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2023 | Book

Monetary Policy Normalization

One Hundred Years After Keynes' Tract on Monetary Reform


About this book

In light of the pickup of inflation at the end of 2021 and monetary policy shifts by the world's major central banks, this book examines interrelated issues in the normalization of monetary policy. It covers topics including the role of technological innovations such as derivatives and cryptocurrencies in monetary and financial management, the role of monetary policy in financial crises (especially public debt), and the major repricing needed for central banks and the global economy. In addition, the book discusses the problem of how flexible money should be and the importance of predictive tools for these decisions, with attention to the advances of languages for scientific research, including those on the workings of the economy. The work addresses the geopolitical and social challenges that have arisen as a result of the invasiveness of monetary policy in its various manifestations in the context of major leading currencies. It is aimed at scholars and students of monetary and financial economics.

Table of Contents

Purpose of the Initiative
This Preface explains the purpose of the collected essays on “normalization” of monetary policy after the unexpected rise of inflation. It shortly examines the problems related to the increasingly involving of money creation in guaranteeing financial stability, in the development of data science and Fintech, in the weakness of forecasts based on econometric models, in the irreconcilability of legal treatment of common and civil law regimes in front of interfungible operations on global markets, in the creation of the digital euro and ongoing changes in the geopolitical-economic utility function. All these factors require a re-examination of the interpretative models of how the markets for real and financial goods function, and empirical implementation which raise doubts about the possibility of a normalization of monetary policy, if we mean a return to the principle on which rests the independence of the monetary authorities, i.e., the stability of prices. The analysis starts from Keynes’ proposal in his 1924 book entitled A Tract on Monetary Reform that the authors consider the beginning of modern theory of money and want to celebrate the ongoing centenary.
Paolo Savona
Economics and Money. Political and Epistemological Perspectives of Connecting and Fault Lines: A Fil Rouge from Keynes to Digitization
To assess the theoretical and normative consequences of the digitization process in money, finance, and defense, a deeper understanding of the underlying methodological reference frameworks of statistics, probability, economics, and social sciences is needed. This paper addresses the problem by looking at the relationship between inductive and deductive approaches in research methodology and at the century-old distinction between measurable objective risk and uncertainty underlined by J. M. Keynes and F. Knight. Assessing the right theoretical framework will be paramount to choose an adequate normative approach in respect to the danger of contagion between the phygital domains, the crypto world, and the traditional financial system.
Rainer Stefano Masera
The Great Repricing: Central Banks and the World Economy
This paper analyses how a financial crisis, a decade of stagnation, a global pandemic, and now a land war in Europe, have undermined all three of Paul Volcker’s verities of a well-organised society: stable prices, sound finance and good government. The subsequent Great Repricing will not be a smooth process. For a better future to follow, the consensus that low interest rates are here to stay needs to be jettisoned in favour of an old truth. If too much money is chasing too few goods, the resulting inflation cannot be held back by central bank words alone. With sound policies, though, the Great Repricing can be the start of a return to a better allocation of resources and faster growth.
Mervyn King
Flexible Monetary Policy Rules from the Great Moderation to the New Normal Times (1993–2023): A Forward-Looking Review
The never-ending debate on the optimal money elasticity and predictability, coupled with the recent wishes of the major central banks to normalize monetary policy, motivate this analysis. Its aim is to offer a review of the evolution of the modern concept of flexible monetary policy rules, from the seminal contribution of (Taylor, Carnegie-Rochester Conference Series on Public Policy 39:195–214, 1993) to nowadays. Four subsequent steps are implemented: after an excursus on the traditional rules versus discretion debate, the origin of the flexible rules is described, and then its evolution; finally, the opportunity to consider as a research perspective the role of the central bankers’ heterogeneity—in terms of personal preferences, including the behavioural biases—is highlighted. The more it is likely that psychology matters, the more a new motivation arises for a central bank to adopt a flexible rule.
Donato Masciandaro
The Universal Language of Economics: où-logòs or éu-logòs?
The problem of the unification of the scientific language has always accompanied the evolution of scientific thought and practice. Linguae francae have evolved in time to allow intellectual exchange across linguistic, cultural, and political borders: Greek, Latin, French, and English. The question also if abstract geometrical forms or mathematics could represent a universal language, devoid of any cultural or historical contamination, has also occupied the mind of many epistemologists and scientists. In economics the question of a unified language, possibly pictorial, was brought in the foreground, in the Vienna swept by Machian relativism, by Otto Neurath. The crisis of traditional physics was also internalized, in the same circumstances, by John von Neumann, who would spearhead the adoption of machine language for operational research into economics. Von Neumann also transformed the economic man into an amateur econometrician who takes decisions based on intuitive probability betting. Modern markets, though, are not only the arena of these new stochastic men but also of artificial beings that were created to resemble these stochastic men. A new economics that allows for these profound changes and speaks the language of these new market actors is, nonetheless, still to come.
Monika Poettinger
Predictive Methods in Economics: The Link Between Econophysics and Artificial Intelligence
In this chapter I investigate the processes and the results of quantitative methods applied to finance, giving a broad overview of the most used techniques of Complex Systems and Artificial Intelligence. Econophysics introduced in the mathematical modelling of financial markets methods such as Chaos Theory, Quantum Mechanics or Statistical Mechanics, trying to represent the behaviour of systems with a huge number of particles, while identifying human traders with particles. These models are very useful to describe and predict financial markets, especially while embedded with algorithms from Machine Learning, overcoming traditional methods from Artificial Intelligence that fail on deeply mapping the historical series on their own. The creation of structures that are not perfect on the input data but have a good accuracy on blind data becomes more and more meaningful, using sophisticated techniques of Artificial Intelligence to avoid overfitting. The combination of Artificial Intelligence and Econophysics is the key to describe complex dynamics of economic and financial world, as revealed by quant funds, constantly over benchmark, but it is of primary importance to test these innovative approaches during times of crisis such as the 2008 great recession or the 2020 pandemic.
Antonio Simeone
The Adoption of Digital Euro: Problems and Perspectives
This paper analyses some aspects of the legal issues related to the digitization of the euro. The first section identifies whether in subiecta materia the application of European or national regulation prevails. In particular, the investigation focuses on assessing the limits of this project and its consequences on different national contexts, with particular attention to the Italian context. With reference to the jurisprudential orientation of the Italian and German constitutional courts, an initial conclusion is then reached regarding the appropriateness of basing the implementation of this project on a politico-legal link between European and national authorities. The second section focuses on the effects of the digital Euro, as an alternative to the types of support for sovereign currency experienced so far. With respect to such alternative, new benefits and risks could emerge. Hence, the analysis refers to the impact on the issuance and the circulation of digital Euro, as well as its effects on the credit intermediation. Indeed, it appears necessary for credit institutions to use the deposit multiplier mechanism even if the central bank sovereign currency has a digital support, as it allows the banks to spread their operating costs over a larger volume of credit than the one of direct deposits (as permitted by the current analogic banking procedures); this, with obvious positive effects on the functioning of the credit sector.
Francesco Capriglione, Valerio Lemma
The Karst Phenomena of Law in Action
The chapter explores the differences between civil law and common law systems, focussing on their impact on legal systems, financial structures and economic growth. The author discusses how civil law systems are based on rules and the idea of sovereign states, while common law systems prioritise individual rights and property protection. The chapter suggests that common law systems have been considered more efficient and adaptable to economic changes, leading to deeper financial markets. However, it also highlights that the efficiency of legal systems is subjective and depends on various factors. The chapter proposes further research to examine how civil law and common law systems react differently to monetary policies and their influence on output and prices. It also discusses a shift in Italy towards a legal system resembling common law, with an increasing reliance on case law, and the transfiguration of the Roman system. The chapter concludes by emphasising the value of precedent and the potential impact of this trend on the Italian legal system, referring to recent EU law judgements as an example.
Marco Rossi
Technological Innovations: A New Model of Geopolitical Digital Relations from Welfare to Warfare?
Four are the topics on which the chapter is built, outlined in a consequential pattern that helps to understand what evolution is likely expected for humanity from the current technological revolution. First, the social consequences of technological innovations. The Fourth Industrial Revolution and the resulting progressive replacement of human cognitive labor by Artificial Intelligence (AI) will have more significant economic and social implications than any previous industrial revolution, especially in economic geopolitics. The role of technological innovations in societies is regulated through the use (and abuse) of social media. Hence the second argument is the role of digital social media in today's democratic processes. Technological advances require mankind to equip itself with a culture of human-machine connection, even at the ethical level. The third point is the increased risk of autonomous insubordination of electronic machines to humans. Mental warfare integrates cybernetic, informational, psychological, and social engineering capabilities to achieve its ends. It exploits the Internet and social media to sow doubt, introduce conflicting narratives, polarize opinion, radicalize groups, and motivate them to acts that can disrupt or fragment an otherwise cohesive society. The human mind is the battleground. This introduces the fourth and final point on which the chapter dwells: the need for a “digital social contract.” Technology must be put at the service of humanity.
Fabio Vanorio
Concluding Remarks: Is It Possible to Return to a “Normalization” of Monetary Policy?
This chapter surveys how government policy decisions have influenced the evolution of the financial system that monetary policy seeks to influence, and how major economists have formulated theories to frame policy analysis. It concludes with some possible alternative scenarios for the design of the financial system and the policy appropriate to their influence.
Jan Kregel
Monetary Policy Normalization
Paolo Savona
Rainer Stefano Masera
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