We provide empirical evidence that the impact of quantitative easing (QE) programs on investment is weaker for countries with high-credit market regulations. We then extend a simple DSGE model with segmented financial markets to include credit regulation and examine its impact on the transmission of conventional and unconventional monetary policies. In our model, the government requires banks to hold a fraction of their assets in government debt. We show that the presence of such regulation can invert monetary transmission under QE policy: An expansionary QE program raises term premiums on corporate bonds and causes a contraction instead of an expansion in the economy. Such a perversion is absent under conventional policy. Further, in contrast to Carlstrom et al. (2017), we show that a simple Taylor rule welfare dominates a term premium peg under financial shocks, while the peg does better in the case of non-financial shocks.

The paper builds a parsimonious US business cycle SVARMA model, establishing identification conditions for independent monetary shocks. The SVARMA model, utilizing Divisia M3 and Divisia M4, is compared to the simple sum M2. The monetary rule with Divisia M3 yields theoretically consistent results marked by the absence of the usual price and liquidity puzzles. As the Federal Reserve (Fed) took a more hawkish approach to curb inflation, significant increases in US interest rates and declines in monetary aggregates were largely influenced by the Fed’s reaction function, which incorporates the Divisia M3 monetary rule. Findings emphasize the monetary impact on the business cycle, highlighting the significance of Divisia monetary aggregates. Historical and variance decompositions reveal diverse, dynamic effects of monetary shocks on macroeconomic variables. The SVARMA model with Divisia M3 and M4 demonstrates superior performance over simple sum M2 in capturing the time path of monetary shocks.

We use the New Keynesian Dynamic Stochastic General Equilibrium (DSGE) framework and Vector Autoregressive (VAR) to investigate the usefulness and relevancy of monetary services, augmented to include credit card transaction services. We use the new credit-card-augmented Divisia monetary aggregates in the models to further the existing research on their usefulness and relevancy. In this research, we compare three different monetary aggregates within the New Keynesian framework: (1) the aggregation-theoretic “true” monetary aggregate, (2) the credit-card-augmented Divisia monetary aggregate, and (3) the simple sum monetary aggregate.

We acquire the following primary results. (1) The credit-card-augmented Divisia monetary aggregate tracks the theoretical (true) monetary aggregate, while simple sum does not. Although this result would be expected from the theory in classical economic models, the result is not an immediate implication of the theory in New Keynesian models and therefore needs empirical confirmation. (2) Under the recursive VAR framework, the credit-card-augmented Divisia monetary aggregate serves as a preferable monetary policy indicator compared to the traditional federal funds rate. (3) On theoretical grounds, we find that the separability condition for existence of a monetary aggregator function could fail, if credit card deferred payment services were excluded from the monetary services block, unless all markets are perfect.

We consider the debut of a new monetary instrument, central bank digital currencies (CBDCs). Drawing on examples from monetary history, we argue that a successful monetary transformation must combine microeconomic efficiency with macroeconomic credibility. A paradoxical feature of these transformations is that success in the micro dimension can encourage macro failure. Overcoming this paradox may require politically uncomfortable compromises. We propose that such compromises will be necessary for the success of CBDCs.

Post the great financial crisis (GFC) of 2008–2009, there has been a surge in the macroeconomics literature on aggregate uncertainty. Although the recent literature has recognized the adverse real effects of global uncertainty shocks in emerging market economies (EMEs), the role of monetary policy in offsetting these adverse effects and their link with the exchange rates is not explored in the literature. We find that the currently followed interest rate rules (IRRs) under a flexible inflation-targeting regime are ineffective in stabilizing the domestic economy during periods of high global uncertainty in the EMEs. Using a small open economy new Keynesian DSGE model with Epstein–Zin preferences and second-moment demand shocks, we compare and propose alternate monetary policy rules that significantly reduce welfare losses. We find that the best monetary policy rule in terms of welfare depends on the nature of shock that is, first-moment or second-moment shock.

Our study investigates the influence of the Korean National Pension Fund's equity ownership on voting premiums, revealing a statistically significant reduction. In particular, we establish the liquidity pathway as the primary factor among the three channels previously suggested in the literature. Analysis of the COVID-19 era and the VKospi index underscores this predominance. These findings enrich the literature on public pension funds and capital markets, providing policymakers in emerging economies with a deeper understanding of the dynamics involved in establishing pension investment institutions.

Modern financial crises are difficult to explain because they do not always involve bank runs, or the bank runs occur late. For this reason, the first year of the Great Depression, 1930, has remained a puzzle. Industrial production dropped by 20.8 percent despite no nationwide bank run. Using cross-sectional variation in external finance dependence, we demonstrate that banks’ decision to not use the discount window and instead cut back lending and invest in safe assets can account for the majority of this decline. In effect, the banks ran on themselves before the crisis became evident.

Adam Smith promoted free banking—private, competitive, convertible banknotes. He also supported restrictions on banks. We study Smith’s views and the era in which they developed, suggesting his ‘regulations’ were a backstop against banks’ risks to depositors but primarily monetary stability. In modern parlance, Smith supported macroprudential regulations to underpin monetary stability, as did Friedman and Schwartz the US FDIC. We discuss why Smith’s vision for banking went unrealised. Bank regulation became microprudential and ran aground in 2008/2009. The prominence of macroprudential regulation now provides a chance to reorientate regulation to support monetary stability. Early signs are not promising.

Should the transmission of monetary policy be understood in terms of its impacts on interest rates and bond yields, or monetary aggregates? This article considers the relationship between those aggregates and inflation, both over the past and more recently. And explains how the MPC takes account of “QT” in its forecasts.

The advent of quantitative easing by the world’s major central banks invites renewed questions about the meaning and role of central bank independence in an age of economic crisis. This article draws together insights from economic sociology, history and democratic theory to engage in further discussion about the proper role of central banks in democratic society. We stress some related themes. Our brief history of central banks aims to show how these banks have always been embedded in economic and political coalitions and conflicts, therefore qualifying the term independence; our study also aims to show that in satisficing between conflicting tasks, central banks need to maintain a balance between cognitive competences and normative expectations. Independence is better understood as a form of dependence on the coalition of interests that supported the financial climate prevailing before the global crisis of 2008, one of low wage-price inflation, high borrowing and debt, and loss of prudential control. We argue that independence amounts to a form of re-privatisation of central banks, and that they are increasingly suborned to the pressures of financial markets. At the same time, asset price inflation has sacrificed growth and employment and therefore prolongs the crisis. The economic measures now demanded by the financial crisis prompt new doubts about the independent central bank experiment, potentially in favour of the ex ante model of governmental oversight of central banks.

The power of finance ensured that, other than for an initial fiscal push to salvage financial institutions, monetary measures in the form of quantitative easing, involving the infusion of large volumes of cheap liquidity, were the principal response to the 2008 global financial crisis. The effects of the generalised and prolonged dependence on such measures have been a substantial increase in vulnerability, at the centre of which is a huge build-up of private – especially corporate – debt, and unwarranted and unsustainable asset price inflation in both developed country and ‘emerging economy’ markets. A consequence of these processes is a massive increase in income and wealth inequality across the world, which limits the level of effective demand and growth.

This paper examines whether changes in US presidential administration and central bank turnover during the period 1976–2016 caused regime shifts in Taylor rule deviations. Using a dynamic stochastic general equilibrium model to construct the welfare-maximizing policy rule and deviations from the optimal rule, we find evidence that politics indeed play a key role in explaining these deviations. In addition to politics, unemployment rates and the interest rate spread significantly account for regime shifts in Taylor rule deviations.

Our study of the day-to-day management of monetary policy in the Netherlands between 1925 and 1936 reveals that policy leaders and central bankers were both willing and able to deviate from the monetary policy paths set by other countries, all while remaining firmly within the gold bloc. The Netherlands wielded an independent monetary policy while remaining on gold thanks to its central bank's plentiful gold reserves. Central bankers quelled any speculation against the guilder by exploiting their domestic policy influence and international reputation to restrict capital mobility. However, maintaining pre-war parity until the collapse of the gold standard in September 1936 came at a cost. Our international comparisons and counterfactual analysis suggest that Dutch officials would have avoided a deepening of the Great Depression by leaving gold alongside the UK in 1931.

We have produced a series on the Bank of England's profits from its foundation in 1694 to the present time. This has not been available before. We explain the path of these profits over more than 300 years and account for their changing pattern. We next examine from where the profits derived, first in ‘normal times’, and then seeking, in particular, the impact of wars and financial crises. Other questions are: how much derived from seignorage; to what extent were profits passively acquired? Finally, we examine what the distribution regime was, and if, and how, that changed. This becomes more interesting in the period after nationalisation with some surprising results.

Expectations are among the main driving forces for economic dynamics. Therefore, managing expectations has become a primary objective for monetary policy seeking to stabilize the business cycle. In this paper, we study whether central banks can manage private-sector expectations by means of publishing one-period ahead inflation projections in a New Keynesian learning-to-forecast experiment. Subjects in the experiment observe these projections along with the historic development of the economy and subsequently submit their own one-period ahead inflation forecasts. In this context, we find that the central bank can significantly manage private-sector expectations and that this management strongly supports monetary policy in stabilizing the economy. Moreover, published central bank inflation projections drastically reduce the probability of a deflationary spiral after strong negative shocks to the economy.

The Latin American debt crisis consumed the 1980s and was not restricted to Latin America. Starting from the August 1982 Mexican weekend, the crisis had three phases: Concerted Lending (1982-5), Baker Plan (1985-9) and Brady Plan (1989 to mid 1990s). This article describes the evolution of the debt strategy and the road to embracing debt write-downs at the end of the decade. In the absence of an external coordinating mechanism, four groups of parties had to reach agreement on any change in the strategy: the borrowing countries, their commercial bank lenders, the home-country authorities of those lenders, and the International Monetary Fund as the principal international institution. Each group could effectively veto any change in the strategy. This need for consensus is lesson number one from the 1980s for today. Lesson number two is that political economy aspects dictated that the strategy be implemented on a case-by-case basis. The article concludes with an application of these lessons to a similar, but even more global, potential debt crisis in the wake of the COVID pandemic.

This paper examines the effectiveness of forward guidance shocks in the US. We estimate a New Keynesian model with imperfect central bank credibility and heterogeneous expectations using Bayesian methods and survey data from the Survey of Professional Forecasters (SPF). The results provide important takeaways: (1) The estimated credibility of the Fed’s forward guidance announcements is relatively high, but anticipation effects are attenuated. Accordingly, output and inflation do not respond as favorably as in the fully credible counterfactual. (2) The so-called “forward guidance puzzle” arises partly from the unrealistically large responses of macroeconomic variables to forward guidance under perfect credibility and homogeneous fully informed rational expectations, assumptions which are found to be jointly inconsistent with the observed US data. (3) Imperfect credibility provides a plausible explanation for the empirical evidence of forecasting error predictability based on forecasting disagreement found in the SPF data. Thus, we show that accounting for imperfect credibility and forecasting disagreements is important to understand the formation of expectations and the transmission mechanism of forward guidance.

We assess the effects of financial shocks on inflation, and to what extent financial shocks can account for the “missing disinflation” during the Great Recession. We apply a Bayesian vector autoregressive model to US data and identify financial shocks through a combination of narrative and short-run sign restrictions. Our main finding is that contractionary financial shocks temporarily increase inflation. This result withstands a large battery of robustness checks. Negative financial shocks help therefore to explain why inflation did not drop more sharply in the aftermath of the financial crisis. Our analysis suggests that higher borrowing costs after negative financial shocks can account for the modest decrease in inflation after the financial crisis. A policy implication is that financial shocks act as supply-type shocks, moving output and inflation in opposite directions, thereby worsening the trade-off for a central bank with a dual mandate.

Credit restrictions were used as a monetary policy instrument in the Netherlands from the 1960s to the early 1990s. Since these restrictions were aimed at containing money rather than credit growth, their focus was on net credit creation by the financial sector. We document the rationale of these credit restrictions and how their implementation evolved in line with the evolution of the financial system. We study the impact on the balance sheet structure of banks and other financial institutions. We find that banks mainly responded to credit restrictions by making adjustments to the liability side of their balance sheets, particularly by increasing the proportion of long-term funding. Responses on the asset side were limited, while part of the banking sector even increased lending after the adoption of a restriction. These results suggest that banks and financial institutions responded by switching to long-term funding to meet the restriction and shield their lending business. Arguably, the credit restrictions were therefore still effective in reaching their main goal. Indeed, we do find evidence of a significant effect of credit restrictions on inflation.

This paper describes how the large budget deficits of 2020 in the United States and the United Kingdom were financed, how central banks are in practice managed not just short-term interest rates but also yields on government bonds, and how their ability to resist a post-coronavirus surge in inflation has been compromised.