Research Topics

Publications on Central banking

There are 13 publications for Central banking.
  • An Inquiry Concerning Long-term US Interest Rates Using Monthly Data


    Working Paper No. 894 | August 2017
    This paper undertakes an empirical inquiry concerning the determinants of long-term interest rates on US Treasury securities. It applies the bounds testing procedure to cointegration and error correction models within the autoregressive distributive lag (ARDL) framework, using monthly data and estimating a wide range of Keynesian models of long-term interest rates. While previous studies have mainly relied on quarterly data, the use of monthly data substantially expands the number of observations. This in turn enables the calibration of a wide range of models to test various hypotheses. The short-term interest rate is the key determinant of the long-term interest rate, while the rate of core inflation and the pace of economic activity also influence the long-term interest rate. A rise in the ratio of the federal fiscal balance (government net lending/borrowing as a share of nominal GDP) lowers yields on long-term US Treasury securities. The short- and long-run effects of short-term interest rates, the rate of inflation, the pace of economic activity, and the fiscal balance ratio on long-term interest rates on US Treasury securities are estimated. The findings reinforce Keynes’s prescient insights on the determinants of government bond yields.
     
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    Author(s):
    Tanweer Akram Huiqing Li

  • From Antigrowth Bias to Quantitative Easing


    Working Paper No. 868 | June 2016
    The ECB’s Belated Conversion?

    This paper investigates the European Central Bank’s (ECB) monetary policies. It identifies an antigrowth bias in the bank’s monetary policy approach: the ECB is quick to hike, but slow to ease. Similarly, while other players and institutional deficiencies share responsibility for the euro’s failure, the bank has generally done “too little, too late” with regard to managing the euro crisis, preventing protracted stagnation, and containing deflation threats. The bank remains attached to the euro area’s official competitive wage–repression strategy, which is in conflict with the ECB’s price stability mandate and undermines its more recent, unconventional monetary policy initiatives designed to restore price stability. The ECB needs a “Euro Treasury” partner to overcome the euro regime’s most serious flaw: the divorce between central bank and treasury institutions.

  • The Repeal of the Glass-Steagall Act and the Federal Reserve’s Extraordinary Intervention during the Global Financial Crisis


    Working Paper No. 829 | January 2015

    Before the global financial crisis, the assistance of a lender of last resort was traditionally thought to be limited to commercial banks. During the crisis, however, the Federal Reserve created a number of facilities to support brokers and dealers, money market mutual funds, the commercial paper market, the mortgage-backed securities market, the triparty repo market, et cetera. In this paper, we argue that the elimination of specialized banking through the eventual repeal of the Glass-Steagall Act (GSA) has played an important role in the leakage of the public subsidy intended for commercial banks to nonbank financial institutions. In a specialized financial system, which the GSA had helped create, the use of the lender-of-last-resort safety net could be more comfortably limited to commercial banks.

    However, the elimination of GSA restrictions on bank-permissible activities has contributed to the rise of a financial system where the lines between regulated and protected banks and the so-called shadow banking system have become blurred. The existence of the shadow banking universe, which is directly or indirectly guaranteed by banks, has made it practically impossible to confine the safety to the regulated banking system. In this context, reforming the lender-of-last-resort institution requires fundamental changes within the financial system itself.

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    Author(s):
    Yeva Nersisyan

  • Financial Crisis Resolution and Federal Reserve Governance


    Working Paper No. 784 | January 2014
    Economic Thought and Political Realities

    The Federal Reserve has been criticized for not forestalling the financial crisis of 2007–09, and for its unconventional monetary policies that have followed. Its critics have raised questions as to whom, if anyone, reins in the Federal Reserve if and when its policies are misguided or abusive. This paper traces the principal changes in governance of the Federal Reserve over its history. These changes have, for the most part, developed in the wake of economic upheavals, when Fed policy has been challenged. The aim is to identify relevant issues regarding governance and to establish a basis for change, if needed. It describes the governance mechanism established by the Federal Reserve Act in 1913, traces the passing of this mechanism in the 1920s and 1930s, and assays congressional efforts to expand oversight in the 1970s. It also considers the changes in Fed policies induced by the financial crisis of 2007–09 and the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. It concludes that the original internal governance mechanism, a system of checks and balances that aimed to protect all the important interest groups in the country, faded in the 1920s and was never adequately replaced. In light of the Federal Reserve’s continued growth in power and influence, this deficiency constitutes a threat not only to “stakeholders” but also to the independence of the Federal Reserve itself.

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    Author(s):
    Bernard Shull

  • Marriner S. Eccles and the 1951 Treasury – Federal Reserve Accord


    Working Paper No. 747 | January 2013
    Lessons for Central Bank Independence

    The 1951 Treasury – Federal Reserve Accord is an important milestone in central bank history. It led to a lasting separation between monetary policy and the Treasury’s debt-management powers, and established an independent central bank focused on price stability and macroeconomic stability. This paper revisits the history of the Accord and elaborates on the role played by Marriner Eccles in the events that led up to its signing. As chairman of the Fed Board of Governors since 1934, Eccles was also instrumental in drafting key banking legislation that enabled the Federal Reserve System to take on a more independent role after the Accord. The global financial crisis has generated renewed interest in the Accord and its lessons for central bank independence. The paper shows that Eccles’s support for the Accord—and central bank independence—was clearly linked to the strong inflationary pressures in the US economy at the time, but that he was as supportive of deficit financing in the 1930s. This broader interpretation of the Accord holds the key to a more balanced view of Eccles’s role at the Federal Reserve, where his contributions from the mid-1930s up to the Accord are seen as equally important. For this reason, the Accord should not be seen as the eternal beacon for central bank independence but rather as an enlightened vision for a more symmetric policy role for central banks, with equal weight on fighting inflation and preventing depressions.

  • ECB Worries / European Woes


    Working Paper No. 742 | December 2012
    The Economic Consequences of Parochial Policy

    Financial market crises with the threat of a subsequent debt-deflation depression have occurred with increasing regularity in the United States from 1980 through the present. Almost reflexively, when confronted with such circumstances, US institutions and the policymakers that run them have responded in a fashion that has consistently thwarted debt-deflation-depression dynamics. It is true that these “remedies,” as they succeeded, increasingly contributed to a moral hazard in US and global financial markets that culminated with the crisis that began in 2007. Nonetheless, the straightforward steps taken by established institutions enabled the United States to derail depression dynamics, while European 1930s-style austerity proved as ineffective as it was almost a century ago. Europe’s, and specifically Germany’s, steadfast refusal to embrace the US recipe has fostered mushrooming economic hardship on the continent. The situation is gruesome, and any serious student of economic history had to have known, given European policy commitments, that it was destined to turn out this way.

    It is easy to understand why misguided policies drove initial European responses. Economic theory has frowned on Keynes. Economic successes, especially in Germany, offered up the wrong lessons, and enduring angst about inflation was a major distraction. At the outset, the wrong medicine for the wrong disease was to be expected.

    What is much harder to fathom is why such a poisonous elixir continues to be proffered amid widespread evidence that the patient is dying. Deconstructing cognitive dissonance in other spheres provides an explanation. Not surprisingly, knowing what one wants to happen at home completely informs one’s claims concerning what will be good for one’s neighbors. In such a construct, the last best hope for Europe is ECB President Mario Draghi. He seems to be able to speak German and yet act European.

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    Author(s):
    Robert J. Barbera Gerald Holtham

  • At the Crossroads: The Euro and Its Central Bank Guardian (and Savior?)


    Working Paper No. 738 | November 2012

    Research Associate Jörg Bibow investigates the role of the European Central Bank (ECB) in the (mal)functioning of Europe’s Economic and Monetary Union (EMU), focusing on the German intellectual and historical traditions behind the euro policy regime and its central bank guardian. His analysis contrasts Keynes’s chartalist conception of money and central banking with the postwar traditions nourished by the Bundesbank and based on a fear of fiscal dominance. Keynes viewed the central bank as an instrument of the state, controlling the financial system and wider economy but ultimately an integral part of, and controlled by, the state. By contrast, the “Maastricht (EMU) regime” (of German design) positions the central bank as controlling the state. Essentially, Bibow observes, the national success of the Bundesbank model in pre-EMU times has left Europe stuck with a policy regime that is wholly unsuitable for the area as a whole. But regime reform is complicated by severely unbalanced competitiveness positions and debt overhang legacies. Refocusing the ECB on growth and price stability would have to be a part of any solution, as would refocusing area-wide fiscal policy on growth and investment.

  • Financial Markets


    Working Paper No. 660 | March 2011

    This paper provides a brief exposition of financial markets in Post Keynesian economics. Inspired by John Maynard Keynes’s path-breaking insights into the role of liquidity and finance in “monetary production economies,” Post Keynesian economics offers a refreshing alternative to mainstream (mis)conceptions in this area. We highlight the importance of liquidity—as provided by the financial system—to the proper functioning of real world economies under fundamental uncertainty, contrasting starkly with the fictitious modeling world of neo-Walrasian exchange economies. The mainstream vision of well-behaved financial markets, channeling saving flows from savers to investors while anchored by fundamentals, complements a notion of money as an arbitrary numéraire and mere convenience, facilitating exchange but otherwise “neutral.” From a Post Keynesian perspective, money and finance are nonneutral but condition and shape real economic performance. It takes public policy to anchor asset prices and secure financial stability, with the central bank as the key public policy tool.

     

  • A Post Keynesian Perspective on the Rise of Central Bank Independence


    Working Paper No. 625 | October 2010
    A Dubious Success Story in Monetary Economics

    This paper critically assesses the rise of central bank independence (CBI) as an apparent success story in modern monetary economics. As to the observed rise in CBI since the late 1980s, we single out the role of peculiar German traditions in spreading CBI across continental Europe, while its global spread may be largely attributable to the rise of neoliberalism. As to the empirical evidence alleged to support CBI, we are struck by the nonexistence of any compelling evidence for such a case. The theoretical support for CBI ostensibly provided by modeling exercises on the so-called time-inconsistency problem in monetary policy is found equally wanting. Ironically, New Classical modelers promoting the idea of maximum CBI unwittingly reinstalled a (New Classical) “benevolent dictator” fiction in disguise. Post Keynesian critiques of CBI focus on the money neutrality postulate as well as potential conflicts between CBI and fundamental democratic values. John Maynard Keynes’s own contributions on the issue of CBI are found worth revisiting.

     

  • A Critical Assessment of Seven Reports on Financial Reform: A Minskyan Perspective, Part IV


    Working Paper No. 574.4 | August 2009
    Summary Tables

    This four-part study is a critical analysis of several reports dealing with the reform of the financial system in the United States. The study uses Minsky’s framework of analysis and focuses on the implications of Ponzi finance for regulatory and supervisory policies. The main conclusion of the study is that, while all reports make some valuable suggestions, they fail to deal with the socioeconomic dynamics that emerge during long periods of economic stability. As a consequence, it is highly doubtful that the principal suggestions contained in the reports will provide any applicable means to limit the worsening of financial fragility over periods of economic stability. The study also concludes that any meaningful systemic and prudential regulatory changes should focus on the analysis of expected and actual cash flows (sources and stability) rather than capital equity, and on preventing the emergence of Ponzi processes. The latter tend to emerge over long periods of economic stability and are not necessarily engineered by crooks. On the contrary, the pursuit of economic growth may involve the extensive use of Ponzi financial processes in legal economic activities. The study argues that some Ponzi processes—more precisely, pyramid Ponzi processes—should not be allowed to proceed, no matter how severe the immediate impact on economic growth, standards of living, or competitiveness. This is so because pyramid Ponzi processes always collapse, regardless how efficient financial markets are, how well informed and well behaved individuals are, or whether there is a “bubble” or not. The longer the process is allowed to proceed, the more destructive it becomes. Pyramid Ponzi processes cannot be risk-managed or buffered against; if economic growth is to be based on a solid financial foundation, these processes cannot be allowed to continue. Finally, a supervisory and regulatory process focused on detecting Ponzi processes would be much more flexible and adaptive, since it would not be preoccupied with either functional or product limits, or with arbitrary ratios of “prudence.” Rather, it would oversee all financial institutions and all products, no matter how new or marginal they might be.

    See also, Working Paper Nos. 574.1, 574.2, and 574.3.

  • A Critical Assessment of Seven Reports on Financial Reform: A Minskyan Perspective, Part III


    Working Paper No. 574.3 | August 2009
    G30, OECD, GAO, ICMBS Reports

    This four-part study is a critical analysis of several reports dealing with the reform of the financial system in the United States. The study uses Minsky’s framework of analysis and focuses on the implications of Ponzi finance for regulatory and supervisory policies. The main conclusion of the study is that, while all reports make some valuable suggestions, they fail to deal with the socioeconomic dynamics that emerge during long periods of economic stability. As a consequence, it is highly doubtful that the principal suggestions contained in the reports will provide any applicable means to limit the worsening of financial fragility over periods of economic stability. The study also concludes that any meaningful systemic and prudential regulatory changes should focus on the analysis of expected and actual cash flows (sources and stability) rather than capital equity, and on preventing the emergence of Ponzi processes. The latter tend to emerge over long periods of economic stability and are not necessarily engineered by crooks. On the contrary, the pursuit of economic growth may involve the extensive use of Ponzi financial processes in legal economic activities. The study argues that some Ponzi processes—more precisely, pyramid Ponzi processes—should not be allowed to proceed, no matter how severe the immediate impact on economic growth, standards of living, or competitiveness. This is so because pyramid Ponzi processes always collapse, regardless how efficient financial markets are, how well informed and well behaved individuals are, or whether there is a “bubble” or not. The longer the process is allowed to proceed, the more destructive it becomes. Pyramid Ponzi processes cannot be risk-managed or buffered against; if economic growth is to be based on a solid financial foundation, these processes cannot be allowed to continue. Finally, a supervisory and regulatory process focused on detecting Ponzi processes would be much more flexible and adaptive, since it would not be preoccupied with either functional or product limits, or with arbitrary ratios of “prudence.” Rather, it would oversee all financial institutions and all products, no matter how new or marginal they might be.

    See also, Working Paper Nos. 574.1, 574.2, and 574.4.

  • A Critical Assessment of Seven Reports on Financial Reform: A Minskyan Perspective, Part II


    Working Paper No. 574.2 | August 2009
    Treasury, CRMPG Reports, Financial Stability Forum

    This four-part study is a critical analysis of several reports dealing with the reform of the financial system in the United States. The study uses Minsky’s framework of analysis and focuses on the implications of Ponzi finance for regulatory and supervisory policies. The main conclusion of the study is that, while all reports make some valuable suggestions, they fail to deal with the socioeconomic dynamics that emerge during long periods of economic stability. As a consequence, it is highly doubtful that the principal suggestions contained in the reports will provide any applicable means to limit the worsening of financial fragility over periods of economic stability. The study also concludes that any meaningful systemic and prudential regulatory changes should focus on the analysis of expected and actual cash flows (sources and stability) rather than capital equity, and on preventing the emergence of Ponzi processes. The latter tend to emerge over long periods of economic stability and are not necessarily engineered by crooks. On the contrary, the pursuit of economic growth may involve the extensive use of Ponzi financial processes in legal economic activities. The study argues that some Ponzi processes—more precisely, pyramid Ponzi processes—should not be allowed to proceed, no matter how severe the immediate impact on economic growth, standards of living, or competitiveness. This is so because pyramid Ponzi processes always collapse, regardless how efficient financial markets are, how well informed and well behaved individuals are, or whether there is a “bubble” or not. The longer the process is allowed to proceed, the more destructive it becomes. Pyramid Ponzi processes cannot be risk-managed or buffered against; if economic growth is to be based on a solid financial foundation, these processes cannot be allowed to continue. Finally, a supervisory and regulatory process focused on detecting Ponzi processes would be much more flexible and adaptive, since it would not be preoccupied with either functional or product limits, or with arbitrary ratios of “prudence.” Rather, it would oversee all financial institutions and all products, no matter how new or marginal they might be.

    See also, Working Paper Nos. 574.1, 574.3, and 574.4.

  • A Critical Assessment of Seven Reports on Financial Reform: A Minskyan Perspective, Part I


    Working Paper No. 574.1 | August 2009
    Key Concepts and Main Points

    This four-part study is a critical analysis of several reports dealing with the reform of the financial system in the United States. The study uses Minsky’s framework of analysis and focuses on the implications of Ponzi finance for regulatory and supervisory policies. The main conclusion of the study is that, while all reports make some valuable suggestions, they fail to deal with the socioeconomic dynamics that emerge during long periods of economic stability. As a consequence, it is highly doubtful that the principal suggestions contained in the reports will provide any applicable means to limit the worsening of financial fragility over periods of economic stability. The study also concludes that any meaningful systemic and prudential regulatory changes should focus on the analysis of expected and actual cash flows (sources and stability) rather than capital equity, and on preventing the emergence of Ponzi processes. The latter tend to emerge over long periods of economic stability and are not necessarily engineered by crooks. On the contrary, the pursuit of economic growth may involve the extensive use of Ponzi financial processes in legal economic activities. The study argues that some Ponzi processes—more precisely, pyramid Ponzi processes—should not be allowed to proceed, no matter how severe the immediate impact on economic growth, standards of living, or competitiveness. This is so because pyramid Ponzi processes always collapse, regardless how efficient financial markets are, how well informed and well behaved individuals are, or whether there is a “bubble” or not. The longer the process is allowed to proceed, the more destructive it becomes. Pyramid Ponzi processes cannot be risk-managed or buffered against; if economic growth is to be based on a solid financial foundation, these processes cannot be allowed to continue. Finally, a supervisory and regulatory process focused on detecting Ponzi processes would be much more flexible and adaptive, since it would not be preoccupied with either functional or product limits, or with arbitrary ratios of “prudence.” Rather, it would oversee all financial institutions and all products, no matter how new or marginal they might be.

    See also, Working Paper Nos. 574.2, 574.3, and 574.4.

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