Transcript 통화완화정책

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.