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2023 | Buch

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Monetary Policy in Interdependent Economies

The Task Ahead

verfasst von: Ioanna T. Kokores

Verlag: Springer Nature Switzerland

Buchreihe : Financial and Monetary Policy Studies

Enthalten in: Springer Professional "Wirtschaft+Technik" , Springer Professional "Wirtschaft"

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Über dieses Buch

This book explores the challenges faced by central banks in the aftermath of the global financial crisis and the events that followed. It further emphasises the asymmetries in the transmission of monetary policy in the Eurozone economies and among major advanced economies. The book also highlights the advances in the monetary policy debate towards an efficient resource allocation.

The author argues that the canonical model of macroeconomic stabilization, which assigns the main burden of stabilization to monetary policy, is outdated primarily because of the absence of financial frictions. Further, she highlights the urgency of pushing risky activities outside the perimeters of regulation in face of rapidly evolving financial markets. The book provides an analytical framework in the context of intense globalisation and increased interdependence across economies, irrespective of the recent re-examining of supply-chains and trade relationships, as well as a policy framework thoroughly amended after the global financial crisis and the crises that followed it.

Presenting policy proposals, the book discusses how policymakers must try to develop a set of policies that the public will have confidence in and take into account in forming expectations about future inflation and spending. It will be useful to central banking practitioners, monetary and fiscal policymakers, as well as students and scholars in economics and, in particular, financial economics.

Inhaltsverzeichnis

Frontmatter

Chapter 1. Introduction

Abstract

Economies worldwide face an environment of recently heightened uncertainty due to noneconomic factors, as the COVID-19 pandemic and the war in Ukraine. In response to the COVID-19 pandemic, policymakers quickly activated a broad range of monetary and fiscal instruments to provide exceptional support to counter the deep impact on output and incomes, even though policy instruments were already stretched uncomfortably close to their limits leading, eventually, to a noticeable rise in inflation, which remains, nevertheless, a monetary phenomenon. In their quest to fight inflation effectively, policymakers need to eliminate, whenever possible, surprises in both monetary and fiscal policies. This book provides an analytical framework in the context of intense globalization and increased interdependence across economies (irrespective of the recent re-examining of supply chains and trade relationships), as well as a policy framework thoroughly amended after the global financial crisis and the crises that followed it. The book presents policy proposals useful to central banking practitioners, monetary and fiscal policymakers, as well as academic researchers of how policymakers must strive to build a set of policies that the public has faith in and will take into account when forming expectations of future inflation and spending.

Ioanna T. Kokores

Does the Science of Monetary Policy Need to be Altered?

Frontmatter

Chapter 2. New Challenges on the Science of Monetary Policy

Abstract

The chapter assesses what policymakers and academic economists have learned about monetary policy strategy and argues on whether we should change our thinking in this regard since the global financial crisis (GFC), starting with a discussion of where the science of monetary policy stood during the Great Moderation. All major central banks continue to implement monetary policy frameworks which emphasize price stability, accepting that there is unlikely a trade-off between the level of real economic activity and the rate of inflation. Academic monetary policy research highlights frameworks that apply a higher weight on the evolution of the price level over the medium term, which seem to cater (at least in theory) more robust explanations on how to increase the effectiveness of the monetary policy transmission in view of the GFC and the subsequent crisis episodes resulting in the recent increase in inflation. Furthermore, in view of the lessons learned after the Great Moderation years, the so-called “leaning-against-the-wind” monetary policy has gained wide acceptance, and the quest for the appropriate level and operational framework of such policy is reflected in pertinent research among academics and central banking practitioners, as well as in the actual conduct of monetary policy.

Ioanna T. Kokores

Chapter 3. New Lessons for Macroeconomics and Finance Theory

Abstract

This chapter argues that even though modern macroeconomic analysis unveiled its inability to effectively model the role of financial intermediaries as key factors in the workings of the monetary transmission mechanism since the advent of the GFC, our understanding of the transmission mechanism from monetary policy to financial stability remains limited to date. Alternative models of the broad “credit channel” emphasize the role of financial frictions that result from borrowers’ behavior to monetary policy effectiveness and efficiency, demonstrating the ways in which monetary policy influences the real economy (i.e., the monetary transmission mechanism). However, as the current understanding and experience justify, on balance, a case for “leaning against the wind” remains limited since under a substantial slack in the macroeconomy transmission from interest rates to financial risks remains weak, costs often appear greater than benefits, and implementation hurdles are substantial. According to current knowledge and the recent unforeseen resurgence of inflation, benefits of a well-conducted monetary policy may easily outweigh costs in certain circumstances, even if they are relatively unlikely. In this sense, these circumstances are likely to reflect a convergence of initial conditions relative to the conjunctural cycle and structural factors that are particular to each country.

Ioanna T. Kokores

Chapter 4. In Search for a New Monetary Policy Framework

Abstract

This chapter argues on a major rethinking of the basic framework for monetary policy following the recognition that the financial sector plays an important role in the macroeconomy and that it can be highly nonlinear at times. A stronger case currently holds for central banks considering a risk management framework. As commercial banking system has ceased to be reserve-constrained, monetary authority actions to change the size of the central bank balance sheet do not affect the nation’s money supply. One thing central banks can control is the size of their balance sheets, but unlike other portfolio managers, they acquire additional financial assets by creating liabilities (by creating money) and not by selling other assets. This transformation is vital in modern financial markets, which use “riskless” government debt as collateral for many types of transactions. Commercial bank deposit liabilities are now a function of the supply of earning assets—both domestic and foreign—offered to commercial banks. Ballooning central bank balance sheets may fuel extreme rates of inflation without further debt monetization. The institutional relationship between the central bank and the Treasury remains crucial in determining the success of balance sheet policies, also not undermining the central bank’s independence.

Ioanna T. Kokores

Challenges for Monetary Policy in Interdependent Economies: Lessons from the Eurozone Crisis

Frontmatter

Chapter 5. Monetary Policy Crisis in the Eurozone

Abstract

This chapter provides a critical analysis on the monetary considerations in interdependent economies, with reference to the European sovereign debt crisis. The euro area witnessed a varied economic landscape encompassing two severe financial crises and a severe adverse economic shock due to the COVID-19 pandemic, facing economic stagnation, that rendered obvious the shortcomings of the initial monetary union. Policy responses included a fiscal backstop, an expansion on the ECB balance sheet, an imperfect bank union and a progressing integration of capital markets, and a notable contribution of the government sector to raising uncertainty (regarding the buildup of fiscal imbalances and sovereign risk locally). The complexity of the interactions across sectors and policy agents in the euro area poses many challenges for the economic analysis, particularly in relation to the use of models that exclude distinct feedback channels. The founding treaty of the euro area neglected financial stability concerns; where absent a mechanism to address continuous and large trade surpluses in some countries and concurrent large and continuous deficits in others. The euro area political and monetary authorities should communicate their support over the new roadmap since capital flight out of distressed countries will accelerate, without it destabilizing the related economies.

Ioanna T. Kokores

Chapter 6. A Critical Assessment of the Euro Project in Retrospect

Abstract

This chapter provides a critical assessment of the euro project in retrospect claiming that the distinct long-term effects on Eurozone member countries’ growth and fiscal stability stemming from the recent crises have been accentuated by the inherent weaknesses in the Eurozone financial system, the apparent inadequacy of the policy tools, and the regulatory environment in place, in addition to the overall incomplete Eurozone institutional architecture. In an effort to stabilize the economy, fiscal stimuli were exercised to support the banking sector. These led to a significant accumulation of public debt, which, in addition to the overarching uncertainty of market participants about the resilience of the Eurozone institutional architecture, created huge pressure on both sovereign yields and credit ratings feeding the adverse effects back to the banking sector and the economy overall. Due to the unfortunate timing of the pandemic shock (after the concomitant effects of the preceding crises), the COVID-19 crisis risks to eventually widen economic divergencies in the EU. While the euro may have contributed to some efficiency gains, it seems to have done little to facilitate intra-euro area trade, and the process of greater financial integration proved to be a destabilizing factor rather than a force for sustainable growth.

Ioanna T. Kokores

The Task Ahead: Monetary Policy in Uncharted Waters

Frontmatter

Chapter 7. Monetary Theory and Policy: The Implications of Radical Uncertainty

Abstract

This chapter argues on the limited explanatory and forecasting ability of current monetary policy models and methods in view of radical uncertainty, with special reference to antecedent experience over the past century. Central banks realize that the large-scale asset purchases have uncomfortable fiscal and distributional consequences, in addition to the lack of clarity on the definition of price stability and the concerns about the legitimacy of large balance sheet expansions, which also foster inflationary consequences. The belief in a stable flat Phillips curve—tied to the policymakers’ belief in their own credibility of commitment to control inflation—helps explain why monetary policymakers failed to anticipate the current surge in inflation (even leaving aside the unforecastable war in Ukraine). As COVID-19 was not an ordinary business cycle downturn, it is certainly possible to debate the transmission mechanism between an increase in broad money and its impact on the resurgence of inflation. The assessment of economic slack given the recovery’s uncharted nature prolongs a considerable level of uncertainty. Prolonged supply disruptions, commodity and housing price shocks, longer-term expenditure commitments, and a de-anchoring of inflation expectations could lead to significantly higher inflation than predicted in the baseline.

Ioanna T. Kokores

Chapter 8. Monetary Policy in Interdependent Economies: The Task Ahead

Abstract

This chapter highlights on the challenges posed to central bank independence by the necessary unconventional measures undertaken and the new horizons open to central banks. Central bank independence is not incontestable, with its boundaries at times remaining blurred. It is vital to understand the practical problems and challenges so as to identify the proper boundaries of central bank independence and promote policies that best contribute to society’s welfare. A central bank regime to address a variety of contingencies cannot be designed absent a good fiscal constitution. Central bankers need to resist pressures to encroach too far into fiscal territory, which is bound to become evident during the emergence of the next recession arrives. The basic concern of the central bank in deciding on an appropriate stance for monetary policy is to do what it can to assure financial conditions conducive to high employment and low inflation in the months and years ahead. Even though increased uncertainties about the accuracy and stability of macroeconometric models give credit to a less active policy, agreement is absent about the best way to carry out policymaking responsibilities.

Ioanna T. Kokores

Chapter 9. Looking to the Future: Monetary Policy in Uncharted Waters

Abstract

By providing vast monetary easing at the advent of the COVID-19 pandemic, central banks cushioned the blow to the economy, and by facilitating the financing of an essential fiscal expansion, they prevented a financial market meltdown. Under normal times, unprecedented money printing of such extent would be alarming as the power of central bank balance sheets, when misused, can immensely destabilize the economy. However, the recovery has been sluggish. This conclusion focuses on the recent crises, namely, the global financial crisis, the Eurozone sovereign debt crisis, the pandemic crisis, and the energy crisis triggered by the war in Ukraine. Considerable uncertainty remains, particularly relating to the assessment of economic slack. A key element of central banks’ policy frameworks is the Phillips curve relationship describing a trade-off between low slack and high inflation, and alternative approaches to understanding the inflation process may consider monetary aggregates as potential predictors of inflation. To avoid an economic slowdown beyond what is needed to bring inflation under control, central banks should coordinate. Amid an environment of monetary policy conduct in uncharted waters where uncertainties have significantly heightened, policymakers in their quest to fight inflation effectively need to eliminate, whenever possible, surprises in both monetary and fiscal policies.

Ioanna T. Kokores

Titel: Monetary Policy in Interdependent Economies
verfasst von: Ioanna T. Kokores
Verlag: Springer Nature Switzerland
Electronic ISBN: 978-3-031-41958-4
Print ISBN: 978-3-031-41957-7
DOI: https://doi.org/10.1007/978-3-031-41958-4