Evolving central bank mandates

Transcription

1 Evolving central bank mandates ALAN M. TAYLOR UNIVERSITY OF CALIFORNIA, DAVIS, NBER & CEPR Conference on the 200th anniversary of the Oesterreichische Nationalbank Vienna September 2016 Central banking in times of change

2 INTRODUCTION The perfect storm of central bank mandates Evolving central bank mandates My goal Take a long-run view and ask how the past informs the present Outline Three mandates Three perspectives Look at some historical evidence and how we got here The perfect storm of mandates What next? Evolution versus revolution 1

3 OVERVIEW Evolving central bank mandates Three mandates Financial stability In fact a very old mandate of central banks and the rationale for creating some of them in the first place. Only in the last years was this somehow forgotten. Bank of England as a bankers bank. Federal Reserve as a response to 1907 panic. Price stability Another old mandate, subsumed under gold standard rules until the 20 th century. Has evolved to include any nominal anchor in current use (e.g., fixed exchange rates, inflation targets) or past/future use (proposed price level or NGDP targets, older money growth rules). Output or employment stability Certainly now an overarching macroeconomic policy goal of governments, but not until mid-20 th century Explicitly there in dual mandates, or else implicitly (deviations from divine coincidence). 2

4 OVERVIEW Evolving central bank mandates Three perspectives History This is arguably a unique moment in history when difficulties/conflicts have put all three mandates simultaneously on center stage for the first time. Challenge: Central banks now have more jobs to do. Economics Also unique in that the current (very unusual) combination of macroeconomic and financial conditions could make any or all goals harder to achieve. Challenge: Each job is harder, and old tools may be lacking. Politics Big question (political as much as technocratic) hangs over us: is the central bank old model broken? Forever? Challenge: The narrow-remit, inflation-targeting, independent central bank was state of the art design a decade ago. But is it now after the crisis, and if so what comes next? 3

5 FINANCIAL STABILITY Crises and the financial hockey stick 4

6 FINANCIAL STABILITY Private credit growth and crisis probability Predicted probability of a financial crisis Predicted probability of a financial crisis Sample mean ± 2 s.d Average annual change over 5 years in banks loans / GDP (pct pts per year) 5

7 PRICE STABILITY The return of lowflation Hi-flation events (>4) Lo-flation events (<2) Fraction of countries

8 PRICE STABILITY And the return of low r-star and near-zlb Real interest rate (% per year) Negative real rate and Near-ZLB=1 Negative real rate and Near-ZLB=

9 OUTPUT-EMPLOYMENT STABILITY Great Depression sequel: no crash, no bounce Real GDP Western Europe Real GDP (1929=100) Eurozone Real GDP (2007=100) Real GDP UK Real GDP (1929=100) UK Real GDP (2007=100) time time 8

10 OUTPUT-EMPLOYMENT STABILITY Great Depression sequel: no crash, no bounce Growth of real GDP per capita (% per year) Growth of real GDP per capita, N=17 advanced economies (5y mov. avg.)

11 CONCLUSIONS A perfect storm of mandates Convergence Never before have all three mandates demanded simultaneous attention to such a degree. Financial stability mandate Big in 19 th century, but declines after 1930s when self-discipline by banks, plus financial repression, LOLR, deposit insurance, etc., kept crises at bay. NOW: It s back, worst financial crisis since 1930s. Price stability mandate Central to gold standard and Bretton Woods, and only a brief failure in the 1970s, but this was enough for near-obsessive attention to this goal. NOW: Still matters, but the new problem is lowflation. Output-employment stability mandate Ignored under gold standard ideology and politics, but brought to fore in democracies by 1930s slump. Like FS mandate, this faded into the background in postwar boom, then dominated by inflation concern after the 1970s. NOW: Worst recession since 1930s, adds weight to this objective too. 10

12 CONCLUSIONS Future of mandates: evolution or revolution? More instruments will be needed to target more goals and more elusive goals Controversial? New frameworks will be needed to design and operate these instruments Controversial? This is likely to make the job of central banks more political Could mean (more) challenges to the presumption of central bank independence? 11