Generational Dynamics Forum - New Site

Trevor wrote:Let's not forget all the Credit Default Swaps that are a bomb just waiting for the fuse to light.

aedens wrote:http://www.graduateinstitute.ch/webdav/ ... anking.pdf

By the early 2000s, a growing number of central banks, in advanced countries and emerging markets alike, had converged on a policy framework, flexible inflation targeting, which seemed capable of achieving price stability and delivering macroeconomic stability at the national and international levels. This framework had many practical achievements, including bringing price stability to many emerging markets. Now, however, there is growing recognition that the conventional approach to central banking needs to be rethought. The relationship between price stability and the broader goals of macroeconomic and financial stability clearly needs to be redefined.

One view is that unconventional policies are no different from conventional policies in their cross-border implications. If floating exchange rates can adjust to make international coordination of conventional policies unnecessary, then the same must be true of unconventional policies. This was the view of the United States following the adoption of QE2. In response to complaints from emerging market policy makers who feared the wave of liquidity coming their way, Fed officials essentially argued that, “everything will be okay if you just let your currencies appreciate.”

Financial stability should be an explicit mandate of central banks. Other micro- and macroprudential policies should be deployed first, wherever possible, in the pursuit of financial stability, but monetary policy should be regarded as a legitimate part of the macroprudential supervisors’ toolkit.

The spillover effects of a central bank’s policies in other countries are a legitimate concern. At present, central banks do little to internalize these effects. Admittedly, they may have difficulty in justifying actions taken in the effort to do so to domestic political authorities. This tension points to the need for further changes in prevailing policy framework. Specifically:
(i) Domestic political authorities should be persuaded to allow such considerations
to play an explicit role in the central bank’s monetary policy framework in large economies.
(ii) Large-country central banks should pay more attention to their collective policy stance and its global implications. Where appropriate, they should consider coordinated action to help stabilize the global economy in times of stress.
(iii) These recommendations are unlikely to be implemented in isolation. We therefore propose that a small group of systemically significant central banks, perhaps called the International Monetary Policy Committee, should meet regularly under the auspices of the Committee on the Global Financial System of the BIS. This group would discuss and assess the implications of their policies for global liquidity, leverage, and exposures, and the appropriateness of their joint money and credit policies from the point of view of global price, output, and financial stability.