothing lies idle. Keynes • Investment was governed by the animal spirits of entrepreneurs, facing an imponderable future. • The same uncertainty gave savers a reason to hoard their wealth in liquid assets, like money, rather than committing it to new capital projects. • This liquidity-preference governed the price of financial of securities and hence the rate of interest. If animal spirits flagged or liquidity-preference surged, the pace of investment would falter, with no obvious market force to restore it. Demand would fall short of supply, leaving willing workers on the shelf. It fell to governments to revive demand, by cutting interest rates if possible or by public works if necessary. • Trade-off between inflation and unemployment The oil-price shocks of the 1970s and the failure of the Keynesian consensus • P. Volcker defeated American inflation in the early 1980s, albeit at a grievous cost to employment. But victory did not restore the intellectual peace. Macroeconomists split into two camps. • The purists, known as “freshwater” economists because of the lakeside universities, blamed stagflation on restless central bankers trying to do too much. Efforts by policymakers to smooth the economy’s natural ups and downs did more harm than good. • To America’s coastal universities, known as “saltwater” pragmatists, the double-digit unemployment that accompanied Mr. Volker’s assault on inflation was proof enough that markets could malfunction. Wages might fail to adjust, and prices might stick. After Volcker’s Recession bottomed out in 1982 • Nothing like it was seen again until last year. In the intervening quarter-century of tranquillity, macroeconomics also recovered its composure. • The opposing schools of thought converged. The freshwater economists accepted a saltier view of policymaking. The opponents adopted a more freshwater style of modelmaking or the new synthesis brackish macroeconomics. Inflation Targeting • Dynamic stochastic general equilibrium (DSGE) models(동태· 확률 일반균형모형)에 반영 • Modern macroeconomists worried about the prices of goods and services, but neglected the prices of assets. This was partly because they had too much faith in financial markets. • “Bags of wheat are more important than stacks of bonds.” Finance is a veil, obscuring what really matters. In many macroeconomic models, therefore, insolvencies cannot occur. • Financial intermediaries, like banks, often don’t exist (Refer to the next page). And whether firms finance themselves with equity or debt is a matter of indifference. The Bank of England’s DSGE model, for example, does not even try to incorporate financial middlemen, such as banks. 참고) Financial firms’ complex interaction with competition and stability • The financial sector is different from other sectors because of its role in intermediating credit to the real economy – bank failures have negative externalities for firms and individuals due to the strong interconnectedness of finance, and competitors benefit from preventing systemically important bank failures (the Lehman failure demonstrates this). DSGE 모형 - 동태적이고 확률적인 요소를 고려한 일반균형이론에 기초하여 설계된 모형 • • • • • • • • 경제주체들(가계, 기업, 정부 등)이 합리적 기대를 바탕으로 임의의 충격이 미래의 경 제상황에 미칠 영향을 고려하여 최적 의사결정을 하는 가운데 모든 시장이 청산되는 경제를 상정하여 모형화 동태적(Dynamic): 현재의 소득을 기초로 소비행위를 하는 것이 아니라 평생기대소득 을 바탕으로 현재의 소비를 결정하는 등 경제주체들의 현재 경제행위가 미래와 연계 되는 기간간 대체(intertemporal substitution)의 개념을 도입 확률적(Stochastic): 국내 및 국외에서 임의로 발생하는 기술, 선호 및 통화정책 등의 각종 충격(random shock)을 도입하고 이러한 충격의 실현과정을 통해 경기변동 및 경제성장 현상을 설명 일반균형(General Equilibrium): 부문별 시장(예: 재화시장, 노동시장, 금융시장 등)에 서 관찰되는 각 경제주체들의 의사결정 행위를 동시적·종합적인 시각에서 고려 이같은 DSGE모형 체계는 크게 경제주체(agents), 경제변수(variables), 모수 (parameters) 등 3가지 요소로 표현 가능 경제주체들은 서로 유기적으로 연결되어 경제행위를 통해 각자의 만족을 추구하며 이들의 의사결정 양식은 내생변수간 관계로 집약 외생변수는 외생적 충격의 형태로 경제주체들의 의사결정에 영향을 미쳐 경기변동이 나 경제성장의 동인(動因) 역할을 수행 모수는 경제환경, 경제주체들의 선호, 가격결정 메커니즘 및 거시경제 정책결정 구조 등에 대한 정보를 반영하는 상수 Financial-market complications • The bank’s modellers go on to say that they prefer to study finance with specialized models designed for that purpose. • In the world assuming that markets are “complete”—that a price exists today, for every good, at every date, in every contingency, you can always borrow as much as you want at the going rate, and you can always sell as much as you want at the going rate. • Before the crisis, many banks and shadow banks made similar assumptions. They believed they could always roll over their short-term debts or sell their mortgage-backed securities, if the need arose. The financial crisis made a mockery of both assumptions. Funds dried up, and markets thinned out. Both of these constraints fed on each other, producing a “liquidity spiral”. • What followed was a furious dash for cash. Keynes would have interpreted this as an extreme outbreak of liquidity-preference. Fiscal fisticuffs • • • • The mainstream macroeconomics embodied in DSGE models was a poor guide to the origins of the financial crisis. In the first months of the crisis, macroeconomists reposed great faith in the powers of the Fed and other central banks. In the summer of 2007, a few weeks after the August liquidity crisis began, Frederic Mishkin, a distinguished academic economist and then a governor of the Fed, gave a reassuring talk at the Federal Reserve Bank of Kansas City’s annual symposium in Jackson Hole, Wyoming. He presented the results of simulations from the Fed’s FRB/US model. Even if house prices fell by a fifth in the next two years, the slump would knock only 0.25% off GDP, according to his benchmark model, and add only a tenth of a percentage point to the unemployment rate. The reason was that the Fed would respond “aggressively”, by which he meant a cut in the federal funds rate of just one percentage point. He concluded that the central bank had the tools to contain the damage at a “manageable level”. Since his presentation, the Fed has cut its key rate by five percentage points to a mere 0-0.25%. Its conventional weapons have proved insufficient to the task. This has shaken economists’ faith in monetary policy. Unfortunately, they are also horribly divided about what comes next. - Continued • Mr Krugman and others advocate a bold fiscal expansion, borrowing their logic from Keynes and his contemporary, Richard Kahn. Kahn pointed out that a dollar spent on public works might generate more than a dollar of output if the spending circulated repeatedly through the economy, stimulating resources that might otherwise have lain idle. • Mr Barro thinks the estimates of Barack Obama’s Council of Economic Advisors are absurdly large. Mr Lucas calls them “schlock economics”, contrived to justify Mr Obama’s projections for the budget deficit. • Today’s economists disagree over the size of this multiplier. Mr Krugman calculates that of the 7,000 or so papers published by the National Bureau of Economic Research between 1985 and 2000, only five mentioned fiscal policy in their title or abstract. From a golden age for macroeconomics to the least popular class • The benchmark macroeconomic model, though not junk, suffers from some obvious flaws, such as the assumption of complete markets or frictionless finance. • According to David Colander, who has twice surveyed the opinions of economists in the best American PhD programmes, macroeconomics is often the least popular class. “What did you learn in macro?” Mr Colander asked a group of Chicago students. “Did you do the dynamic stochastic general equilibrium model?” “We learned a lot of junk like that,” one replied. Financial economics - Efficiency and beyond – Economist, July 16th 2009 • The efficient-markets hypothesis has underpinned many of the financial industry’s models for years. IN 1978 Michael Jensen, an American economist, boldly declared that “there is no other proposition in economics which has more solid empirical evidence supporting it than the efficient-markets hypothesis” (EMH). Eugene Fama, of the University of Chicago, defined its essence: that the price of a financial asset reflects all available information that is relevant to its value. • From that idea powerful conclusions were drawn, not least on Wall Street. If the EMH held, then markets would price financial assets broadly correctly. Deviations from equilibrium values could not last for long. If the price of a share, say, was too low, wellinformed investors would buy it and make a killing. If it looked too dear, they could sell or short it and make money that way. It also followed that bubbles could not form—or, at any rate, could not last: some wise investor would spot them and pop them. And trying to beat the market was a fool’s errand for almost everyone. If the information was out there, it was already in the price. • On such ideas, and on the complex mathematics was founded the Wall Street profession of financial engineering. The engineers designed derivatives and securitisations, from simple interest-rate options to ever more intricate credit-default swaps and collateralised debt obligations. They reassured any doubters that all this activity was not just making bankers rich. It was making the financial system safer and the economy healthier. • That is why many people view the financial crisis that began in 2007 as a devastating blow to the credibility not only of banks but also of the entire academic discipline of financial economics. • A strand of sceptical thought, behavioural economics, has been booming. There are even signs of a synthesis between the EMH and the sceptics. Academia thus moved on, even if Wall Street did not. The EMH has loyal defenders. Myron Scholes’ experience • Myron Scholes, who in 1997 won the Nobel prize in economics for his part in creating the most widely used model in the finance industry—the BlackScholes formula for pricing options. • Mr Scholes thinks much of the blame for the recent woe should be pinned not on economists’ theories and models but on those on Wall Street and in the City who pushed them too far in practice. • He pointed out dangers ignored or underestimated in the finance industry, such as the risk that liquid markets can dry up far faster than is typically assumed. VaR models’ flaws • The “value-at-risk” (VAR) models have been used by institutional investors to work out how much capital they need to set aside as insurance against losses on risky assets. These models mistakenly assume that the volatility of asset prices and the correlations between prices are constant. • When two types of asset were assumed to be uncorrelated, investors felt able to hold the same capital as a cushion against losses on both, because they would not lose on both at the same time. However, at times of market stress assets that normally are uncorrelated can suddenly become highly correlated. At that point the capital buffer implied by VAR turns out to be woefully inadequate. Institutional frictions in financial markets • The EMH’s devotees had assumed that smart investors would be able to trade against less wellinformed “noise traders” and overwhelm them by driving prices to reflect true value. But it became clear that there were limits to their ability to arbitrage folly away. It could be too costly for informed investors to borrow enough to bet against the noise traders. Once it is admitted that prices can move away from fundamentals for a long time, informed investors may do best by riding the trend rather than fighting it. The trick then is to get out just before momentum shifts the other way. But in this world, rational investors may contribute to bubbles rather than preventing them. Do financial institutions matter? • Lay people might be surprised to learn that institutions play little role in financial theory. But researchers, based on the EMH, spent little time worrying about the workings of financial institutions—a weakness of macroeconomics too. Markets’ inherent rationality • If prices reflect all information, then there is no gain from going to the trouble of gathering it, so no one will. A little inefficiency is necessary to give informed investors an incentive to drive prices towards efficiency. • Behavioural economists, which applies the insights of psychology to finance, have argued that human beings tend to be too confident of their own abilities and tend to extrapolate recent trends into the future, a combination that may contribute to bubbles. There is also evidence that losses can make investors extremely, irrationally risk-averse— exaggerating price falls when a bubble bursts. The adaptive markets hypothesis - From evolutionary science - • Humans are neither fully rational nor psychologically unhinged. Instead, they work by making best guesses and by trial and error. If one investment strategy fails, they try another. If it works, they stick with it. • They do not see markets as efficient in Mr Fama’s sense, but as fiercely competitive. Because the “ecology” changes over time, people make mistakes when adapting. Old strategies become obsolete and new ones are called for. • The finance industry is in the midst of a transformative period of evolution, and financial economists have a huge agenda to tackle. One task, also of interest to macroeconomists, is to work out what central bankers should do about bubble. Systemic risk, illiquidity, and the risk of moral hazard • A lot of risk-managers in financial firms believed their risk was perfectly controlled, but they needed to know what everyone else was doing, to see the aggregate picture. It turned out that everyone was doing very similar things. So when their VAR models started telling them to sell, they all did—driving prices down further and triggering further model-driven selling. Several countries now expect to introduce a systemic-risk regulator. Data should be collected from individual firms and aggregated. The overall data should then be published. • Financial economists also need better theories of why liquid markets suddenly become illiquid and of how to manage the risk of “moral hazard”—the danger that the existence of government regulation and safety nets encourages market participants to take bigger risks than they might otherwise have done. Monetary policy O. Blanchard, Feb. 2010, Rethinking Macroeconomic Policy, IMF. • One target=inflation and one instrument=policy rate • The Great Moderation for a quarter of a century = stable inflation and small output gap(=Y-Y*) • Fiscal policy as a secondary role limiting its de facto usefulness One Target: Stable Inflation • Stable and low inflation was presented as the primary, if not exclusive, mandate of central banks. This was the result of a coincidence between the reputational need of central bankers to focus on inflation rather than activity (and their desire, at the start of the period, to decrease inflation from the high levels of the 1970s) and the intellectual support for inflation targeting provided by the New Keynesian model. • In the benchmark version of that model, constant inflation is indeed the optimal policy, delivering a zero output gap. Low Inflation • There was an increasing consensus that inflation should not only be stable, but very low (most central banks chose a target around 2 percent). • This led to a discussion of the implications of low inflation for the probability of falling into a liquidity trap: corresponding to lower average inflation is a lower average nominal rate, and given the zero bound on the nominal rate, a smaller feasible decrease in the interest rate— thus less room for expansionary monetary policy in case of an adverse shock. One Instrument: The Policy Rate - Two assumptions - • The first was that the real effects of monetary policy took place through interest rates and asset prices, not through any direct effect of monetary aggregates. • The second assumption was that all interest rates and asset prices were linked through arbitrage. So that long rates were given by proper weighted averages of risk-adjusted future short rates, and asset prices by fundamentals, the risk-adjusted present discounted value of payments on the asset. • Under these two assumptions, one needs only to affect current and future expected short rates: all other rates and prices follow. • One can do this by using a transparent, predictable rule such as the Taylor rule, giving the policy rate as a function of the current economic environment. An exception: Under these two assumptions the details of financial intermediation are largely irrelevant. • Banks were seen as special in two respects. • First, bank credit was seen as special, not easily substituted by other types of credit. This led to an emphasis on the “credit channel,” where monetary policy also affects the economy through the quantity of reserves and, in turn, bank credit. • Second, the liquidity transformation involved in having demand deposits as liabilities and loans as assets, and the resulting possibility of runs, justified deposit insurance and the traditional role of central banks as lenders of last resort. The resulting distortions were the main justification for bank regulation and supervision. • Little attention was paid, however, to the rest of the financial system from a macro standpoint. A Limited Role for Fiscal Policy • • • • • • • In the 1960s and 1970s, fiscal and monetary policy had roughly equal billing, often seen as two instruments to achieve two targets—internal and external balance, for example. In the past two decades, however, fiscal policy took a backseat to monetary policy. The reasons were many: First was wide skepticism about the effects of fiscal policy, itself largely based on Ricardian equivalence arguments. Second, if monetary policy could maintain a stable output gap, there was little reason to use another instrument. Third, in advanced economies, the priority was to stabilize and possibly decrease typically high debt levels; in emerging market countries, the lack of depth of the domestic bond market limited the scope for countercyclical policy anyway. Fourth, lags in the design and the implementation of fiscal policy, together with the short length of recessions, implied that fiscal measures were likely to come too late. Fifth, fiscal policy, much more than monetary policy, was likely to be distorted by political constraints. The rejection of discretionary fiscal policy as a countercyclical tool in academia • The focus in advanced economies was on prepositioning the fiscal accounts for the looming consequences of aging. • In emerging market economies, the focus was on reducing the likelihood of default crises, but also on establishing institutional setups to constrain procyclical fiscal policies, so as to avoid boom-bust cycles. Financial Regulation: Not a Macroeconomic Policy Tool • Financial regulation targeted the soundness of individual institutions and markets, largely ignored their macroeconomic implications, and aimed at correcting market failures stemming from asymmetric information, limited liability, and other imperfections such as implicit or explicit government guarantees. • Little thought was given to using regulatory ratios, such as capital ratios, or loan-to-value ratios, as cyclical policy tools. On the contrary, given the enthusiasm for financial deregulation, the use of prudential regulation for cyclical purposes was considered improper mingling with the functioning of credit markets. The Great Moderation • Increased confidence that a coherent macro framework had been achieved was surely reinforced by the “Great moderation,” the steady decline in the variability of output and of inflation over the period in most advanced economies. • The successful responses to the 198 7 stock market crash, the Long-Term Capital Management(LTCM) collapse, and the bursting of the tech bubble reinforced the view that monetary policy was also well equipped to deal with the financial consequences of asset price busts. • Thus, by the mid-2000s, it was indeed not unreasonable to think that better macroeconomic policy could deliver, and had indeed delivered, higher economic stability. • Then the crisis came. WHAT WE HAVE LEARNED FROM THE CRISIS - Stable Inflation May Be Necessary, but Is Not Sufficient • Core inflation was stable in most advanced economies until the crisis started. Some have argued that core inflation was not the right measure of inflation, and that the increase in oil or housing prices should have been taken into account. • As in the case of the precrisis 2000s, both inflation and the output gap may be stable, but the behavior of some asset prices and credit aggregates, or the composition of output, may be undesirable (for example, too high a level of housing investment, too high a level of consumption, or too large a current account deficit) and potentially trigger major macroeconomic adjustments later on. Low Inflation Limits the Scope of Monetary Policy in Deflationary Recessions (Refer to “the inflation solution?”) • Had they been able to, they would have decreased the rate further: estimates, based on a simple Taylor rule, suggest another 3 to 5 percent for the U nited States. • But the zero nominal interest rate bound prevented them from doing so. • One main implication was the need for more reliance on fiscal policy and for larger deficits than would have been the case absent the binding zero interest rate constraint. Financial Intermediation Matters • Markets are segmented, with specialized investors operating in specific markets. Most of the time, they are well linked through arbitrage. • However, when, for some reason, some of the investors withdraw from that market, the effect on prices can be very large. In this sense, wholesale funding is not fundamentally different from demand deposits, and the demand for liquidity extends far beyond banks. When this happens, rates are no longer linked through arbitrage, and the policy rate is no longer a sufficient instrument for policy. • Another old issue the crisis has brought back to the fore is that of bubbles and fads, leading assets to deviate from fundamentals, not for liquidity but for speculative reasons. It surely puts into question the “benign neglect” view that it is better to pick up the pieces after a bust than to try to prevent the buildup of sometimes difficult-to-detect bubbles. Countercyclical Fiscal Policy Is an Important Tool • The crisis has returned fiscal policy to center stage as a macroeconomic tool for two main reasons: • first, to the extent that monetary policy, including credit and quantitative easing, had largely reached its limits, policymakers had little choice but to rely on fiscal policy. • Second, from its early stages, the recession was expected to be long lasting, so that it was clear that fiscal stimulus would have ample time to yield a beneficial impact despite implementation lags. Regulation Is Not Macroeconomically Neutral • Financial regulation contributed to the amplification effects that transformed the decrease in U.S. housing prices into a major world economic crisis. • The limited perimeter of regulation gave incentives for banks to create off-balance-sheet entities to avoid some prudential rules and increase leverage. • Mark-to-market rules, when coupled with constant regulatory capital ratios(CAR), forced financial institutions to take dramatic measures to reduce their balance sheets, exacerbating fire sales and deleveraging. Reinterpreting the Great Moderation • The Great Moderation led too many (including policymakers and regulators) to understate macroeconomic risk, ignore, in particular, tail risks, and take positions (and relax rules)—from leverage to foreign currency exposure, which turned out to be much riskier after the fact. IMPLICATIONS FOR THE DESIGN OF POLICY • Defining a new macroeconomic policy framework is much harder. • The bad news is that the crisis has made clear that macroeconomic policy must have many targets; • the good news is that it has also reminded us that we have in fact many instruments, from “exotic” monetary policy to fiscal instruments, to regulatory instruments. • It will take some time, and substantial research, to decide which instruments to allocate to which targets, between monetary, fiscal, and financial policies. • What follows are explorations; ⑴ the natural rate hypothesis; ⑵ Stable inflation as one of the major goals of monetary policy; ⑶ fiscal sustainability of the essence not only for the long term, but also in affecting expectations in the short term Should the Inflation Target Be Raised? • When the inflation rate becomes very low, policymakers should err on the side of a more lax monetary policy, so as to minimize the likelihood of deflation, even if this means incurring the risk of higher inflation in the event of an unexpectedly strong pickup in demand. • This issue, which was on the mind of the Fed in the early 2000s, is one we must return to. Combining Monetary and Regulatory Policy • Part of the debate about monetary policy, even before the crisis, was whether the interest rate rule should be extended to deal with asset prices. (“bubble fighter debate”) The crisis has added a number of candidates to the list, from leverage to current account positions to measures of systemic risk. • The policy rate is a poor tool to deal with excess leverage, excessive risk taking, or apparent deviations of asset prices from fundamentals. Even if a higher policy rate reduces some excessively high asset price, it is likely to do so at the cost of a larger output gap. • Were there no other instrument, the central bank would indeed face a difficult task. cyclical regulatory tools • Use the policy rate primarily in response to aggregate activity and inflation, and to use the following specific instruments; • if leverage appears excessive, regulatory capital ratios can be increased; • if liquidity appears too low, regulatory liquidity ratios can be introduced and, if needed, increased; • to dampen housing prices, loan-to-value ratios can be decreased; • to limit stock price increases, margin requirements can be increased. The potential conundrum created by the effect of low interest rates on risk taking • If it is indeed the case that low interest rates lead to excessive leverage or to excessive risk taking, should the central bank keep the policy rate higher than is implied by a standard interest rule? • The central bank would face a difficult choice, having to accept a positive output gap in exchange for lower risk taking. Combining monetary and regulatory tools -Coordination between both and the role of the CB- • Measures reflecting systemwide cyclical conditions will have to complement the traditional institution-level rules and supervision. • Find the right trade-off between a sophisticated system, finetuned to each marginal change in systemic risk, and an approach based on simple-to-communicate triggers and easy-to-implement rules. • It raises the issue of how coordination is achieved between the monetary and the regulatory authorities, or whether the central bank should be in charge of both. • The increasing trend toward separation of the two may well have to be reversed. Central banks are an obvious candidate as macroprudential regulators. • The potential implications of monetary policy decisions for leverage and risk taking also favor the centralization of macroprudential responsibilities within the central bank. Two arguments against giving such power to the central bank • The first was that the central bank would take a “softer” stance against inflation, since interest rate hikes may have a detrimental effect on bank balance sheets. • The second was that the central bank would have a more complex mandate, and thus be less easily accountable. • Both arguments have merit and, at a minimum, imply a need for further transparency if the central bank is given responsibility for regulation. The alternative, that is, separate monetary and regulatory authorities, seems worse. Inflation Targeting and Foreign Exchange Intervention • In large advanced economies, the central banks that adopted inflation targeting typically argued that they cared about the exchange rate only to the extent that it had an impact on their primary objective, inflation. • For smaller countries, however, the evidence suggests that, in fact, many of them paid close attention to the exchange rate and also intervened on foreign exchange markets to smooth volatility and, often, even to influence the level of the exchange rate. Large fluctuations in exchange rates, due to sharp shifts in capital flows (as we saw during this crisis) can create large disruptions in activity. Central banks in small open economies • Central banks in small open economies should openly recognize that exchange rate stability is part of their objective function. • This does not imply that inflation targeting should be abandoned. • Indeed, at least in the short term, imperfect capital mobility endows central banks with a second instrument in the form of reserve accumulation and sterilized intervention. Limits to sterilized intervention • Limits to sterilized intervention can be easily reached if capital account pressures are large and prolonged. • These limits will depend on countries’ openness and financial integration. • When these limits are reached and the burden falls solely on the policy rate, strict inflation targeting is not optimal, and the consequences of adverse exchange rate movements have to be taken into account. Providing Liquidity More Broadly • The crisis has forced central banks to extend the scope and scale of their traditional role as lenders of last resort. • They extended their liquidity support to non-deposit-taking institutions and intervened directly (with purchases) or indirectly (through acceptance of the assets as collateral) in a broad range of asset markets. • The question is whether these policies should be kept in tranquil times. Two arguments against public liquidity provision • The first is that the departure of private investors may reflect solvency concerns. Thus, the provision of liquidity carries risk for the government balance sheet and creates the probability of bailout with obvious consequences for risk taking. • The second is that such liquidity provision will induce more maturity transformation and less-liquid portfolios. Moral hazard and Costs • The cost may be positive, reflecting the need for higher taxation or foreign borrowing. • Both problems can be partly addressed through the use of insurance fees and haircuts. • The problems can also be addressed through regulation, by both drawing up a list of assets eligible as collateral (in this respect, the ECB was ahead of the Fed in having a longer list of eligible collateral) and, for financial institutions, by linking access to liquidity to coming under the regulatory and supervision umbrella. Creating More Fiscal Space in Good Times • A key lesson from the crisis is the desirability of fiscal space to run larger fiscal deficits when needed. • There is an analogy here between the need for more fiscal space and the need for more nominal interest rate room. • Had governments had more room to cut interest rates and to adopt a more expansionary fiscal stance, they would have been better able to fight the crisis. • The required degree of fiscal adjustment (after the recovery is securely under way) will be formidable, in light of the need to reduce debt against the background of agingrelated challenges in pensions and health care. • The lesson from the crisis is clearly that target debt levels should be lower than those observed before the crisis. Designing Better Automatic Fiscal Stabilizers • One must distinguish between truly automatic stabilizers—that is, those that by their very nature imply a procyclical decrease in transfers or increase in tax revenues—and rules that allow some transfers or taxes to vary based on prespecified triggers tied to the state of the economic cycle. The inflation solution? -Economist, March 11th 2010- • An obstacle to investment and a tax on the thrifty. • Inflation is now touted as a solution to the rich world’s economic troubles. • If central banks had a higher target for inflation, that would allow for bigger cuts in real interest rates in a recession. • Faster inflation makes it easier to restore costcompetitiveness in depressed industries and regions. • And it would help reduce the private and public debt burdens that weigh on the rich world’s economies. The orthodoxy on inflation is certainly shifting • Empirical research is far clearer about the harmful effects on output once inflation is in double digits. So a 4 % inflation target might be better than a goal of 2 % as it would allow for monetary policy to respond more aggressively to economic “shocks”. • The higher rates required in normal times would create the space for bigger cuts during slumps. • Wages should ideally be tied to productivity, but workers are usually reluctant to suffer the pay cuts that are sometimes required to maintain that link. A higher inflation rate can make it easier for relative wages to adjust. A cut in real wages is easier to disguise with inflation of 3- 4 % than a rate of 12% . The anxiety about indebtedness • A burst of inflation would speed up this process by eroding the real value of mortgages. • Inflation would work the same magic on government debt. It could also give a fillip to revenues. Obstacle 1 : government-debt burden - hard to achieve its goals and the benefits not quite obvious - • With regard to government-debt burden, almost all of this inflation tax was borne by those who held bonds with a maturity of five years or more. • According to Bloomberg, the weighted average maturity of all American public debt is now around five years, while the average maturity of federal debt was more than seven years in the 19 4 0s. • Governments also have an incentive to keep inflation (and thus bond yields) low as long as they are issuing fresh bonds to cover their huge budget deficits. Obstacle 2 : Gov’ts have promised price stability. • A central bank could not credibly commit itself to a 4 % inflation target having broken a pledge to keep inflation close to 2 % . Bond investors would demand an interest-rate premium for bearing the risks of a future increase in the target, as well as an extra reward for enduring more variable returns (higher inflation tends to be more volatile). • Moreover, many social-security and health-care entitlements are indexed to prices, as is a chunk of public debt, so higher inflation would drive up public spending. Obstacle 3 : private sector’s mixed blessing • U sing inflation to transfer wealth from savers to debtors may help boost spending. But there are limits to how much you can do this in a country such as Britain, where both saving and mortgages are linked to short-term interest rates. • Nor would it be politically popular: savers tend to be older and the old vote more often.