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We argue that changes in the monetary and financial regimes over the last twenty years or so have been subtly altering the dynamics of the economy and hence the challenges that monetary and prudential authorities face. In particul...
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We argue that changes in the monetary and financial regimes over the last twenty years or so have been subtly altering the dynamics of the economy and hence the challenges that monetary and prudential authorities face. In particular, the current environment may be more vulnerable to the occasional build up of financial imbalances, i.e. over-extensions in (private sector) balance sheets, which herald economic weakness and unwelcome disinflation down the road, as they unwind. As a result, achieving simultaneous monetary and financial stability in a lasting way may call for refinements to current monetary and prudential policy frameworks. These refinements would entail a firmer long-term focus, greater symmetry in policy responses between upswings and downswings, with greater attention to actions during upswings, and closer coordination between monetary and prudential authorities.
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It is well-known that if international linkages are relatively small, the potential gains to international monetary policy coordination are typically quite limited. But when goods and financial markets are tightly linked, is it pr...
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It is well-known that if international linkages are relatively small, the potential gains to international monetary policy coordination are typically quite limited. But when goods and financial markets are tightly linked, is it problematic if countries unilaterally design their monetary policy rules? Are the stabilization gains from having separate currencies largely squandered in the absence of effective international monetary coordination? We argue that under plausible assumptions the answer is no. Unless risk aversion is very high, lack of coordination in rule setting is a second-order problem compared with the overall gains from macroeconomic stabilization.
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Abstract The debate about the use of fiscal instruments for macroeconomic stabilization has regained prominence in the aftermath of the Great Recession, and its relevance has suddenly increased further, after the recent Covid-19 s...
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Abstract The debate about the use of fiscal instruments for macroeconomic stabilization has regained prominence in the aftermath of the Great Recession, and its relevance has suddenly increased further, after the recent Covid-19 shock. The analysis of fiscal stabilization in the United States, a monetary union equipped with a common fiscal capacity, has often informed the literature on the European EMU and could serve as a reference for its possible future reforms. This paper expands that literature in three ways: first, by measuring stabilization not only as inter-state risk-sharing of asymmetric shocks, but also as intertemporal stabilization of common shocks; second, by doing this for specific items in the US federal budget, both on the revenue and on the expenditure side; and third, by also measuring the impact of the federal system of unemployment benefits and of its extension as a response to the Great Recession. Corporate and personal income tax, on the revenue side, and social security benefits and federal grants, on the spending side, are the most effective items. The US federal system of unemployment insurance provides great stabilization in the event of a large shock, in particular when enhanced by the discretionary program of extended benefits. These findings imply that a proper design of the budget can maximize its stabilization effect, when it helps bridging the gap between higher mobility of capital and lower mobility of labor, by collecting revenues based on the income of the most mobile factor (corporate income tax) and providing support to the income of the least mobile factor (social security).
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We evaluate two main views on pursuing financial stability within a flexible inflation-targeting regime. It appears that potential gains from an activist or precautionary approach to promoting financial stability are highly shock ...
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We evaluate two main views on pursuing financial stability within a flexible inflation-targeting regime. It appears that potential gains from an activist or precautionary approach to promoting financial stability are highly shock dependent. We find support for the conventional view that concern for financial stability generally warrants a longer target horizon for inflation. The preferred target horizon depends on the financial stability indicator and the shock. An extension of the target horizon favoring financial stability may contribute to relatively higher variation in inflation and output.
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Research In 2020, all the world's economies faced a new, special phenomenon – the coronacrisis caused by the pandemic, and with the fall of most economic indicators. In the current conditions, it is extremely important to build a...
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Research In 2020, all the world's economies faced a new, special phenomenon – the coronacrisis caused by the pandemic, and with the fall of most economic indicators. In the current conditions, it is extremely important to build a competent monetary policy in order to soften the "blows" caused by the global recession for national economies.Purpose of the article: The main purpose of the presented article is the analysis of measures to stimulate the economy using monetary policy instruments in the conditions of the coronacrisis.
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I examine the stability of least-squares learning in a flexible-price endowment economy when there is an anticipated change in the inflation target. Monetary policy follows a Taylor rule and a change in the target is announced sev...
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I examine the stability of least-squares learning in a flexible-price endowment economy when there is an anticipated change in the inflation target. Monetary policy follows a Taylor rule and a change in the target is announced several periods in advance. I show that highly plausible parameter values may lead to short-run instability and that the conditions for the stability of learning are more demanding soon after the policy change is announced. Also, the farther in advance the change is announced the narrower is the range of policy parameters that generate stability. This is because with a long transition, any estimation error is projected farther into the future and its effects are therefore magnified. These results suggest that advance communication of a change in the inflation target may destabilise inflation in the short run; when the central bank changes its inflation target, a brief transition may be preferable.
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This paper investigates the determinants of monetary stability in Europe from the late medieval era until World War I. Through this period, the anchor for monetary policy was the silver or gold value of the monetary unit. States, ...
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This paper investigates the determinants of monetary stability in Europe from the late medieval era until World War I. Through this period, the anchor for monetary policy was the silver or gold value of the monetary unit. States, however, frequently abandoned this anchor, some depreciating their monetary units against silver and gold less than 10-fold and others more than 10,000-fold between 150 0 and 1914. To understand the determinants of these differences, we compile a new and comprehensive monetary history dataset for all major states in Europe and test alternative theories. We find strong evidence that political factors, and in particular, fiscal capacity, political regime and warfare explain patterns of monetary stability. This finding is robust to addressing endogeneity, controlling for the instability induced by the mechanics of the monetary system and accounting for the impacts of new monetary technologies and the advent of fiat standard. (c) 2019 Elsevier B.V. All rights reserved.
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Since the end of the Bretton Woods era, the world has operated on a de facto system of free-floating exchange rates, with the US dollar as the dominant international currency. The system, characterized by large pro-cyclical capita...
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Since the end of the Bretton Woods era, the world has operated on a de facto system of free-floating exchange rates, with the US dollar as the dominant international currency. The system, characterized by large pro-cyclical capital flows and chronic imbalances, is inherently unstable, and has contributed to repeated crises, recessions and geopolitical tensions. One potentially "least-difficult" line of reform would be to allow the evolution of a multi-currency system, underpinned by an expanded role for Special Drawing Rights (SDRs). Attempts to promote wider use of the SDR have foundered on the liquidity premium. However, for Chinese corporations and institutions, at present restricted in their capital account activities, the SDR liquidity premium would appear less daunting. The Chinese authorities could provide policy encouragement for the use of SDRs by their institutions. This initiative, supported by China's Special Administrative Region Hong Kong, would kick-start an international SDR ecosystem, and encourage even broader use of SDRs, to the benefit of international monetary stability.
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Depending on one's vision as to the inherent stability or instability of a market economy, credit either enhances stability or promotes instability. As such, credit either supports or retards social provisioning. Two representativ...
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Depending on one's vision as to the inherent stability or instability of a market economy, credit either enhances stability or promotes instability. As such, credit either supports or retards social provisioning. Two representative approaches to the role of credit are compared: a DSGE framework and a modern variation of classical political economy. The implications of vision for methodological features are traced. The paper discusses empirical patterns for the American experience since the mid-1970s with respect to their consistency with the visions. If a market economy is inherently unstable, economic and financial stability requires more than monetary policy.
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