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Rethinking central banking

This report lays out a framework for rethink­ing central banking in light of lessons learned in the lead-up to and aftermath of the global financial crisis. 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 […]

By: , , , , , , , , , , , , , , and Date: September 13, 2011 Topic: European Macroeconomics & Governance

This report lays out a framework for rethink­ing central banking in light of lessons learned in the lead-up to and aftermath of the global financial crisis.

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. Moreover, the evolution of monetary and exchange rate regimes has resulted in incompatibilities among the poli­cies of some key countries. Central banks are also being pulled into new roles by the post-crisis envi­ronment, which features high levels of public and private debt in advanced economies and concerns about capital inflows and currency appreciation in emerging markets. While some aspects of these roles are not new, they are risky, as central bank actions can inflict collateral damage on domestic financial systems and have the potential of raising new domestic and international tensions.

The report analyzes these issues from academ­ic and practical policy-oriented perspectives. Drawing on this analysis, it recommends changes to the dominant framework guiding central bank­ing practice.

The first recommendation is that central banks should go beyond their traditional emphasis on low inflation to adopt an explicit goal of financial stability. Macroprudential tools should be used alongside monetary policy in pursuit of that ob­jective. Mechanisms should also be developed to encourage large-country central banks to inter­nalize the spillover effects of their policies. Spe­cifically, we call for the creation of an International Monetary Policy Committee composed of repre­sentatives of major central banks that will report regularly to world leaders on the aggregate conse­quences of individual central bank policies.

There is substantial pressure on central banks to acknowledge the importance of still other issues, such as the high costs of public debt management and the level of the exchange rate. Central banks are more likely to safeguard their independence and credibility by acknowledging and explicitly addressing the tensions between inflation target­ing and competing objectives than by denying such linkages and proceeding with business as usual. Central banks should make clear that mon­etary policy is only one part of the policy response and cannot be effective unless other policies—fis­cal and structural policies, financial sector regula­tion—work in tandem.

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Opinion

A temporary, common fiscal stimulus to answer the mayhem of COVID-19

We are not in normal times and we have to surpass, albeit only for the duration of the COVID-19 shock, the hurdles that did not allow the euro-area to endow itself of a common fiscal policy.

By: Francesco Papadia Topic: European Macroeconomics & Governance Date: April 2, 2020
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Upcoming Event

Apr
6
14:30

A European response to the coronavirus crisis with Paolo Gentiloni

This is the second event in our series with the Financial Times, where Paolo Gentiloni will discuss the European response to the coronavirus crisis.

Speakers: Paolo Gentiloni, Mehreen Khan and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
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Opinion

Will the economic strategy work?

Because even thriving companies can be killed in a matter of weeks by a recession of the magnitude now confronting the world, advanced-economy governments have reacted in a remarkably similar fashion to the COVID-19 crisis. But extending liquidity lifelines to private businesses and supporting idled workers assumes a short crisis.

By: Jean Pisani-Ferry Topic: European Macroeconomics & Governance Date: April 1, 2020
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Podcast

Podcast

The macroeconomic policy response to the COVID-19 crisis

From the European Stability Mechanism (ESM) to "coronabonds", the EU seems to be struggling to find an appropriate mechanism to tackle the economic crisis created by the COVID-19 pandemic. What is really the best option? And how do we ensure that, once the pandemic is over, we return to sustainable debt levels and competitive economies? This week, Giuseppe Porcaro is joined by Lucrezia Reichlin, professor of Economics at the London Business School, Grégory Claeys and Guntram Wolff to discuss the macroeconomic policy response to the COVID-19 crisis.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: March 31, 2020
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Past Event

Past Event

The Sound of Economics Live: The macroeconomic policy response to the COVID-19 crisis

Which macroeconomic policy response is the best option to deal with the crisis currently unfolding and will ensure that the recovery will be as quick as possible?

Speakers: Grégory Claeys, Giuseppe Porcaro, Lucrezia Reichlin and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: March 31, 2020
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Past Event

Past Event

CANCELLED: How adequate is the European toolbox to deal with financial stability risks in a low rate environment?

Bruegel is delighted to welcome the governor of the Central Bank of Ireland, Gabriel Makhlouf. He will deliver a keynote address about how adequate the European toolbox is to tackle financial stability risks in a low rate environment. Following his speech, a panel of experts will further discuss the topic.

Speakers: Gabriel Makhlouf, Guntram B. Wolff and Agnès Bénassy-Quéré Topic: European Macroeconomics & Governance, Finance & Financial Regulation Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: March 31, 2020
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Blog Post

The fiscal consequences of the pandemic

The likely economic depression triggered by coronavirus will pose a serious fiscal challenge to some euro-area countries. Given the special circumstances of the pandemic, a European solution is needed, involving more European Central Bank purchases, a significantly increased European Stability Mechanism and some degree of mutualisation of the pandemic-related economic costs.

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: March 30, 2020
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External Publication

Facing the lower bound: what will the ECB do in the next recession?

In responding to the global financial crisis, the ECB has pushed its monetary policy into unchartered territories . Today, it appears increasingly constrained by persistently low interest rates. This paper seeks to understand this challenge and assess whether its toolkit would allow the ECB to weather a European recession.

By: Aliénor Cameron, Grégory Claeys and Maria Demertzis Topic: European Macroeconomics & Governance Date: March 27, 2020
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Opinion

Europe needs a Covid-19 Recovery Programme

Policymakers need to think long-term and start planning a broad investment scheme to reboot the European economy.

By: Grégory Claeys, Simone Tagliapietra and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: March 27, 2020
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Blog Post

COVID-19 Fiscal response: What are the options for the EU Council?

It is time for the EU Council to make quick progress on the fiscal front and announce something as soon as possible to show that it taken full measure of the severity of the situation.

By: Grégory Claeys and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: March 26, 2020
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Blog Post

What the EU should do and not do on trade in medical equipment

The European Union has introduced export controls on some medical supplies. This was a mistake. It should announce that it is withdrawing the measure, and call on other countries to do the same.

By: André Sapir Topic: European Macroeconomics & Governance Date: March 25, 2020
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Blog Post

Coronavirus and the politics of a common fiscal instrument

Coronavirus means many European Union countries will soon face major increases in their sovereign debt burdens, exacerbated by the sudden collapse of economic activity. What should the European Union do to address these debt problems?

By: Mark Hallerberg and Stavros Zenios Topic: European Macroeconomics & Governance Date: March 25, 2020
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