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2. Automatic stabilizers in a low-rate environment
- Author:
- Olivier Blanchard and Lawrence H. Summers
- Publication Date:
- 02-2020
- Content Type:
- Policy Brief
- Institution:
- Peterson Institute for International Economics
- Abstract:
- With interest rates persistently low or even negative in advanced countries, policymakers have barely any room to ease monetary policy when the next recession hits. Fiscal policy will have to play a major and likely dominant role in stimulating the economy, requiring policymakers to fundamentally reconsider fiscal policy. Blanchard and Summers argue for the introduction of what they call “semiautomatic” stabilizers. Unlike purely automatic stabilizers (mechanisms built into government budgets that automatically—without discretionary government action or explicit triggers—increase spending or decrease taxes when the economy slows or enters a recession), semiautomatic stabilizers are targeted tax or spending measures that are triggered if, say, the output growth rate declines or the unemployment rate increases beyond a specified threshold. The authors argue that the trigger should be changes in unemployment rather than changes in output, and the design of semiautomatic stabilizers, whether they focus on mechanisms that rely primarily on income or on intertemporal substitution effects (changing the timing of consumption), depends crucially on the design of discretionary policy.
- Topic:
- Economics, Government, Monetary Policy, and Finance
- Political Geography:
- Global Focus and United States of America
3. A program for strengthening the Federal Reserve's ability to fight the next recession
- Author:
- David Reifschneider and David Wilcox
- Publication Date:
- 03-2020
- Content Type:
- Working Paper
- Institution:
- Peterson Institute for International Economics
- Abstract:
- If the Federal Reserve does not decisively change the way it conducts monetary policy, it will probably not be capable of fighting recessions in the future as effectively as it fought them in the past. This reality helped motivate the Fed to undertake the policy framework review in which it is currently engaged. Researchers have suggested many steps the Fed could take to improve its recession-fighting ability; however, no consensus has emerged as to which of these steps would be both practical and maximally effective. This paper aims to fill that gap. It recommends that the Fed commit as soon as possible to a new approach for fighting recessions, involving two key elements. First, the Fed should commit that whenever it runs out of room to cut the federal funds rate further, it will leave the rate at its minimum level until the labor market recovers and inflation returns to 2 percent. Second, the Fed should commit that under the same circumstances, it will begin to purchase longer-term assets in volume and will continue such purchases until the labor market recovers. If the forces driving the next recession are not unusually severe, this framework might allow the Fed to be as effective at fighting that recession as it was in the past. If the next recession is more severe, however, the Fed will probably run out of ammunition even if it takes the two steps recommended here. Therefore, both monetary and fiscal policymakers should consider yet other steps they could take to enhance their ability to fight future recessions.
- Topic:
- Economics, Monetary Policy, and Federal Reserve
- Political Geography:
- North America, Global Focus, and United States of America
4. The Fight Against Money Laundering and Terrorist Financing
- Author:
- Jeremy Lin
- Publication Date:
- 10-2019
- Content Type:
- Commentary and Analysis
- Institution:
- The Geneva Centre for Security Policy
- Abstract:
- The Financial Action Task Force (FATF) fulfills a critical role in international financial governance as the global standards-setter for antimoney laundering and combating the financing of terrorism (AML/CFT). Money laundering and terrorist-financing challenges are evolving, particularly as AML/CFT regimes in developed countries become more robust and illicit financial flows move deeper into primarily cash-based informal economies. Recent political maneuvering by FATF member states to influence the organization’s decisions and global AML/CFT standards-setting has demonstrated that the FATF and AML/CFT policymaking are vulnerable to individual state interests and that the organization’s political independence needs to be strengthened. To more effectively address the above challenges, the FATF should establish an independent oversight function, provide clearer guidance and technical support to countries with deficient AML/CFT regimes, and expand the diversity of its membership.
- Topic:
- Security, Terrorism, Monetary Policy, Governance, and Financial Crimes
- Political Geography:
- Global Focus
5. Should Monetary Policy Take Inequality and Climate Change into Account?
- Author:
- Patrick Honohan
- Publication Date:
- 10-2019
- Content Type:
- Working Paper
- Institution:
- Peterson Institute for International Economics
- Abstract:
- Should central banks take more account of ethical issues, notably the impact of monetary policy actions on the distribution of income and wealth and on efforts to combat climate change, in the design and implementation of the wider monetary policy toolkit they have been using in the past decade? Although the scope to influence a range of objectives is more limited than is often supposed, and while it is vital to not derail monetary policy from its core purposes, central bank mandates justify paying more attention to such broad issues, especially if policy choices have a significant potential impact. Carefully managed steps in this direction could actually strengthen central bank independence while making some contribution to improving the effectiveness of public policy on these issues.
- Topic:
- Climate Change, Economics, Monetary Policy, Inequality, and Central Bank
- Political Geography:
- North America, Global Focus, and United States of America
6. Average Inflation Targeting Would Be a Weak Tool for the Fed to Deal with Recession and Chronic Low Inflation
- Author:
- David Reifschneider and David Wilcox
- Publication Date:
- 11-2019
- Content Type:
- Policy Brief
- Institution:
- Peterson Institute for International Economics
- Abstract:
- The Federal Reserve faces two important monetary policy challenges: First, since the Great Recession it has struggled to move inflation convincingly up to the 2 percent target level. Second, during the next recession it will struggle to deliver enough support to the economy unless the recession is unusually mild. As a result, the search is on for alternative policy frameworks that might allow the Fed to achieve its monetary policy objectives more effectively. Among the alternatives is average inflation targeting (AIT). The basic idea is simple: Instead of aiming to return inflation over the medium term to the target rate of 2 percent, the Fed would aim to return the average of inflation over some period to the target rate. The crucial innovation of AIT is that when inflation has been running below the target rate, it would have the Fed aim for above-target inflation in the future, in order to bring average inflation up toward the target. Simulations of the Fed’s workhorse econometric model of the US economy (the FRB/US model) suggest that AIT would be a weak addition to the Fed’s policy toolkit for dealing with recessions and persistently low inflation. In addition, simple versions of AIT would sometimes compel the Fed to run an undesirably restrictive monetary policy. AIT is thus not a very appealing alternative to the current framework.
- Topic:
- Economics, Global Recession, Monetary Policy, and Federal Reserve
- Political Geography:
- North America, Global Focus, and United States of America
7. Economic recovery and inflation
- Author:
- Marek Dabrowski
- Publication Date:
- 04-2018
- Content Type:
- Special Report
- Institution:
- Center for Social and Economic Research - CASE
- Abstract:
- In the last decade, advanced economies, including the euro area, experienced deflationary pressures caused by the global financial crisis of 2007-2009 and the anti-crisis policies that followed—in particular, the new financial regulations (which led to a deep decline in the money multiplier). However, there are numerous signs in both the real and financial spheres that these pressures are disappearing. The largest advanced economies are growing up to their potential, unemployment is systematically decreasing, the financial sector is more eager to lend, and its clients—to borrow. Rapidly growing asset prices signal the possibility of similar developments in other segments of the economy. In this new macroeconomic environment, central banks should cease unconventional monetary policies and prepare themselves to head off potential inflationary pressures.
- Topic:
- Economics, Monetary Policy, Economic growth, Inflation, Macroeconomics, and Unemployment
- Political Geography:
- Europe, Global Focus, and European Union
8. Some Thoughts on International Monetary Policy Coordination
- Author:
- Charles I. Plosser
- Publication Date:
- 06-2018
- Content Type:
- Journal Article
- Journal:
- The Cato Journal
- Institution:
- The Cato Institute
- Abstract:
- It is a pleasure to be back here at Cato and to be invited to speak once again at this annual conference. This is one of the premier ongoing monetary policy conferences, and the participants, both at the podium and in the audience, attest to its prominence. This is a session on international monetary arrangements, and there has already been an interesting discussion. I find myself in substantial agreement with the comments of John Taylor, so I do not wish to repeat his points. What I will try to do is put the rules-based approach to international monetary policy coordination in a context that I hope will help us understand some of the past failures so we might avoid them in the future. In many ways, I will simply be reminding us of some principles we all have known for some time, yet which we seem to forget all too frequently.
- Topic:
- International Cooperation, Monetary Policy, and Banks
- Political Geography:
- Global Focus
9. The Case for a New International Monetary System
- Author:
- Judy Shelton
- Publication Date:
- 06-2018
- Content Type:
- Journal Article
- Journal:
- The Cato Journal
- Institution:
- The Cato Institute
- Abstract:
- How often do we hear references to the notion that we live in a rules-based global trading system? Addressing the World Economic Forum at Davos in January 2017, British Prime Minister Theresa May praised liberalism, free trade, and globalization as “the forces that underpin the rules-based international system that is key to our global prosperity and security” (Martin 2017). Chinese President Xi Jinping likewise extolled the virtues of a rules-based economic order at Davos, winning widespread praise for defending free trade and globalization (Fidler, Chen, and Wei 2017). But could someone please explain: What exactly are those rules? Because if we are going to invoke the sentimentality of Bretton Woods by suggesting that the world has remained true to its precepts, we are ignoring geopolitical reality. Moreover, we are denying the warped economic consequences of global trade conducted in the absence of orderly currency arrangements. We have not had a rules-based international monetary system since President Nixon ended the Bretton Woods agreement in August 1971. Today there are compelling reasons—political, economic, and strategic—for President Trump to initiate the establishment of a new international monetary system.
- Topic:
- Economics, International Cooperation, and Monetary Policy
- Political Geography:
- Global Focus
10. Toward a Rules‐Based International Monetary System
- Author:
- John B. Taylor
- Publication Date:
- 06-2018
- Content Type:
- Journal Article
- Journal:
- The Cato Journal
- Institution:
- The Cato Institute
- Abstract:
- Over the past few years I have been making the case for moving toward a more rules-based international monetary system (e.g., Taylor 2013, 2014, 2015, 2016a, 2016b, 2017). In fact, I made the case over 30 years ago in Taylor (1985), and the ideas go back over 30 years before that to Milton Friedman (1953). However, the case for such a system is now much stronger because the monetary system drifted away from a rules-based approach in the past dozen years and, as Paul Volcker (2014) reminds us, the absence of a rulesbased monetary system “has not been a great success.” To bring recent experience to bear on the case, we must recognize that central banks have been using two separate monetary policy instruments in recent years: the policy interest rate and the size of the balance sheet, in which reserve balances play a key role. Any international monetary modeling framework used to assess or to make recommendations about international monetary policy must include both instruments in each country, the policy for changing the instruments, and the effect of these changes on exchange rates. Using such a framework, I show that both policy instruments have deviated from rules-based policy in recent years. I then draw the policy implications for the international monetary system and suggest a way forward to implement the policy.
- Topic:
- International Cooperation, International Trade and Finance, Monetary Policy, and Central Bank
- Political Geography:
- Global Focus
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