The financial crisis of 2007 to 2009 can be divided into two distinct phases. The first and more limited phase from August 2007 to August 2008 stemmed from losses in one relatively small segment of ...the U.S. financial system—namely, subprime residential mortgages. Despite this disruption to financial markets, real GDP in the United States continued to rise into the second quarter of 2008, and forecasters were predicting only a mild recession. In mid-September 2008, however, the financial crisis entered a far more virulent phase. In rapid succession, the investment bank Lehman Brothers entered bankruptcy on September 15, 2008; the insurance firm AIG collapsed on September 16, 2008; there was a run on the Reserve Primary Fund money market fund on the same day; and the highly publicized struggle to pass the Troubled Asset Relief Program (TARP) began. How did something that appeared in mid-2008 to be a significant but fairly mild financial disruption transform into a full-fledged global financial crisis? What caused this transformation? Did the government responses to the global financial crisis help avoid a worldwide depression? What challenges do these government interventions raise for the world financial system and the economy going forward?
The fallacy that monetary policy is ineffective during financial crises is dangerous because it may promote policy inaction when it is most needed. This paper argues that, if anything, monetary ...policy is more potent during financial crises because aggressive monetary policy easing can make adverse feedback loops less likely. The fact that monetary policy is more potent than during normal times supports a risk-management approach to monetary policy during financial crises in which monetary policy is far less inertial than would otherwise be typical--not only moving decisively through conventional or nonconventional means to reduce downside risks from the financial disruption, but also in being prepared to quickly take back some of that insurance in response to a recovery in financial markets or an upward shift in inflation risks.
This lecture examines how the recent global financial crisis changes our thinking about how monetary policy should be conducted. It starts with a discussion of the science and practice of monetary ...policy before the crisis and then uses the lessons from the crisis to argue how the practice of monetary policy should be rethought along six dimensions: flexible inflation targeting, response to asset price bubbles, dichotomy between monetary policy and financial stability policy, risk management and gradualism, fiscal dominance, and forward guidance.
This paper argues that globalization is a key factor in stimulating institutional reforms in developing countries that promote financial development and economic growth. Advanced countries can help ...in this process by supporting the opening of their markets to goods and services from emerging-market countries. By encouraging these countries to increase their participation in global markets, advanced countries can create exactly the right incentives for developing countries to implement the reforms that will enable them to have high economic growth.
Is Financial Globalization Beneficial? MISHKIN, FREDERIC S.
Journal of money, credit and banking,
March–April 2007, Letnik:
39, Številka:
2-3
Journal Article
Recenzirano
Odprti dostop
This lecture examines whether financial globalization is beneficial to developing countries by first examining the evidence on financial development and economic growth and concludes that financial ...development is indeed a key element in promoting economic growth. It then asks why if financial development is so beneficial, it often does not occur. It then goes on to examine whether globalization, particularly of the financial kind, can help encourage financial and economic development and argues that it can. However, financial globalization does not always work to encourage economic development because it often leads to devastating financial crises. The issue is thus not whether financial globalization is inherently good or bad, but whether it can be done right.
As the US labor market has tightened beyond full employment with relatively little evidence of inflation pressure, observers are increasingly inclined to declare the demise of the Phillips curve, ...that is, the flattening of its slope to zero. This paper reviews a substantial range of empirical evidence on this point, by assessing the performance of the conventional expectations-augmented Phillips curve for both prices and wages, based on both historical macro or national level data and panel data for states and MSAs (cities). National data going back to the 1950s and 60s yield strong evidence of negative slopes and significant nonlinearity in those slopes, with slopes much steeper in tight labor markets than in easy labor markets. This evidence of both slope and nonlinearity weakens dramatically based on macro data since the 1980s for the price Phillips curve, but not the wage Phillips curve. However, the endogeneity of monetary policy and the lack of variation of the unemployment gap, which has few episodes of being substantially below zero in this sample period, makes the price Phillips curve estimates from this period less reliable. At the same time, state level and MSA level data since the 1980s yield significant evidence of both negative slope and nonlinearity in the Phillips curve. The difference between national and city/state results in recent decades can be explained by the success that monetary policy has had in quelling inflation and anchoring inflation expectations since the 1980s. We also review the experience of the 1960s, the last time inflation expectations became unanchored, and observe both parallels and differences with today. Our analysis suggests that reports of the death of the Phillips curve may be greatly exaggerated.
This paper argues that the rules versus discretion debate has been miscast because a central bank does not have to choose only between adopting a policy rule versus pure discretion, both of which ...have serious shortcomings. Rather, it can choose a constrained discretionary regime that has rule‐like attributes. To make monetary policy discretion more rule‐like, it can be improved by (1) adopting a nominal anchor such as an inflation target, a monetary‐policy strategy that has proved to be very successful in recent years, and (2) communication of a monetary‐policy reaction process, especially through data‐based forward guidance, in which the monetary‐policy authorities describe how the future policy path will change as economic circumstances change.
The paper argues that many of the exaggerated claims that globalization has been an important factor in lowering inflation in recent years just do not hold up. Globalization does, however, have the ...potential to be stabilizing for individual economies and has been a key factor in promoting economic growth. The paper then examines four questions about the impact of globalization on the monetary transmission mechanism and arrives at the following answers: (i) Has globalization led to a decline in the sensitivity of inflation to domestic output gaps and thus to domestic monetary policy? No. (ii) Are foreign output gaps playing a more prominent role in the domestic inflation process, so that domestic monetary policy has more difficulty stabilizing inflation? No. (iii) Can domestic monetary policy still control domestic interest rates and so stabilize both inflation and output? Yes. (iv) Are there other ways, besides possible influences on inflation and interest rates, in which globalization may have affected the transmission mechanism of monetary policy? Yes.
The squam lake report French, Kenneth R; Baily, Martin N; Campbell, John Y ...
2010., 20100525, 2010, 2010-05-25
eBook
In the fall of 2008, fifteen of the world's leading economists--representing the broadest spectrum of economic opinion--gathered at New Hampshire's Squam Lake. Their goal: the mapping of a long-term ...plan for financial regulation reform.
The Squam Lake Reportdistills the wealth of insights from the ongoing collaboration that began at these meetings and provides a revelatory, unified, and coherent voice for fixing our troubled and damaged financial markets. As an alternative to the patchwork solutions and ideologically charged proposals that have dominated other discussions, the Squam Lake group sets forth a clear nonpartisan plan of action to transform the regulation of financial markets--not just for the current climate--but for generations to come.
Arguing that there has been a conflict between financial institutions and society, these diverse experts present sound and transparent prescriptions to reduce this divide. They look at the critical holes in the existing regulatory framework for handling complex financial institutions, retirement savings, and credit default swaps. They offer ideas for new financial instruments designed to recapitalize banks without burdening taxpayers. To lower the risk that large banks will fail, the authors call for higher capital requirements as well as a systemic regulator who is part of the central bank. They collectively analyze where the financial system has failed, and how these weak points should be overhauled.
Combining an immense depth of academic, private sector, and public policy experience,The Squam Lake Reportcontains urgent recommendations that will positively influence everyone's financial well-being--all who care about the world's economic health need to pay attention.
Inflation Dynamics Mishkin, Frederic S.
International finance (Oxford, England),
12/2007, Letnik:
10, Številka:
3
Journal Article
Recenzirano
This paper first outlines the key stylized facts about changes in inflation dynamics in recent years: (1) inflation persistence has declined, (2) the Phillips‐curve has flattened and (3) inflation ...has become less responsive to other shocks. These changes in inflation dynamics are interpreted as resulting from an anchoring of inflation expectations as a result of better monetary policy. The paper then goes on to draw implications for monetary policy from this interpretation, as well as implications for inflation forecasts.
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