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Financial Plumbing and Monetary Policy
TL;DR: In this paper, the authors focus on how changes in financial plumbing of the markets may impact themonetary policy options as central banks contemplate lift off from zero lower bound (ZLB).
Abstract: This paper focuses on how changes in financial plumbing of the markets may impact themonetary policy options as central banks contemplate lift off from zero lower bound (ZLB). Under the proposed regulations, banks will face leverage ratio constraints. As a result of quantitative easing (QE), banks want balance sheet “space” for financial intermediation/ non-depository activities. At the same time, regulatory changes are boosting demand for high quality liquid assets. The paper also discusses the role of repo markets and the importance of collateral velocity and the need to avoid wedges between repo and monetary policy rates when leaving ZLB.
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TL;DR: The authors analyzed monetary policy with interest on reserves and a large balance sheet and found that monetary policy can peg the nominal rate, and determine expected inflation, though higher interest rates raise output and then inflation.
Abstract: I analyze monetary policy with interest on reserves and a large balance sheet. I show that conventional theories do not determine inflation in this regime, so I base the analysis on the fiscal theory of the price level. I find that monetary policy can peg the nominal rate, and determine expected inflation. With sticky prices, monetary policy can also affect real interest rates and output, though higher interest rates raise output and then inflation. The conventional sign requires a coordinated fiscal-monetary policy contraction. I show how conventional new-Keynesian models also imply strong monetary-fiscal policy coordination to obtain the usual signs. I address theoretical controversies. A concluding section places our current regime in a broader historical context, and opines on how optimal fiscal and monetary policy will evolve in the new regime.Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.
54 citations
TL;DR: In this article, the authors study the role of macro-prudential ideas in the failure of regulatory intervention in the shadow banking system, and point out the difficulties to generate evidence and the difficulty to generate it are major impediments for regulatory consensus.
Abstract: Post-crisis, macro-prudential ideas have challenged the epistemic authority of private risk management technologies, declaring them to be pro-cyclical contributors to systemic risk. This discursive challenge has been most critical of the shadow banking system, where private risk management instruments are central. This challenge, however, has not been translated into regulatory tools which reflect these convictions. This paper studies this process of discursive challenge to (failed) regulatory intervention for the case of the repo-market, the heart of the current shadow banking system. It traces regulatory efforts on the global and EU level from regulatory statements to (lack of) action, documenting both the persistent articulation of macro-prudential ideas challenging private risk-management systems and timid to no regulatory intervention. It links this hiatus to international coordination problems, the need for macro-prudential action to span regulatory communities, involving banking and financial market authorities and disagreements between micro- and macro-prudentially oriented regulators. The lack of evidence and the difficulty to generate it are identified as major impediments for regulatory consensus, further aggravated by ambiguities about the goals of anti-cyclical regulation. Beyond governance problems and the persistent appeal of private risk-management systems, the paper thus points to difficulties operationalizing macro-prudential ideas as a major explanatory factor.
15 citations
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TL;DR: The People's Bank of China-Federal Reserve Bank of New York Joint Symposium, Hangzhou, Zhejiang, China as discussed by the authors was the first forum for joint discussion of monetary policy.
Abstract: Remarks at the People’s Bank of China-Federal Reserve Bank of New York Joint Symposium, Hangzhou, Zhejiang, China.
3 citations