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1. Central bank policy sets the lower bound on bond yields

Author:
Joseph E. Gagnon and Olivier Jeanne
Publication Date:
01-2020
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics
Abstract:
This paper shows that the scope for bond yields to fall below zero is strictly limited by market expectations about how far below zero central banks are willing to set their short-term policy rates. If a central bank communicates a credible commitment to keeping its policy rate above a given level under all circumstances, then bond yields must be higher than that level. This result holds true even in a model in which central banks are able to depress the term premium in bond yields below zero via large-scale purchases of long-term bonds, also known as quantitative easing (QE). QE becomes less effective as bond yields approach their lower bound.
Topic:
Economics, Finance, Central Bank, and Global Bond Market
Political Geography:
Global Focus

2. Does Low Inflation Pose a Risk to Economic Growth and Central Banks Reputation?

Author:
Marek Dabrowski
Publication Date:
03-2020
Content Type:
Special Report
Institution:
Center for Social and Economic Research - CASE
Abstract:
Inflation in advanced economies is low by historical standards but there is no threat of deflation. Slower economic growth is caused by supply-side constraints rather than low inflation. Below-the-target inflation does not damage the reputation of central banks. Thus, central banks should not try to bring inflation back to the targeted level of 2%. Rather, they should revise the inflation target downwards and publicly explain the rationale for such a move. Risks to the independence of central banks come from their additional mandates (beyond price stability) and populist politics.
Topic:
Economic growth, Inflation, and Central Bank
Political Geography:
Global Focus

3. 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

4. The Function Transformation of Central Banks and Commercial Banks under the Application of Digital Fiat Currency

Author:
Song Shuang and Liu Dongmin
Publication Date:
04-2019
Content Type:
Policy Brief
Abstract:
Since the advent of Bitcoin, digital currency and its underlying distributed ledger technology have been spread and applied rapidly around the world. Traditionally, currency issuance and circulation are based on binary tree structure, with the central bank as the highest node, commercial banks in the middle and the public and enterprises at the bottom. However, in the distributed ledger system, all nodes have similar privileges and can transact with each other directly. Hence, the advocators promote the potential of digital currency to subvert the monetary control of sovereign countries and alter the traditional business of commercial banks with the characteristics of decentralization, trust-free intermediary, non-tampering and encryption security. On the other hand, the dissenters believe that transaction nodes in distributed ledger system will be greatly increased, and hence reducing the professionalism of transaction processing and forfeiting the authenticity of original information, which then becomes difficult to play a significant role in the future economy.
Topic:
Science and Technology, Economy, Banks, Central Bank, Currency, and Bitcoin
Political Geography:
China and Global Focus

5. 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

6. Interest on Excess Reserves as a Monetary Policy Instrument: The Experience of Foreign Central Banks

Author:
David Bowman, Etienne Gagnon, and Mike Leahy
Publication Date:
03-2010
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This paper reviews the experience of eight major foreign central banks with policy interest rates comparable to the interest rate on excess reserves paid by the Federal Reserve. We pursue two main lines of inquiry: 1) To what extent have these policy interest rates been lower bounds for short-term market rates, and 2) to what extent has tightening that included increasing these policy rates been achieved without reliance on reductions in reserves or other deposits held at the central bank? The foreign experience suggests that policy rate floors can be effective lower bounds for market rates, although incomplete access to central bank accounts and interest on them weakens this result. In addition, the foreign experience suggests that tightening by increasing the interest rate paid on central bank balances can help reduce or eliminate the need to drain balances. These results are consistent with theoretical results that show that tightening without draining is possible, irrespective of whether excess reserves are large or small.
Topic:
Markets, Interest Rates, Central Bank, and Fiscal Policy
Political Geography:
Global Focus

7. The Macroeconomic Effects of External Pressures on Monetary Policy

Author:
Davide Debortoli and Ricardo Nunes
Publication Date:
09-2008
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Central banks, whether independent or not, may occasionally be subject to external pressures to change policy objectives. We analyze the optimal response of central banks to such pressures and the resulting macroeconomic consequences. We consider several alternative scenarios regarding policy ob- jectives, the degree of commitment and the timing of external pressures. The possibility to adopt “more liberal” objectives in the future increases current inflation through an accommodation effect. Simultaneously, the central bank tries to anchor inflation by promising to be even “more conservative” in the future. The immediate effect is an output contraction, the opposite of what the pressures to adopt “more liberal” objectives may be aiming. We also discuss the opposite case, where objectives may become “more conservative” in the future, which may be the relevant case for countries considering the adoption of inflation targeting.
Topic:
Finance, Banks, Inflation, and Central Bank
Political Geography:
Global Focus