Transcript Slide 1

Credit in monetary and (macro-)
prudential policy
by Claudio Borio
Comments by Stefan Gerlach
University of Frankfurt
• Yet another paper on the nexus between credit,
monetary policy and financial stability.
– Earlier work has been widely cited and influential in
policy community.
• Much to agree with …
– In particular, credit plays a crucial role in asset price
booms and busts, and in episodes of financial
instability.
• … but also a some things to disagree with.
© Stefan Gerlach
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1. Information content of credit
• Contradiction:
– Presentation emphasizes (on p. 8) that credit-to-GDP
& asset price “gaps” contain information about future
output, inflation and the likelihood of financial
distress (p. 8).
– But it also states (on p. 11) that “information content is
highly non-linear and episodic” and that “linear
correlations do not help.”
© Stefan Gerlach
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RMSFE for inflation (1-20 quarters ahead)
• 18 OECD countries; 1986-2008; 7 models; credit, equity & property
price gaps; benchmark include short rate, inflation, output gap.
• Using credit and asset price gaps leads to worse forecasts.
Assenmacher-Wesche & Gerlach, Economic Policy, 2010.
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• Overall, information claim appears exaggerated :
– C & AP gaps largely uninformative about inflation
and output.
– Does not improve as longer horizons are considered.
• Policy conclusions:
1. Imprudent to rely on indicators whose information
content is “episodic” and hard to establish.
2. The notion that “extending the horizon” raises the
usefulness of C & AP as indicators seems incorrect.
© Stefan Gerlach
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2. MaP and Monetary Policy
• Paper’s policy conclusions:
– “Imprudent to believe that MaP policy is enough … [and
CBs should] .. . tighten even if near-term inflation appears
under control.”
• Reinhart and Rogoff (2009):
– “A single minded focus on inflation can be justified only in
an environment in which other regulators are able to
ensure that leverage … does not become excessive.”
(p. 291, my underlining)
© Stefan Gerlach
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• Focus on improving other (MaP) policies:
– Spectacular failure:
• SIVs; Northern Rock; subprime mortgage originators; …
– Much more focused than monetary policy.
– Many tools (but not always under CB’s control, and a
clear legal mandate is needed):
• Reserve requirements; risk weights; loan-to-value ratios; …
• Responding with interest rates to credit and
asset prices will amplify business cycles.
© Stefan Gerlach
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• Several estimates in literature:
– Walentin and Sellin (2010) estimate that depressing
house prices by 10% would reduce real GDP by 6%.
– Assenmacher-Wesche and Gerlach (2010) estimate
that doing so would reduce real GDP by 4%.
– “Leaning against the wind” could be costly.
– Large changes in interest rates are needed.
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• Policy conclusions
1. Need to be imaginative & ambitious with MaP:s.
2. Leaning against the wind could be very costly.
© Stefan Gerlach
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