Showing papers by "Carl E. Walsh published in 2011"

Central Bank Independence Revisited

Abstract: The recent financial crisis has drawn attention to the interactions between monetary and fiscal policies and their potential implications for central bank independence. I focus on aspects of these interactions. First, is central bank independence meaningless with fiscal acquiescence? And does central bank independence threatens potential gains from monetary and fiscal policy coordination?

The Future of Inflation Targeting

Abstract: By the end of the Great Moderation, over two dozen central banks were formal inflation targeters, and others, such as the Federal Reserve, the European Central Bank and the Swiss National Bank, behaved essentially as inflation targeters even though they were resistant to identifying themselves as such. However, the past 3 years have seen central banks faced with new challenges, and these have raised questions about the future of inflation targeting as a framework for the conduct of monetary policy. I consider three suggested modifications to this policy framework: incorporating additional goals among a central bank's objectives; raising the average target for inflation; and switching to price level targeting.

Discussion of "Reserve Requirements for Price and Financial Stability: When Are They Effective?" ∗

Abstract: Since the onset of the 2008 financial crisis, many economists have studied the effects of unconventional monetary policies such as credit-easing policies or actions aimed at altering the maturity structure of the private sector’s asset holdings. But surprisingly, there has been relatively little work on one of the traditional policy tools of a central bank—required reserve ratios—and how required reserves might be used as a cyclical policy instrument. Christian Glocker and Peter Towbin fill this gap by employing a modern dynamic stochastic general equilibrium (DSGE) model of a small open economy to analyze the use of reserve requirements as a tool for cyclical stabilization. At one time, we all learned that central banks had three policy instruments—the quantity of non-borrowed reserves, the interest rate charged on discount window borrowing, and the required reserve ratio. The first two instruments operated by affecting the supply of bank reserves; the third worked by affecting the demand for reserves. Then, many central banks adopted a short-term interbank rate as their primary policy instrument. Doing so made the quantity of non-borrowed reserves an endogenous variable, adjusting to ensure reserve supply and demand were consistent with the policy interest rate. Under such a policy regime, the discount rate and reserve requirement became irrelevant. Of course, this wasn’t (and isn’t) true of developing economies. There, central banks continued to

Monetary–Fiscal Interactions: How to Improve Policy Outcomes?*

Abstract: It has long been recognised that the interaction between monetary and fiscal policy may be an important determinant of the outcomes of both policies. To provide some insights into how this interaction and macroeconomic outcomes can be improved, a symposium was held at the 2010 Australian Conference of Economists. This piece summarises the discussion, with the full papers by

Monetary Policy and Resource Mobility

Abstract: The imperfect nature of resource mobility plays a surprisingly small role in most policy models. In the standard benchmark new Keynesian model, for example, it is costly for …rms to adjust their selling prices, but these same …rms can costlessly hire and …re workers and both workers and capital can costlessly shift from one …rm to another. In this paper, I review some of the implications for monetary policy of imperfect resource mobility, distinguishing between its role in altering the transmission