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Policy Area Papers on Monetary policy

Assessing the G20’s Mutual Assessment Process: A MAP but Little Direction
Graham Bird, World Economics, June 2017
After the global economic and financial crisis, the G20 has tried to orchestrate an internationally coordinated approach to economic recovery. In late 2009, the Mutual Assessment Process (MAP) was introduced to minimize risk by reducing global economic imbalances and encouraging economic growth. To implement MAP, the G20 attempted to oversee macro-economic policy at the global level with the International Monetary Fund collecting data and providing technical assistance. Later experience suggests that, in the absence of a global economic crisis, the MAP will continue to lose direction and relevance and is unlikely to become a modality for close international macro-economic coordination.
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The Political Limits of Independent Monetary Policy
Colin Ellis, World Economics, September 2016
Central banks in advanced economies have adopted a number of less conventional policy measures since the onset of the financial crisis and great recession. However, the efficiency of these measures remains highly uncertain; and, if downside risks crystallize, more radical approaches may be needed. In turn, that could force central banks to get explicit support from political authorities. As such, we may be near the political limits of independent monetary policy.
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Japan’s Monetary Policy Misadventure
Masanaga Kumakura, World Economics, June 2016
This paper argues that the Bank of Japan’s decision in April 2013 to formally adopt inflation targeting as the framework of its monetary policy and to embark on a programme of quantitative and qualitative monetary easing was misconceived. The aim of the policy to achieve consumer price inflation of two percent on a sustainable basis has not been achieved. It is ill conceived because Japan’s deflation during the past two decades has been quantitatively small with evidence that a substantial part of this deflation is a statistical artefact. Furthermore, much of the fall in growth rates can be explained by a combination of a shrinking labour force and falling working hours. A large part of Japan’s fiscal deficits is structural, reflecting ballooning social security expenditure for the elderly which policy makers are unlikely to be able to reform. Weakening fiscal discipline implies that monetary policy in Japan is a de facto open monetization of government debt. When a crisis comes, the Bank of Japan will have no option but to continue financing government deficits even if the inflation rate climbs beyond its official target in the future.
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The IMF’s Uneasy Excursion into the Euro Zone
Graham Bird, World Economics, September 2015
Much of the evolutionary history of the International Monetary Fund reflects its responses to unanticipated events. The crisis in the Eurozone at the end of the 2000s was largely unexpected. For many years prior to the crisis, the IMF’s clientele had been made up of low income and emerging economies and it was generally assumed that the future pattern of IMF lending would see some of them graduating from the Fund, rather than the Fund once again lending to ‘advanced’ economies. Programs in Greece, Ireland, Portugal and Cyprus confronted the Fund with a range of unfamiliar problems. These cover the IMF as a crisis averter, crisis lender and crisis manager. In particular the conventional design of IMF adjustment programs is not feasible in countries that belong to a monetary union. In this regard the ‘major overhaul’ of conditionality made in the aftermath of the global economic crisis may have been unhelpful. While various reforms could enhance the Fund’s ability to help Eurozone countries in the future, perhaps the main lesson that emerges from this interlude is that it is better for the IMF’s assistance not to be needed in Eurozone countries.
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What is Britain worth to the next generation?
Angus Hanton, World Economics, June 2015
Government economic policy implicitly aims to build up useful reserves for future generations, or at least to not burden our children and grandchildren with unsustainable debt. Surprisingly, even though this must be an important policy objective, it is rarely discussed or measured. This paper estimates what Britain is now worth to the next generation and we explain how well recent British governments have done in building up value to hand on. The results are eye-watering for anyone who has assumed that there has been a steady build-up of wealth.
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The Liquidity Consequences of the Euro Area Sovereign Debt Crisis
William A. Allen & Richhild Moessner, World Economics, March 2013
We examine the liquidity effects of the euro area sovereign debt crisis on euro area banks as a group, on intra-euro area financial flows and on international liquidity. The lending capacity of the euro area banking system has been much weakened, despite the remarkable growth of the operations of the Eurosystem, including its greatly increased lending and its intermediation between national central banks in surplus and deficit countries. The euro crisis has also created international liquidity stresses.
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The IMF and the Challenges it Faces
Graham Bird & Dane Rowlands, World Economics, December 2010
From being widely seen in early 2008 as an institution in decline and irrelevant to many of the problems then facing the world economy, the International Monetary Fund (IMF) has more recently been presented as an international financial institution that is of essential importance in the aftermath of the global financial and economic crisis of 2008/09. There has been a plethora of reforms affecting the amount of resources the IMF can lend, the design of its conditionality and its organisational structure. This article assesses the extent to which these reforms will enable the IMF to enhance its role and improve its operations. It identifies and analyses challenges currently facing the IMF and claims that the future of the IMF depends crucially on the success it exhibits in meeting these challenges.

HIV/AIDS funding appears largely protected in the current crisis, as the two largest programmes – the US PEPFAR Program, and the Global Fund for AIDS, TB and Malaria – are not expected to contract. Moreover, 38% of all GFATM funding over nine funding rounds has not yet been spent by recipient governments, leaving a significant cushion particularly in Sub-Saharan Africa, where almost half of all allocations remain to be spent. Donor funding historically moves procyclically in developing countries, but there have been major shifts in recent years. During the current crisis, World Bank lending expanded by 50% as governments ramped up safety nets. Regionally, only eastern Europe was hit hard. Declining spending on that region’s social programmes has forced longdelayed reforms, but there have been negative impacts on household spending, particularly in health, though education spending has been far less affected.

To the editors of World Economics
Tim Congdon
World Economics, June 2010
There is no summary available for this paper.
F. Gerard Adams on David Wessel: In Fed We Trust

World Economics, March 2010
There is no summary available for this paper.
Monetary Policy at the Zero Bound: A discussion of the effectiveness of monetary policy, with comments on contributions from Keynes, Krugman and Bernanke
Tim Congdon, World Economics, March 2010
The main conclusion of the paper is that – even if bank lending to the private sector is falling (and destroying money balances) at a zero short-term interest rate – the monetary authorities can always increase the quantity of money (broadly defined to include all bank deposits) without limit by means of debt market operations. Such operations are to be distinguished from more conventional money market operations. Assuming – in line with standard theory – that equilibrium nominal national income increases by the same percentage as the quantity of money, debt market operations are available at all times to pre-empt a downward debt-deflationary spiral.

The paper differentiates debt market operations from money market operations, and a broad liquidity trap (in which increases in the quantity of money, broadly defined, do not reduce the long bond yield because of the infinite elasticity of non-banks’ demand to hold money) from a narrow liquidity trap (in which increases in the monetary base do not boost the quantity of money, because banks behave as if their demand for base were infinitely elastic). Keynes analysed the broad liquidity trap in The General Theory.

Quantitative Easing: Will it generate demand or inflation?
Colin Ellis, World Economics, June 2009
Central banks around the world have moved to cut interest rates to record lows, with many in advanced economies going further and embracing full quantitative easing – creating new money to inject into the economy. This paper examines why quantitative easing has been necessary, and whether it is likely to result in higher demand or instead show up in higher inflation. Given the retrenchment in household spending, the risk is that quantitative easing has more impact on prices than output. And, with some first warning signs perhaps already evident in commodity markets, policymakers could face considerable difficulties unwinding the monetary stimulus.
The Institutional Framework of the Gulf Central Bank
Nasser H. Saidi & Fabio Scacciavillani, World Economics, March 2009
This paper discusses the viable alternatives for a suitable institutional and governance framework for the policymaking body presiding over the GMU. The authors review a series of alternatives, from the simplest one (i.e. a governors’ council formed by the governors of the national central banks and monetary authorities, each endowed with a single equal vote), to the more elaborate ones, involving the set-up of a supranational institution, a Gulf Central Bank (GCB) with permanent staff, an appointed president and an executive board, which together with the national governors would form a monetary policy council (MPC) responsible for the setting of monetary policy instruments and taking decisions in all the main areas of monetary policy. The members of the MPC could be given equal voting rights, or voting power weighted according to the economic and financial size of each country, with some corrective counterweight mechanisms, such as a specific voting weight for the president and/or the executive board to provide checks and balances. The solution the authors feel markets (and the public) would find more credible and suitable would be one involving the creation of a new GCB with its own staff and an independent executive board, because it would strengthen the authority and sustainability of the institutional arrangement, and create an organisation that is an effective counterpart of the other major international central banks and financial markets.
Perspectives on Inclusive Development: Concepts, approaches and current issues
Michael Chibba, World Economics, December 2008
The pursuit of inclusive development raises numerous questions and challenges for academics, practitioners and policymakers. To demystify the subject and move towards addressing the challenges, this paper first highlights the concept of inclusive development. Next, the key approaches as advanced by various proponents of inclusive development are presented. This is followed by a discussion of the neo-liberal ideology’s demise and its likely impact on inclusive development. The findings suggest that inclusive development should be shaped by various factors, such as; the functional definition of inclusive development, interventions that enhance governance and promote effective institutions, sound economic policies, and cultural and socio-economic considerations in policymaking and implementation. Furthermore, inclusive development requires – as with the generic Asian approach to capitalism – that planning and interventions are state-led, with indispensable but ancillary engagement by the private sector and other stakeholders. In lieu of the failed neo-liberal model of governance and the free-market system, the generic Asian approach to development is suggested to be one realistic option to pursuing inclusive development goals in developing countries.
Challenging Times for UK Monetary Policy
Andrew Sentance, World Economics, March 2008
Global economic developments have recently thrown up two major challenges for the setting of UK monetary policy. The recent global financial turmoil threatens to reinforce the slowdown in the UK and globally. But rising energy and commodity prices will push up inflation in the short term, and pose an upside risk to inflation expectations. In this article, Andrew Sentance-an external member of the Monetary Policy Committee (MPC)-argues that two issues will be critical to the future course of UK monetary policy: the course of the economic slowdown at home and abroad; and whether inflation expectations remain stable and well anchored. He argues that UK monetary policy has flexibility to adapt to changing circumstances and the data flow from the real economy will be very important in shaping future interest rate decisions. However, the MPC remains focused on its remit of keeping inflation on course to meet the 2% target for CPI inflation.
Keynes in the Long Run
Robert Skidelsky, World Economics, December 2007
In the light of recent market volatility, this essay asks: is Keynes dead or alive? The broad conclusion is that while macroeconomic models are still used, very little survives of Keynes’s original theory. 'New Keynesians' have replaced his key concept of radical uncertainty by models of imperfect information and 'sticky prices'. These can be used to justify policy interventions, but they attract only a minority of economists. By contrast, Keynesian policy is much more alive, and most monetary authorities and Treasuries are prepared to counter potential output gaps. This is for political rather than for theoretical reasons. A worrying gap, therefore, exists between economic theory and economic policy. At the same time Keynes remains alive in unexpected places and ways: notably in developing countries (though he never addressed development issues) and through occasional, less theoretical writings like his Economic Possibilities for Our Grandchildren. His reflections on the link between economics and ethics are important for our day, and his actual life remains exemplary.
Monetary Policy, Governance and Economic Development: The Botswana experience
Michael Chibba, World Economics, September 2007
Botswana is at a crossroads, as economic growth has slowed significantly in recent years while social problems remain largely unresolved. Exacerbating this situation is a monetary policy in crisis as over a decade of generally high interest rates have failed to address inflationary pressures. Thus, the Botswana experience challenges generally accepted wisdom on the relationship between interest rates and inflation. The main lessons learned highlight the need for (i) enhancing the knowledge and information base; (ii) tempering monetary policy to prevailing mores; and (iii) ensuring the provision of good governance at the central bank. Policy and programme recommendations that are offered are relevant not only to Botswana but also to other developing countries that face similar challenges.
What Future for Central Banks?
Howard Davies, World Economics, December 2006
Central banks around the world differ in their functions, size, efficiency and status. In this article, Sir Howard Davies, a former Deputy Governor of the Bank of England, discusses the development of central banking over the last few years, and where it might go in the future. His main focus is the political setting within which central banks operate, and their institutional structure and governance.
Milton Friedman, 1912–2006: Polemicist, scholar, and giant of twentieth–century economics
Brian Snowdon & Howard R. Vane, World Economics, December 2006
Milton Friedman is best known as the founding father and leading exponent of the monetarist school of macroeconomic thought, and for championing the case for the efficacy of free markets in a wide variety of contexts. Without doubt, Friedman’s ideas have influenced the research agenda of a whole generation of economists as well as those who influence public policy throughout the world. Friedman’s extraordinary gifts of communicating complicated ideas allowed him to become one of the very few economists who are well known outside the economics profession. As well as his many scientific contributions, Friedman sought to communicate his views on a wide range of issues to non-economists. His gift for writing about topics in applied economics, accessible to a mass audience, established Friedman as one of the world’s most famous economists. Throughout his professional academic life, because of his high public profile, the ideas of Milton Friedman certainly aroused strong reactions from both opponents and supporters, and, until very recently, with respect to many of his ideas, he swam against a strong and extremely hostile tide of opinion. However, whatever view is held about Friedman’s libertarian political and economic philosophy, most commentators would agree that his recent passing brings to an end the life of the last great economist guru of the twentieth century. In this paper, Brian Snowdon and Howard Vane review his most influential contributions to economic analysis and political economy.
Gold and Silver as Monetary Metals: An overview
John Cooper, World Economics, June 2006
Commodity money systems, based upon gold or silver, provided relative economic stability for centuries. On the other hand, our modern paper money system, based upon unbacked government liabilities, is particularly vulnerable to abuse. The various financial crises during the twentieth century bear witness to that. This paper seeks to explain the mechanics of the former Gold and Silver Standards and provides an overview of America’s experience with its bimetallic system.
Monetary Policy, Macro-stability and Growth: South Africa’s recent experience and lessons
Janine Aron & John Muellbauer, World Economics, December 2005
There is greater appreciation now amongst economists of the negative effect of uncertainty on investment, growth and equality, especially when credit constraints are widespread. This implies an important linkage between the transparency and predictability of the policy environment, and growth and equality. The paper begins with a literature survey on the inflation and inflation volatility link, the uncertainty and investment link and the inflation volatility and growth link. This framework is used to examine the experience of South Africa’s new monetary policy regime (inflation targeting, IT) in achieving greater macrostability. South Africa is an interesting case study, being one of the more advanced of the emerging markets with its deep and sophisticated financial system, and yet with around 35 percent unemployment and a legacy of developmental problems from the Apartheid era. The authors demonstrate using evidence from three sources of micro-data that the new monetary regime is more credible, transparent and predictable. They examine the performance of monetary policy and argue IT has not resulted in real interest rate levels that are a hindrance to growth. They explore the better response under IT to big external shocks like exchange rate depreciation, as compared with the monetary regime prior to IT. The paradox is examined of success in achieving macro-stability, where greater household acquisition of debt and increased demand is both inflationary and limits saving, hence constraining corporate investment. The paper concludes with lessons from South Africa’s recent successful monetary policy experience for other emerging market countries and for less developed countries’ central banks e.g., in Africa.
Monetary Policy in an Uncertain World
Charles Bean, World Economics, March 2005
In this article, Charles Bean, Bank of England Chief Economist and member of the Monetary Policy Committee, reviews and assesses the three types of uncertainty which affect monetary policymakers: uncertainty about the data; uncertainty about the nature and persistence of shocks; and uncertainty about the structure of the economy. Focusing on uncertainty about the structure of the economy, he notes the unusual stability of inflation and output growth in the past decade or so. There are a number of possible explanations, including plain good luck, structural changes in the economy and improved policymaking. The author goes on to note that the short-run trade-off between inflation and activity seems to have flattened as inflation has stabilised at low levels and he attributes this in part to improved monetary policymaking. He goes on to consider some of the policy implications of this change.
Monetarism: A Rejoinder
Tim Congdon, World Economics, September 2004
Tim Congdon responds to the article by Thomas Mayer and Patrick Minford, ‘Monetarism: A Retrospective’ that appeared in World Economics, Vol. 5, No. 2 (April–June), 2004, pp. 147–185.
Monetarism in Retrospect — and Prospect
Andrew G Haldane, World Economics, September 2004
Andrew Haldane responds to the article by Thomas Mayer and Patrick Minford, ‘Monetarism: A Retrospective’ that appeared in World Economics, Vol. 5, No. 2 (April–June), 2004, pp. 147–185.
Monetarism: A Response
Meghnad Desai, World Economics, September 2004
Meghnad Desai responds to the article by Thomas Mayer and Patrick Minford, ‘Monetarism: A Retrospective’ that appeared in World Economics, Vol. 5, No. 2 (April–June), 2004, pp. 147–185.
Monetarism Revisited
Allan Meltzer, World Economics, September 2004
Allan Meltzer responds to the article by Thomas Mayer and Patrick Minford, ‘Monetarism: A Retrospective’ that appeared in World Economics, Vol. 5, No. 2 (April–June), 2004, pp. 147–185.
Monetarism: A retrospective
Thomas Mayer & Patrick Minford, World Economics, June 2004
This paper offers a retrospective on the monetarist debate started by Milton Friedman in the 1950s, discussing both monetarist theory and policy recommendations. While the inability to find a controllable monetary aggregate with a velocity that can be accurately predicted has severely damaged the monetarist case, on other issues, such as the importance of changes in the monetary growth rate and the need to control inflation, the monetarist challenge to Keynesian orthodoxy was successful and made a central contribution to the currently prevailing macroeconomics.
Monetary Policy: A subtle paradigm shift?
Claudio Borio & Philip Lowe, World Economics, June 2003
A growing challenge for central banks is to secure monetary and financial stability simultaneously. Indeed, somewhat paradoxically, success in controlling inflation can sometimes contribute to the development of imbalances that ultimately lead to financial stresses, with potentially serious macroeconomic consequences. And a monetary regime that does not take these imbalances into account may unwittingly accommodate their further build-up. Accordingly, despite the difficulties involved, it may be desirable, in some circumstances, for monetary policy to be used to contain financial imbalances before they grow too large, even if the imbalances pose no immediate threat to inflation. Justifying such a response would not require redefining the ultimate objectives of monetary policy. It would, however, arguably call for adopting longer policy horizons than are commonly used and paying greater attention to the balance of risks facing the economy.
Some Lessons from a Single Currency
Alan J. Brown, World Economics, March 2003
This article looks at the early experience of the Euro and argues that both the original rules established for the European Central Bank and the Stability and Growth pact need to be reconsidered. Failure to do so will result in the whole European economy delivering less growth and prosperity. Without a selfcorrecting mechanism like transfer payments, a single monetary policy is procyclical and destabilizing. Countries growing fast and in danger of over-heating face low or negative real interest rates. Countries in recession face too high real interest rates and are pushed further into sub-potential growth. The Stability and Growth pact further restricts policy options.
The UK’s Achievement of Economic Stability: How and why did it happen?
Tim Congdon, World Economics, December 2002
The UK achieved a remarkable degree of macro-economic stability in the 1990s. Contrary to expectations when the pound was expelled from the European exchange rate mechanism in September 1992, over the next ten years inflation was kept almost exactly on target and its volatility declined by over 90 per cent compared with the previous 20 years. Stability was achieved when the official aim was to balance the budget and major industries were being de-nationalised, contradicting claims that Keynesian policies are needed.
James Tobin, 1918–2002
An interview with introduction by Brian Snowdon & Howard Vane
World Economics, September 2002
Professor James Tobin, who died on 11 March 2002, was possibly the most eminent of the world’s ‘Keynesian’ economists. Described by Nobel Laureate Paul Samuelson as “the archetype of a late-twentieth century American scholar”, Tobin was without doubt one of the most influential economists of his time who inspired a whole generation of students. In this interview, Professor Tobin discusses the progress and development of economics in the second half of the twentieth century.
Japan’s Monetary and Economic Policy
Allan Meltzer, World Economics, September 2002
Japan has gone from very successful policies that promoted growth without inflation to a long period of slow growth, recessions and deflation. The Bank of Japan’s policies are a major reason for deflation. Although the Bank has purchased foreign exchange, it counteracts the inflationary effects of its purchases via sterilization. This forces deflation to continue. Currently, there is a ‘dialogue of the deaf’. The government wants faster growth but does not reform the banking system; the Bank makes bank reform a condition for ending deflationary policies.
The Quest for Stability
Alan Budd, World Economics, September 2002
The UK seems to be enjoying a golden age of macroeconomic policy-making. Growth is steady; inflation is low and stable, and unemployment is low. After years of trying to achieve economic stability we seem to have found the answer. This paper explores the history of policy-making from the late 1950s. For many years the presumption was that active demand management could be directed at achieving a desirable (low) level of unemployment. Pursuit of that policy helped produce the disasters of 1975 and brought the recognition of supply-side constraints. Progress has been uneven but the system set in place after 1992 and the move, four and a half years later, to the establishment of the Bank of England’s Monetary Policy Committee have produced an effective and highly successful system of policy-making. Ironically, stability of output, and a low level of unemployment, have been achieved when they have ceased to be explicit objectives of policy.
Stock Markets and Central Bankers: The economic consequences of Alan Greenspan
Stephen Wright, World Economics, March 2002
There is a near-consensus that central bankers should focus their attention on the control of inflation, and should accordingly not pay attention to movements in stock markets. This view is reinforced by the continuing influence of the Efficient Markets Hypothesis (EMH), which maintains that financial markets correctly price firms at all times. The authors assert that this general view is incorrect. There are strong reasons, both in principle and in practice, to doubt the applicability of the EMH to the valuation of the stock market as a whole. Indicators of stock market value, such as q, show the market to have been severely overvalued at the end of the twentieth century. Previous episodes of overvaluation have been succeeded, both in the US and Japan, by severe recessions. Such recessions raise the risk of central banks losing control of inflation, due to liquidity traps; they also impose costs, in terms of output and inflation, which central bankers should take into account. Finally, central bankers already do in any case take these into account, but asymmetrically: only when markets fall, not when they rise.
Redefining the Role of the State: Joseph Stiglitz on building a ‘post-Washington consensus’
An interview with introduction by Brian Snowdon
World Economics, September 2001
An interview with introduction by Brian Snowdon
Professor Joseph Stiglitz is without question one of the world’s leading economists. In his extensive research he has made seminal contributions to the analysis of the economic consequences of incomplete information and uncertainty. This work has greatly enhanced economists’ understanding of the welfare properties of markets and the sources of market failure. His research has also contributed to the development of better microeconomic foundations for Keynesian macroeconomic models. Most recently Professor Stiglitz has been heavily involved in controversial public policy debates relating to the East Asian crisis, problems of transition from communism to capitalism, the limitations of the ‘Washington consensus’, and globalisation and development. A common theme in all of these debates relates to the role of government and legitimate borders of the state in both developed and developing economies. In this article/interview Professor Stiglitz gives his views on these and several other important global issues.

On Understanding Money
Martin Shubik, World Economics, March 2001
Fiat money is a creation of both the state and society. Its value is supported by expectations which are conditioned by the dynamics of trust in government, the socio-economic structure and by outside events such as wars, plagues or political unrest. The micro-management of a dynamic economy is not far removed in difficulty from the micro-management of the weather. However, money and the financial institutions and instruments of a modern economy provide the means to influence expectations and bound behaviour. The control of the fiat money supply, together with rules on the granting of credit and the bankruptcy, default and reorganisation rules are public services. They provide lower and upper bounds for the price level in the economy. They also determine the innovation rate of the economy. An innovation may be regarded as an economic mutation; the less costly failure is, the more likely an innovation will be risked.