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Symposium 2010

Reassessing Central Banking

The Challenge

The Great Recession of 2008–09 has cast doubt on the broad consensus among economists and policy-makers that inflation targeting by central banks leads to desirable macroeconomic outcomes. Indeed, many analysts suggest that the loose monetary policy stance of the US Federal Reserve was one of the main causes of the financial crisis and the economic downturn that followed.

Before the crisis, most central banks focused on low and stable consumer price inflation and used short-term interest rates as the main tool to implement their inflation target. Monetary aggregates and the supervision of other prices (such as asset prices) usually played a minor role in the conduct of monetary policy.

While most central banks had a role in monitoring risks to the financial system, they typically shared responsibilities for banking supervision with other government bodies. Will central banking be the same after the Great Recession? Should there be more than one pillar to central banks’ strategy—a focus on financial stability as well as price stability? And if they are to play a bigger role in monitoring systemic risk, what are the potential tensions between traditional monetary policy and banking supervision?

    Solutions

    Solution
    Symposium 2010

    Central banks should monitor financial stability using a variety of indicators.

    Central banks should monitor financial stability using a variety of indicators.

    Central banks should monitor financial stability using a variety of indicators.

    Polity, Academia
    Solution
    Symposium 2010

    Central banks need to use multiple tools to ensure price stability and financial stability. This may require them to be given responsibility for macro-prudential supervision.

    Central banks need to use multiple tools to ensure price stability and financial stability. This may require them to be given responsibility for macro-prudential supervision.

    Central banks need to use multiple tools to ensure price stability and financial stability. This may require them to be given responsibility for macro-prudential supervision.

    Polity, Academia
    Solution
    Symposium 2010

    Central banks should use unconventional monetary policy in a crisis but it must be conducted with great care.

    Central banks should use unconventional monetary policy in a crisis but it must be conducted with great care.

    Central banks should use unconventional monetary policy in a crisis but it must be conducted with great care.

    Polity
    Solution
    Symposium 2010

    In conducting monetary policy, central banks need to adopt a medium-term orientation and rely on a comprehensive set of information, including developments in money and credit.

    In conducting monetary policy, central banks need to adopt a medium-term orientation and rely on a comprehensive set of information, including developments in money and credit.

    In conducting monetary policy, central banks need to adopt a medium-term orientation and rely on a comprehensive set of information, including developments in money and credit.

    Polity
    Solution
    Symposium 2010

    Protect central bank independence.

    Protect central bank independence.

    Protect central bank independence.

    Polity

    Proposals

    Proposal
    Symposium 2010

    Reassessing central banking

    With their bold and decisive action in response to the financial crisis, central banks played a key role in sustaining financial intermediation, reducing systemic risks, and ultimately restoring finan ...

    With their bold and decisive action in response to the financial crisis, central banks played a key role in sustaining financial intermediation, reducing systemic risks, and ultimately restoring financial market stability. In addition to extraordinary policy rate cuts in response to receding inflationary pressures and risks in an environment in which the financial crisis had significantly weakened the outlook for economic activity, many central banks have taken a number of non-standard measures to support the functioning of financial markets and thereby the economy. Specifically, between October 2008 and May 2009, i.e. within a period of only seven months, the

    Polity
    Proposal
    Symposium 2010

    Reassessing Central Banking: The Central Bank and the Government

    At last year’s advisory board meeting, I argued that it would serve the GES best if panel members focused on their areas of expertise and did not venture into other areas that might be more timely o ...

    At last year’s advisory board meeting, I argued that it would serve the GES best if panel members focused on their areas of expertise and did not venture into other areas that might be more timely or popular. My research area is general microeconomics and personnel economics in particular - not monetary economics. My credentials for discussing central banking derive solely from my background as chief economic advisor to the President of the United States during the financial crisis. As such, I will focus my remarks on aspects of central bank behavior that interact with that of national governments, and

    Polity, Academia, Business, Civil Society
    Proposal
    Symposium 2010

    Reassessing Central Banking

    The recent financial and economic turbulence has led to a dramatic shift in conventional macroeconomic thinking, and central banking was not an exception. In fact central banks usually go over major t ...

    The recent financial and economic turbulence has led to a dramatic shift in conventional macroeconomic thinking, and central banking was not an exception. In fact central banks usually go over major transformation in the aftermath of each major crisis episodes. Think of the Great Depression that redefined the role of the Federal Reserve in the United States or the turmoil in the 1970s that put inflation fighting front and center. It is likely that the next era in central banking will be shaped by the discussions on the relation and conflicts of price stability and financial stability. The role

    Polity, Academia, Business, Civil Society
    Proposal
    Symposium 2010

    Reassessing Central Banking

    The central banks in small open economies should include the exchange rate in their objective function Central banks in small open economies should openly recognize that exchange rate stability is par ...

    The central banks in small open economies should include the exchange rate in their objective function Central banks in small open economies should openly recognize that exchange rate stability is part of their objective function. This does not imply that inflation targeting should be abandoned. Indeed, at least in the short term, imperfect capital mobility endows central banks with a second instrument in the form of reserve accumulation and sterilized intervention. This tool can help control the external target while domestic objectives are left to the policy rate. Central Banks primary objective must remain the maintenance of price stability, it shall

    Polity, Academia, Business, Civil Society
    Proposal
    Symposium 2010

    Will Central Banking be the same after the "Great Recession" as it was before?

    Will Central Banking be the same after the "Great Recession" as it was before? Prior to the financial crisis, the main focus of most central banks’ was to achieve and maintain price stability. Howev ...

    Will Central Banking be the same after the "Great Recession" as it was before? Prior to the financial crisis, the main focus of most central banks’ was to achieve and maintain price stability. However, in advanced countries lower inflation and stable macro-economic environment proved inadequate to restore financial stability. Insufficient supervisory framework aggravated the build-up of the current financial crisis. In Turkey, the example I know best, the issue did not present itself this way. The Central Bank took a lead in restoring confidence to the market after the 2001 self-generated crisis. Banks were subject to tight regulation. The

    Polity, Academia, Business, Civil Society