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From monetary to fiscal


8 October 2016, London

October Bulletin 2016 - Cover (1)

Central bankers have responded to the global financial crisis with a mix of unconventional policies, including negative rates and asset purchases. Addressing September’s OMFIF main meeting in Rome, in comments reproduced in this month’s Bulletin, Banca d’Italia Governor Ignazio Visco noted that such policies helped cushion the initial shock, and that subsequent GDP growth and inflation would have been lower without them. But they have hardly provided a panacea. As Visco noted, such policies have distorted markets and created risks for financial stability.

Extraordinarily loose policies have failed to boost growth substantially and created dangerous debt overhangs in many economies. There have been some collateral effects too, examined in the October Bulletin. Charles Goodhart and Geoffrey Wood argue that such measures have hurt bank profitability. Stijn Claessens and Nicholas Coleman of the Federal Reserve Board of Governors, and Michael Donnelly of MIT, consider evidence on the effect on banks’ net interest margins. Ben Robinson presents the findings of an OMFIF report, produced in conjunction with BNY Mellon, showing that unconventional policies have reduced the supply of liquid assets for collateral. Panicos Demetriades, former governor of the Central Bank of Cyprus, highlights the negative consequences for central banks’ credibility and the notion of their independence.

Nevertheless, there are signs that monetary policy is reaching an important inflection point, with more emphasis being placed on fiscal policy. As Darrell Delamaide outlines, a December US rate rise is now more likely, while the Bank of Japan’s decision to refrain from a rate cut and introduce yield curve controls in asset purchases confirms a shift to a more flexible approach. However, escaping from the unconventional quicksand dragging down central bankers will not be easy.

Vicky Pryce highlights how divisions across the euro area have risen and anti-euro movements are gaining ground in many countries. Steve Hanke alerts us to a doomsday scenario for Italian banks. William Keegan reviews an account of his time in politics by Ed Balls, the UK Labour party’s former shadow chancellor. Around half of respondents to our Advisory Board Poll expect the ECB to expand its quantitative easing programme into new asset classes rather than let it expire in March 2017.

Other highlights of the October 2016 edition:

Donald Mbaka assesses Nigeria’s search for a better monetary-fiscal policy mix.

Kingsley Chiedu Moghalu calls for a deepening of Africa’s democratic ethos.

William White outlines the perils of pursuing fiscal policy through unconventional measures.

Peter Warburton argues for rethinking UK monetary policy.

Danae Kyriakopoulou and Bhavin Patel highlight headwinds with the potential to derail Brazil’s economic recovery.

Flavia Micilotta says that more can be done to help socially responsible investing expedite the transition to low-carbon economies.

• The second in OMFIF’s series of Focus reports examines the case for Frankfurt.

The Bulletin is available to OMFIF members, and to non-members on a subscription basis. To subscribe please contact: membership@omfif.org