Unconventional monetary policy,liquidity trap,and asset prices

This article offers a fundamental critique of monetary policy implemented in the United States following the 2007–8 global financial crisis. It aims to show that the misunderstanding of the mainstream theoretical thinking underlying monetary policy actions led to the ineffectiveness of the policy response to the 2007–8 global financial crisis. The conventional view that monetary policy is the stabilization tool has serious flaws and is ineffective for bringing about economic recovery. The Federal Reserve’s experiment with the so-called unconventional monetary policy exposed the weakness of the conventional belief in understanding how banks operate, how the monetary authority can influence the yield curve, and how the monetary transmission mechanism works, resulting in prescribing an ineffective treatment to boost economic activity. In this regard, it is argued that the Federal Reserve’s decision to let long-term interest rates be market determined represents a significant self-imposed constraint, which limits policy options regarding monetary policy actions and the effective control of long-term interest rates. By limiting the setting of policy rates only to the overnight interest rate, the ability of the monetary authority to influence long-term interest rates is both weak and indirect.     

Taming the City? Ideas,Structural Power and the Evolution of British Banking Policy Amidst the Great Financial Meltdown

We are increasingly learning more about the contingencies and independent variables that shape the structural power of business and financial interests. This paper contributes to this research by analysing factors that led to weakening in the structural power of financial interests in the City of London in the aftermath of the 2007/2008 crisis. We focus on under-researched mediators of structural power dynamics, especially the context of action and the agency and ideas of state leaders. Prior to the crisis, closed regulatory policy and a prevailing discourse premised upon the notion of market efficiency, helped to reinforce the structural power of the UK banking and financial sector. After the crisis heightened politicisation, more assertive state leadership, and especially ideational revision, has increasingly challenged the power of the City. We illustrate this through an examination of the Independent Commission on Banking's proposals in relation to the ‘ring fencing’ of investment and retail banks.     

Asset Prices and the Financial Crisis of 2007–09: An Overview of Theories and Policies

The financial crisis of 2007–09 has led to a rethinking of the role of monetary and financial regulatory policy. It has also called into question the benefits of financial innovation and monetary policy that focuses solely on inflation and the output gap. This paper discusses financial instabilities in general, the recent financial crisis as well as the appropriate role of monetary and financial regulatory policy in dealing with asset bubbles. The paper concludes by evaluating appropriate policies to reduce the economic impact of future financial crises.     

The Gendered Nature of Poverty in the EU: Individualized versus Collective Poverty Measures

Due to the adoption of the household as a unit of analysis, researchers have failed to identify accurate measures of women's income poverty. This study proposes an individualized measure of European poverty to highlight gender differences in the economic crisis. Employing data from the European Union Statistics on Income and Living Conditions (EU-SILC) for the period 2007–12, it compares the household-based at-risk-of-poverty rate (ARPR) and the individualized financial dependency rate (FDR). The study shows that the gender gap in poverty in Europe is considerably higher when computed through FDR. Indeed, since the ARPR constitutes a proxy of the household's average conditions, it levels down gender inequalities within the household and also variations in individuals’ incomes over time. Only more detailed data collection on intrahousehold resource sharing will possibly allow the development of more precise and realistic indicators of women's and men's risks of poverty and financial dependency.     

Asset Prices and the Financial Crisis of 2007–09: An Overview of Theories and Policies

The financial crisis of 2007–09 has led to a rethinking of the role of monetary and financial regulatory policy. It has also called into question the benefits of financial innovation and monetary policy that focuses solely on inflation and the output gap. This paper discusses financial instabilities in general, the recent financial crisis as well as the appropriate role of monetary and financial regulatory policy in dealing with asset bubbles. The paper concludes by evaluating appropriate policies to reduce the economic impact of future financial crises.     

Why does the peso-dollar exchange rate show a depreciation trend? The role of productivity differentials

Over the last three decades, Mexico's macroeconomic policy has been driven by a sound orthodox strategy: an open economy via many trade agreements signed since the mid-1980s, a nominal exchange rate under a flexible regime since 1994, central bank autonomy, and responsible fiscal policy, among other benchmarks. Nevertheless, the exchange rate has continued on a path of depreciation against the US dollar. In this paper, we show that although an equilibrium relationship exists between the exchange rate and prices in Mexico and the US (its main commercial partner), there are other forces affecting the former. The main factor in this relentless long-term depreciation is the loss of productivity in Mexico relative to the US. In addition, we show that the extraordinary liquidity supplied by the US during the 2008 crisis caused the Mexican peso to appreciate against the dollar.     

A Crisis of the Overcrowded Future: Shadow Banking and the Political Economy of Financial Innovation

This article focuses on the role the shadow banking system played in the financial crisis of 2007–9. Engaging with emergent theories of shadow banking, I inquire into its structural role in contemporary capitalism. My main premise here is that the crisis of 2007–9 is distinct in financial history because it did not centre on any organised market. Rather, it was crisis of the overcrowded financial channels bridging the present and the future, which have become congested because of the massive concentration of financial values generated, yet not sustained, through the shadow banking network. My analysis suggests that shadow banking has determined the nature of financial crisis of 2007–9 and continues to play a necessary role in financial capitalism based on futurity. Drawing on scholarship in financial Keynesianism, contemporary legal studies and early evolutionary political economy, I argue that shadow banking is best seen as the organic institutional infrastructure of financialised capitalism based on debt and geared towards futurity, a concept originally developed by John Commons.     

The effects of the subprime crisis on the Latin American financial markets: An empirical assessment

The aim of this article is to answer the following question: can the considerable rise in the volatility of the LAC stock markets in the aftermath of the 2007/2008 crisis be explained by the worsening financial environment in the US markets? To this end, we rely on a time-varying transition probability Markov-switching model, in which “crisis” and “non-crisis” periods are identified endogenously. Using daily data from January 2004 to April 2009, our findings do not validate the “financial decoupling” hypothesis since we show that the financial stress in the US markets is transmitted to the LAC's stock market volatility, especially in Mexico.     

Gender Analysis of the Policy Responses to High Oil Prices: A Case Study of South Africa

ABSTRACT

The 2007–8 surge in oil prices has created concern about its impacts on poor and vulnerable populations in developing countries. Government management of the energy crisis was shown to be important in reducing adverse impacts. This study uses an applied general equilibrium framework to examine alternative policy and external shocks with the recent surge in oil prices in South Africa through a gender lens. Simulation results show that although the 2007–8 energy crisis contributed to slowing down South African gross domestic product (GDP) growth and reducing employment and earnings, the distributional impact between men and women has been neutral. This neutrality is driven by an increase in capital inflows, which has mitigated the exchange rate depreciation owing to the oil price hike. Without an increase in capital inflows, the crisis would have significantly depreciated the exchange rate and contributed to decreasing women's market opportunities and increasing women's workload as compared to men.     

Globalisation and the Institutional Re-embedding of Markets: The Political Economy of Price Formation in the Bordeaux En Primeur Market

Contemporary analyses commonly attribute the global credit crisis to faulty regulation. What have been the roots of these deficient rules, particularly in Europe, where rapid spill-over from US markets took policy makers and observers by surprise? This article focuses on regulatory liberalism as the paradigm guiding European Union (EU) regulation. It has dominated regulatory thinking for decades, but it has been implemented throughout Europe only since the mid-1990s. This shift can be traced to political institutions that have filtered policy ideas. EU financial reforms have pushed policy from pragmatism, under which it was adapted to political contingencies, to dogmatism, which adapts it to the intellectual exigencies of rigid policy paradigms. Inadvertently, reforms had created an epistemic community in which ‘professional’ rule setters systematically ignored external criticisms. The institutionalised ambition to craft ‘intellectually sound’ policy–rather than policy that simply ‘works’ –generated rules that persistently ignored the financial markets' self-reflexivity and thereby aggravated the crisis.     

Interdependence or contagion: A model switching approach with a focus on Latin America

Empirical research analysing contagion has become increasingly fragmented. Different definitions of contagion have resulted in different methods being deployed to analyse financial transmission channels. This paper devises a novel econometric strategy where the nature of interdependencies, magnitude of interdependencies and transmission channels selected for inclusion can change over time. We thus appeal to multiple definitions of contagion, distinguishing between: interdependence, contagion through interdependence and abrupt contagion through changing linkages. Using our approach we analyse different crisis episodes in Latin America. Results generally indicate interdependence not contagion during the currency crises of the 1990s and Argentine crisis of 1998–2002. During the global financial crisis, results indicate abrupt contagion from the US to Argentina and Brazil. Mexico, however, experiences contagion through existing interdependencies with the US. Results also show that macroeconomic and uncertainty channels play a role during different crises not just financial channels. By establishing whether or not different interdependencies and transmission channels are present during different crises our model switching approach provides new insights.     

Financial market fragmentation and monetary transmission in the euro area: what do we know?

We provide a survey on the literature examining financial market fragmentation in the euro area and discuss the policy options how to reduce it. The fragmentation has increased markedly since the outbreak of the global financial crisis in 2007. It declined somewhat from late 2012 onwards, but is still above the pre-crisis level. Interest rate pass-through has become less efficient primarily because of increased mark-ups and, to a certain extent, the lower responsiveness of bank interest rates to policy rates. The effectiveness of interest rate pass-through has become more heterogeneous across euro area countries, making a common monetary policy more difficult. The unconventional monetary policy conducted by the European Central Bank has reduced financial market fragmentation notably; however, this policy was not without side effects. Enhancing financial and fiscal stability in the euro area is key for the efficient functioning of the monetary transmission mechanism.     

Reserve accumulation and exchange rate policy in China: The authoritarian elite's aim of political survival

Since the Asian financial crisis of 1997–1998, China has significantly increased its foreign exchange reserves. We argue that the resulting abnormal levels of currency reserves accumulated by Chinese authorities are not intended to maximize the citizenry's economic welfare, as in a mercantilist or a precautionary account, but rather to forestall the elite's own political demise. This goal has been pursued mainly by generating large current account surpluses through manipulation of the renminbi exchange rate. The Chinese elite has sought to promote the acceptance of this policy by influencing the costs of collective action taken by winners and losers.     

State-led or Capital-driven? The Fall of Bretton Woods and the German Currency Float Reconsidered

This article argues that the lead role of West Germany in the transition from fixed to floating exchange rates sits uneasily with accounts that conceptualise the breakdown of Bretton Woods in terms of hegemonic power politics, the influence of global economic interests or a neoliberal paradigm shift. Short of a convincing explanation, the German currency float seems to be a prime example of states surrendering to financial markets. The article offers an alternative interpretation that focuses on the nexus between state agency and capital accumulation. German authorities were indeed confronted with a destabilising influx of dollars that undermined their available policy options. But as they realised that these inflationary flows emanated from the same export-oriented forces in whose interest they had sought to hold on to an undervalued currency, they chose floating in order to regain command over liquidity and create an anti-inflationary programme that was at the heart of Germany's subsequent ability to better manage the 1970s crisis than its partners. Attention to the particular circumstances and consequences of these ‘structured choices’, I conclude, may offer a more compelling account of financial globalisation as a state-led project than those which generalise from the US context.     

The Effectiveness of Unconventional Monetary Policy in Japan

Since the global financial crisis of 2007–2008, central bankers around the world have been forced to abandon conventional monetary policy tools in favor of unconventional policies such as quantitative easing, forward guidance, and even lowering the interest rate paid on bank reserves into negative territory. Japan, which faced a crisis in its banking sector and came up against the theoretical zero lower bound on interest rates nearly a decade earlier, was a pioneer in the use of many of these unconventional policy tools. This article analyzes the effectiveness of Japan’s bold experiment with unconventional monetary policy. Using a panel of bi-annual bank data covering the full universe of Japanese commercial banks over a fifteen-year period, this study analyzes the effectiveness of quantitative easing policy on the bank lending channel of monetary policy transmission. Our findings suggest that Japan’s unconventional monetary policy worked: there is a bank lending channel of monetary policy transmission in Japan. These results are robust to the inclusion of time fixed effects and generalized method of moments analysis.     

The effects of economic policy uncertainty on China’s economy: evidence from time-varying parameter FAVAR

ABSTRACT

This article explores the effects of China’s economic policy uncertainty (EPU) on its fiscal policy, monetary policy and a wide range of macro-economic variables using a time-varying parameter FAVAR model. Based on monthly data from 07/2003 to 08/2017, the time-varying structure of the model allows us to capture the time-varying characteristics of the macro-economic variables and which channel is relevant. Empirical results reveal that the reaction of monetary and fiscal policies to EPU is highly asymmetric across macro-economic circumstances. Loose monetary and fiscal policies are adopted in response to EPU shocks during the financial crisis, while policies are moderately tightened after the crisis. The China Interbank Offered Rate (Chibor) responds more sensitively and severely than M2 to EPU shocks. Additionally, EPU shocks have a significant and negative impact on economic growth, consumption, exchange rates, bonds and the stock market, but showing a positive impact on credit, real estate and fixed asset investment (which might be due to China’s special economic market environment and the high investment return). The results indicate that EPU shocks significantly affect macroeconomic fundamentals through precautionary savings and financial market channels but lose their effectiveness through a ‘real options’ effect.     

Banking in macroeconomic theory and policy

This special issue, “Banking in Macroeconomic Theory and Policy,” explores a problem that has occupied to varying degrees several recent generations of economists: identifying and integrating the appropriate role of a banking sector within a policy-relevant analytical framework of macroeconomic analysis. This introductory article tries to provide a context for the fascinating contributions to this issue. It reviews efforts to apply developments in bank modeling to augmenting macroeconomic models during the 1960s through 1980s, theoretical and empirical elements that led to diminished emphasis on incorporating banking into analytical macroeconomic frameworks between the 1990s and the 2007–2009 financial crisis, and recently renewed work to integrate banking sectors into modern macroeconomic models. The paper concludes by reviewing briefly the contributions contained in this special issue.     

金融危机、货币政策与信贷供给*——基于公司层面银行信贷数据的经验研究

不同的银行特征会对金融危机和货币政策传导的银行信贷渠道产生异质性影响。本文运用2001-2015年公司层面银行信贷数据实证检验了我国货币政策传导的银行信贷渠道,随后进一步研究金融危机对不同特征银行信贷供给的影响差异。经验研究发现：我国货币政策银行信贷渠道主要通过非国有控股银行传导,并引起不同资产负债表特征银行信贷供给的异质性反应。银行规模越大、流动性越强、资本充足率越高,银行信贷供给对货币政策越不敏感。金融危机期间,银行信贷渠道的传导效率显著降低,高资本充足水平的银行和国有控股银行受金融危机的冲击较小,并且宽松的货币政策对国有控股银行信贷供给调控的效率更高。     

Keynesian Dominance in Crisis Therapy

The 1930s’ debate about the short-run Keynesian response to crisis and Hayek's critique of its long-run consequences has significant contemporary parallels. This article examines, from a historical perspective, the Keynes–Hayek debate by considering the development of Keynesian economic theory, its ascension and application during financially sound times, the Hayekian critique, the monetary counter-revolution, and the Keynesian renaissance in the wake of the global financial crisis. It is shown that Keynesian fiscal measures prevail over the Hayekian approach in the midst of a crisis leading to rising inflation and public debt, depressed long-run growth and a new crisis.     

The 2007–2009 financial crisis: changing market dynamics and the impact of credit supply and aggregate demand sensitivity

This article singles out the determinants of changes in US firms’ systematic risk and idiosyncratic return induced by the 2007–2009 financial crisis. After establishing that systematic risk changes during the crisis, the results show that higher operational and financial leverage coincide with an increase in systematic risk, while high cash availability is associated with a decrease in systematic risk. The crisis-induced idiosyncratic return worsens with increasing financial leverage, higher sensitivity to aggregate demand shocks and banking sector problems, and lower operational leverage. Additional results show that the aforementioned variables have economically large effects on firm performance during the crisis.