November 10, 2011

Central Banks, Financial Regulators, and the Quest for Financial Stability (Guest Post)

By Olivier Blanchard  (via iMFDirect)


The global financial crisis gave economists pause for thought about what should be the future of macroeconomic policy. We have devoted much of our thinking to this issue these past three years, including how the many policy instruments work together.

The interactions between monetary and macroprudential policies, in particular, remain hotly debated. And this year’s IMF Annual Research Conference is an important opportunity to take that debate another step forward.



Looking back, it is striking how many papers from last year’s conference—onpost-crisis macroeconomic and financial policies—have been so immediately relevant to events on the ground. Just to give you an example: the paper on fiscal space is obviously front and center in the policy debate on the European sovereign crisis, the United States’ budget, and challenges faced by advanced country governments more generally.
This year’s topic—monetary and macroprudential policies—is equally relevant. It goes to the core of central banks’ mandates, and their role in achieving macroeconomic and financial stability. The financial crisis triggered a fundamental rethinking of these issues, but much research, both conceptual and empirical, remains to be done. The conference provides an excellent opportunity to engage with prominent academics, policymakers and private sector practitioners. I hope the conference will contribute to expanding the frontier of knowledge on this topic.

The conference program lays the ground for an exciting debate.

Professor Hyun Song Shin of Princeton University will give the keynote Mundell-Fleming address. He will talk about the role of international factors in determining domestic financial conditions. We saw a good illustration of this in the run-up to the recent financial crisis, when European global banks intermediating U.S. dollar funds eased credit conditions in the United States. Clearly, such international linkages need to be taken into account when choosing an appropriate mix of monetary and macroprudential policies.

Eleven other papers we have on the program each touch on a critical aspect of the intersection between monetary and macroprudential policies. Just to give you a flavor of what to expect, here are some of the questions we will be discussing:
  • Should monetary policy lean against credit and asset price bubbles, or should this task be delegated squarely to macroprudential policy?
  • What if macroprudential policy is only partially effective because it encourages regulatory arbitrage and other “leakages”? Does this imply that monetary policy should weigh in, too?
  • What if the government does not have full information on the riskiness of new financial instruments? Will it be able to set macroprudential policies at the levels that will ensure lasting financial stability?
  • How can policymakers guard against the possibility that monetary tightening may encourage excessive risk-taking by financial institutions that find themselves in distress at higher interest rates?
  • How should macroprudential policies be coordinated internationally if they have cross-border repercussions?
In addition to the Mundell-Fleming Lecture, the conference will feature three other policy-oriented events. David Lipton, the IMF’s First Deputy Managing Director, will open the conference. The luncheon speech, by Jean-Pierre Landau, Second Deputy Governor of the Banque de France, will be an opportunity to reflect with a central bank insider on the role of central banks in maintaining financial stability and how that role is set to evolve in light of the lessons from the crisis.

And we will conclude the conference with an Economic Forum on “Monetary and Macroprudential Policies: Challenges and Solutions.” A panel of experts—including Lewis Alexander (Nomura), Joe Gagnon (Peterson Institute of International Economics), Andrew Lo (MIT), and John Williams (Federal Reserve Bank of San Francisco)—will discuss how synergies between monetary and macroprudential policies can be best achieved to reduce the risks of future financial crises, without imposing undue costs on the economy.
I would like to take this opportunity to thank the Conference Organizing Committee and the Editor of the IMF Economic ReviewPierre-Olivier Gourinchas, for drawing up such an outstanding program. Some of the conference papers will be featured in the IMF Economic Review, which is becoming a required reading for everyone interested in questions related to global economic policies, open economy macroeconomics, and international finance and trade.

As always, the IMF’s Annual Research Conference is intended to be a forum for discussing innovative research, and facilitating an exchange of views among researchers and policymakers. Like in the past, we hope that research presented at this conference will contribute to new policy thinking both here at the IMF, and among economists and policymakers more broadly.

I hope you can find the time to read the papers posted online, and to join us via the broadcast of the Economic Forum at www.imf.org or by commenting here.

About The Author - iMFdirect is a weblog covering the global economy and policy issues, posted by the International Monetary Fund (IMF) headquartered in Washington D.C., United States. iMFdirect posts content related to the IMF’s work in economics and finance at global or national level, and posts currently highlight the debate over policy responses to the biggest global recession since the Great Depression. The IMF is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world. (EconMatters author archive here)


The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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