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Begin New Search Topic Monetary Policy Publication Year within 1 Year

1. Lessons for the European Central Bank from the 2021–23 Inflationary Episode

Author:
Pablo Hernández de Cos
Publication Date:
05-2025
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics (PIIE)
Abstract:
Since mid-2021, the euro area economy has gone through several shocks, leading to the highest inflation since the creation of the European Monetary Union. A forceful and persistent response from the European Central Bank, grounded in the monetary policy framework it agreed in 2021 ahead of the inflationary episode, has succeeded in bringing inflation down and delivering on the central bank’s price stability mandate. The framework will be reviewed in 2025, and it might conclude that there is no need for a drastic change. Nevertheless, this assessment should be compatible with identifying some areas for improvement. In particular, the 2021 review was primarily focused on the effective lower bound. The recent inflationary episode, together with high ongoing uncertainty, indicate that the articulation of monetary policy strategy frameworks should be robust to very different scenarios. Likely persistence of high levels of uncertainty over the next few years will also require an emphasis on flexibility to adapt to the magnitude, origin, and persistence of shocks. Unconditional forward guidance should be avoided. In addition, there might be a need to more clearly distinguish in the future, when possible, between quantitative easing for market functioning versus monetary stimulus, which could incentivize a careful assessment of the amount, duration, and structure of any asset purchase program. Communication also needs to be improved in relation to the level of uncertainty and its consequences for monetary policymaking with, for instance, greater use of scenarios and sensitivity analyses as appropriate. Improving forecasting/modeling tools, in particular when dealing with large supply shocks, and understanding the roles of different measures of inflation expectations should also be priorities.
Topic:
Monetary Policy, Inflation, and European Central Bank
Political Geography:
Europe

2. Lessons for the European Central Bank from the 2021-2023 inflationary episode

Author:
Pablo Hernández de Cos
Publication Date:
05-2025
Content Type:
Working Paper
Institution:
Bruegel
Abstract:
Since mid-2021, the euro-area economy has gone through several shocks, leading to the highest inflation since the creation of the European Monetary Union. A forceful and persistent response from the European Central Bank, grounded in the monetary policy framework it agreed in 2021 ahead of the inflationary episode, has succeeded in bringing inflation down and delivering on the central bank’s price-stability mandate. The framework will be reviewed in 2025 and it might conclude that there is no need for a drastic change. Nevertheless, this assessment should be compatible with identifying some areas for improvement. In particular, the 2021 review was primarily focused on the effective lower bound. The recent inflationary episode, together with high ongoing uncertainty, indicate that the articulation of monetary policy strategy frameworks should be robust to very different scenarios. Likely persistence of high levels of uncertainty over the next few years will also require an emphasis on flexibility to adapt to the magnitude, origin and persistence of shocks. Unconditional forward guidance should be avoided. In addition, there might be a need to more clearly distinguish in the future, when possible, between quantitative easing for market functioning versus monetary stimulus, which could incentivise a careful assessment of the amount, duration and structure of any asset purchase programme. Communication also needs to be improved in relation to the level of uncertainty and its consequences for monetary policy making with, for instance, greater use of scenarios and sensitivity analyses as appropriate. Improving forecasting/modelling tools, in particular when dealing with large supply shocks, and understanding the roles of different measures of inflation expectations should also be priorities.
Topic:
Monetary Policy, Governance, European Union, Central Bank, and Macroeconomics
Political Geography:
Europe

3. The inflation surge in Europe

Author:
Patrick Honohan
Publication Date:
05-2024
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics (PIIE)
Abstract:
For most of the decade before the COVID-19 pandemic, undershooting rather than overshooting had been the main inflation problem of the European Central Bank (ECB). During 2020, consumer prices in the euro area were falling; by the end of that year, average inflation since the introduction of the euro two decades earlier stood at only 1.6 percent per year. Things began to snowball in 2021. The 12-month inflation rate steadily accelerated. It reached double digits in the final quarter of 2022—more than twice the level it had ever reached since the euro’s introduction in 1999. Four striking features emerge from a review of the unexpected surge in European inflation since 2021: (1) The ECB’s monetary policy response lagged behind that of the US Federal Reserve, reflecting the more gradual evolution of inflation in the euro area and its distinct pattern of causes; (2) the range of inflation rates across different euro area countries has been unprecedented. This largely reflects the differential impact of war-related energy shocks (especially for natural gas piped from Russia) as well as the differential fiscal response by national governments partially insulating consumers from these shocks; (3) not all households were net losers from the inflation, with some benefiting from the fact that inflation reduced the real value of their indebtedness; and (4) the speed with which inflation was returning toward target during 2023 prompted concerns that the ECB’s monetary tightening might have been pushed too far, prolonging the output slowdown.
Topic:
Monetary Policy, European Union, Inflation, and COVID-19
Political Geography:
Europe

4. Sovereign Haircuts: 200 Years of Creditor Losses

Author:
Clemens M. Graf von Luckner, Josefin Meyer, Carmen M. Reinhart, and Christoph Trebesch
Publication Date:
06-2024
Content Type:
Working Paper
Institution:
Kiel Institute for the World Economy (IfW)
Abstract:
We study sovereign external debt crises over the past 200 years, with a focus on creditor losses, or "haircuts". Our sample covers 327 sovereign debt restructurings with external private creditors over 205 default spells since 1815. Creditor losses vary widely (from none to 100%), but the statistical distribution has remained remarkably stable over two centuries, with an average haircut of around 45 percent. The data also reveal that “serial restructurings”, meaning two or more debt exchanges in the same default spell, are on the rise. To account for this trend toward serial renegotiation, we introduce the “Bulow-Rogoff haircut” – a cumulative measure that captures the combined creditor loss across all restructurings during a single debt crisis. Using this measure, we show that longer debt crises deliver larger haircuts and that interim restructurings provide limited debt relief. We further examine past predictors of the size of haircuts and identify “rules of thumb” applicable to future defaults. Poorer countries, first-time debt issuers, and those that borrowed heavily from external creditors all record significantly higher haircuts in case of a default. Geopolitical shocks – such as wars, revolutions, or the break-up of empires – deliver the deepest haircuts. Sovereign debt investment disasters are often linked to (geo-)political disasters.
Topic:
Monetary Policy, Financial Crisis, Geopolitics, Credit, Sovereign Debt, Emerging Economies, Debt Restructuring, and Sovereign Default
Political Geography:
Global Focus

5. Monetary Policy and Illiquidity

Author:
Jan Toporowski
Publication Date:
01-2024
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
The discussion of financial stability, and the role of monetary policy, is incoherent because there is very little agreement on what constitutes financial stability (and, by implication, instability) - exchange rate stability, asset price stability, absence of debt default. By implication, there is a gap between the claims of various authors to the general applicability of their respective analyses, and the actual applicability of their conclusions, let alone the usefulness of some of their policy recommendations. The paper argues that the key issue is the regulation of the liquidity of all financial markets, and not just that of the banking system, through the markets for government securities. The paper examines the sources of this liquidity in the financial portfolios of the private sector, and how that liquidity may be managed through the open market operations of central banks and the debt management operations of governments. An implication of this approach is yield curve control and the use of (government) debt management to control the liquidity of the markets. These elements of monetary policy have been neglected in theory and policy since the 1950s.
Topic:
Debt, Economics, Monetary Policy, Banking, and Liquidity
Political Geography:
Global Focus

6. Tilting at Windmills: Bernanke and Blanchard’s Obsession with the Wage-Price Spiral

Author:
Servaas Storm
Publication Date:
04-2024
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
Bernanke and Blanchard (2023) use a simple dynamic New Keynesian model of wage-price determination to explain the sharp acceleration in U.S. inflation during 2021-2023. They claim their model closely tracks the pandemic-era inflation and they confidently conclude that “… we don’t think that the recent experience justifies throwing out existing models of wage-price dynamics.” This paper argues that this confidence is misplaced. The Bernanke and Blanchard is another failed attempt to salvage establishment macroeconomics after the massive onslaught of adverse inflationary circumstances with which it could evidently not contend. It misrepresents American economic reality, hides distributional issues from view, de-politicizes (monetary and fiscal) policy-making, and sets monetary policymakers up to deliver significantly more monetary tightening than can be justified on the basis of more realistic model analyses.
Topic:
Economics, Monetary Policy, Inflation, Macroeconomics, and Wages
Political Geography:
North America and United States of America

7. Good Policy or Good Luck? Why Inflation Fell Without a Recession

Author:
Thomas Ferguson and Servaas Storm
Publication Date:
09-2024
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
This paper analyzes claims that the Federal Reserve is principally responsible for the decline of inflation in the U.S. We compare several different quantitative approaches. These show that at most the Fed could plausibly claim credit for somewhere between twenty and forty percent of the decline. The paper then examines claims by central bankers and their supporters that a steadfast Fed commitment to keeping inflationary expectations anchored played a key role in the process. The paper shows that it did not. The Fed’s own surveys show that low-income Americans did not believe assurances from the Fed or anyone else that inflation was anchored. Instead, what does explain much of the decline is the simple fact that most workers nowadays cannot protect themselves by bargaining for higher wages. The paper then takes up the obvious question of why steep rises in interest rates have not so far led to big rises in unemployment. We show that recent arguments by Benigno and Eggertson that shifts in vacancy rates can explain this are inconsistent with the evidence. The biggest factor in accounting for the strength in the economy is the continuing importance of the wealth effect in sustaining consumption by the affluent. This arises, as we have emphasized in several papers, from the Fed’s quantitative easing policies. Absent sharp declines in wealth, the continuing importance of this factor is likely to feed service sector inflation in particular.
Topic:
Economics, Monetary Policy, Federal Reserve, Inflation, and Macroeconomics
Political Geography:
North America and United States of America

8. Macroeconomic Modeling in the Anthropocene

Author:
Yannis Dafermos, Andrew McConnell, Maria Nikolaidi, Servaas Storm, and Boyan Yanovski
Publication Date:
10-2024
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
Recent years have seen an increasing use of environmental dynamic stochastic general equilibrium (E-DSGE) models for analyzing the macroeconomic effects of the climate crisis. This paper explores to what extent these models are fit for purpose. We identify the limitations of the benchmark E-DSGE framework and explain how these limitations restrict the ability of this framework to meaningfully capture the macroeconomics of the climate crisis. We then explain how the assumptions behind these limitations can be relaxed, but argue that simply relaxing some of these assumptions in isolation is insufficient to address the problem. We therefore call for a broader use of other macroeconomic models, such as ecological stock-flow consistent (E-SFC) and ecological agent-based (E-AB) models, that address these limitations simultaneously. We explain how these models do not suffer from the pitfalls of the E-DSGE framework and outline how they need to improve to increase their usefulness as tools that can inform macroeconomic policy making in the Anthropocene.
Topic:
Climate Change, Environment, Monetary Policy, and Macroeconomics
Political Geography:
Global Focus

9. Xi Jinping’s Quantitative Easing Unlikely to Save Economy

Author:
Willy Wo-Lap Lam
Publication Date:
10-2024
Content Type:
Journal Article
Journal:
China Brief
Institution:
The Jamestown Foundation
Abstract:
In an apparent U-turn, the People’s Republic of China (PRC) has initiated stimulus policies that have boosted the stock market and are attempting to jump-start key sectors and meet the annual GDP growth target of 5 percent. In the last week of September, the central bank announced a package worth at least 2 trillion Renminbi (RMB; $280 billion), cut the banks’ reserve requirement ratio by 50 basis points, and hinted at further measures. The domestic and international response has been underwhelming, in part because the package leaves the economy even more overleveraged than before. President Xi Jinping’s attempts to enhance the PRC’s global stature, including through a recent ICBM test and by deepening support for Russia’s war in Ukraine and for other countries willing to denounce the United States and the West, will not help the domestic economic woes as they discourage foreign investment.
Topic:
Monetary Policy, Economy, Economic Growth, Investment, and Quantitative Easing
Political Geography:
China and Asia

10. Was Something Structurally Wrong at the FOMC?

Author:
Alan S. Blinder
Publication Date:
10-2024
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics (PIIE)
Abstract:
There is little doubt that the Federal Reserve was late to start raising interest rates as inflation rose in 2021–22. The Federal Open Market Committee (FOMC) made a substantial, though perhaps understandable, error in failing to raise interest rates until March 2022. Much of that policy error can be attributed to faulty forecasts of inflation, which the Federal Reserve shared with many other forecasters. It was not an outlier. But the error was not quite as consequential as the Fed’s sharpest critics allege. Even if the FOMC had started to hike rates earlier, the econometric evidence suggests that the effects on peak inflation would likely have been small. Supply constraints, not excess demand, ruled the roost. They came, driving inflation higher; and then they went, pulling inflation down. Blinder says that the FOMC’s August 2020 framework shoulders more of the blame for the inflationary surge than it should—probably because the new wording revised both of the Fed’s goals, low inflation and high employment, in dovish directions. For that reason alone, the framework will almost certainly be changed in 2025, given the high inflation since. But how? Blinder suggests that the August 2020 change in the employment goal, from symmetry to “shortfalls,” is sensible and probably not too important anyway. But the change in the inflation goal, from a 2 percent point target to flexible average inflation targeting (FAIT), was probably consequential. It may have made the FOMC slow on the draw as inflation gathered steam, and it may have kept monetary policy too tight for too long in 2024. In both directions, Blinder argues, a 1.5 to 2.5 percent target range would be a better choice. To answer the question in the title of this Policy Brief, that may be the structural flaw the Fed should fix.
Topic:
Economics, Monetary Policy, Federal Reserve, Interest Rates, and Supply
Political Geography:
North America and United States of America