- Jeremy Clift
- Published Date:
- October 2014
The possibility that periods of relative economic stability may contribute to risk taking and the buildup of imbalances that may unwind in a painful manner is often linked to the ideas of Hyman Minsky, see Hyman P. Minsky (1992), “The Financial Instability Hypothesis (PDF),” Working Paper 74 (Annandale-on-Hudson, New York: Jerome Levy Economics Institute of Bard College, May). For a recent example of an economic model that tries to explore these ideas, see, for example, Markus K. Brunnermeier and Yuliy Sannikov (2014), “A Macroeconomic Model with a Financial Sector,” American Economic Review, Vol. 104 (February), pp. 379–421.
For a discussion of this issue encompassing experience across a broad range of advanced economies in the 2000s, including the United States, see Jane Dokko, Brian M. Doyle, Michael T. Kiley, Jinill Kim, Shane Sherlund, Jae Sim, and Skander Van Den Heuvel (2011), “Monetary Policy and the Global Housing Bubble,” Economic Policy, Vol. 26 (April), pp. 233–83. Igan and Loungani (2012) highlight how interest rates are an important, but far from the most important, determinant of housing cycles across countries, see Deniz Igan and Prakash Loungani (2012), “Global Housing Cycles,” IMF Working Paper 12/217 (Washington: International Monetary Fund, August). Bean and others (2010), examining the trade-offs between unemployment, inflation, and stabilization of the housing market in the United Kingdom, imply that reliance on monetary policy to contain a housing boom may be too costly in terms of other monetary policy goals (see Charles Bean, Matthias Paustian, Adrian Penalver, and Tim Taylor (2010), “Monetary Policy after the Fall (PDF),” paper presented at “Macroeconomic Challenges: The Decade Ahead,” a symposium sponsored by the Federal Reserve Bank of Kansas City, held in Jackson Hole, Wyoming, August 26–28). Saiz (2014) suggests that about 50 percent of the variation in house prices during the 2000s boom can be explained by low interest rates, and finds that it was the remaining, “non-fundamental” component that subsequently collapsed—that is, the interest rate component was not a primary factor in what Saiz terms “the bust,” see Albert Saiz (2014), “Interest Rates and Fundamental Fluctuations in Home Values (PDF),” paper presented at the Public Policy and Economics Spring 2014 Workshops, hosted by the Harris School of Public Policy, University of Chicago, April 8.
The notion that tighter monetary policy may have ambiguous effects on leverage or repayment capacity is illustrated in, for example, Anton Korinek and Alp Simsek (2014), “Liquidity Trap and Excessive Leverage (PDF),” NBER Working Paper Series 19970 (Cambridge, Massachusetts: National Bureau of Economic Research, March).
See, for example, Tobias Adrian and Hyun Song Shin (2010), “Liquidity and Leverage,” Journal of Financial Intermediation, Vol. 19 (July), pp. 418–37; and Tobias Adrian and Hyun Song Shin (2011), “Financial Intermediaries and Monetary Economics,” in Benjamin Friedman and Michael Woodford, eds., Handbook of Monetary Economics, Vol. 3A (San Diego, California: Elsevier), pp. 601–50. For a study emphasizing how changes in the response of monetary policy to financial vulnerabilities would likely change the relationship between monetary policy and financial vulnerabilities, see Oliver de Groot (2014), “The Risk Channel of Monetary Policy (PDF),” International Journal of Central Banking, Vol. 10 (June), pp. 115–60.
This evidence and experience suggest that a reliance on monetary policy as a primary tool to address the broad range of vulnerabilities that emerged in the mid-2000s would have had uncertain and limited effects on risks to financial stability. Such uncertainty does not imply that a modestly tighter monetary policy may not have been marginally helpful. For example, some research suggests that financial imbalances that became apparent in the mid-2000s may have signaled a tighter labor market and more inflationary pressure than would have been perceived solely from labor market conditions and overall economic activity. Hence, such financial imbalances may have called for a modestly tighter monetary policy through the traditional policy lens focused on inflationary pressure and economic slack. See, for example, David M. Arseneau and Michael Kiley (2014), “The Role of Financial Imbalances in Assessing the State of the Economy,” FEDS Notes (Washington: Board of Governors of the Federal Reserve System, April 18).
For a summary of house price developments across a range of countries through 2013, see International Monetary Fund (2014), “Global Housing Watch” (Washington: International Monetary Fund).
For a discussion of macroprudential steps taken in Canada, see Ivo Krznar and James Morsink (2014), “With Great Power Comes Great Responsibility: Macroprudential Tools at Work in Canada,” IMF Working Paper 14/83 (Washington: International Monetary Fund, May).
See Norges Bank (2010), “The Executive Board’s Monetary Policy Decision—Background and General Assessment,” press release, May 5, paragraph 28.
See Per Jansson (2013), «How Do We Stop the Trend in Household Debt? Work on Several Fronts,” speech delivered at the SvD Bank Summit, Berns Salonger, Stockholm, December 3, p. 2.
For a discussion, see Min Zhu (2014), “Era of Benign Neglect of House Price Booms Is Over,” IMF Direct (blog), June 11.
These questions have been explored in, for example, International Monetary Fund (2013), The Interaction of Monetary and Macroprudential Policies (PDF) (Washington: International Monetary Fund, January 29).
The IMF recently discussed tools to build resilience and lean against excesses (and provided a broad overview of macroprudential tools and their interaction with other policies, including monetary policy); see International Monetary Fund (2013), Key Aspects of Macroprudential Policy (PDF) (Washington: International Monetary Fund, June 10).
See the “Policy Statement on the Scenario Design Framework for Stress Testing at Regulation YY–Enhanced Prudential Standards and Early Remediation Requirements for Covered Companies (PDF),” 12 C.F.R. pt. 252 (2013), Policy Statement on the Scenario Design Framework for Stress Testing. (Washington: Board of Governors of the Federal Reserve System).
For a related discussion, see Elliott, Feldberg, and Lehnert, “The History of Cyclical Macroprudential Policy in the United States.” FEDS Working Paper (Washington: Board of Governors of the Federal Reserve System).
Adam and Woodford (2013) present a model in which macroprudential policies are not present and housing prices experience swings for reasons not driven by “fundamentals.” In this context, adjustments in monetary policy in response to house price booms—even if such adjustments lead to undesirable inflation or employment outcomes—are a component of optimal monetary policy. See Klaus Adam and Michael Woodford (2013), “Housing Prices and Robustly Optimal Monetary Policy” (PDF), Working Paper, June 29.
Janet Yellen took office as Chair of the Board of Governors of the Federal Reserve System on February 3, 2014, for a four-year term ending February 3, 2018. She is the first woman to hold this position. Prior to her appointment as Chair, Dr. Yellen served as Vice Chair of the Board of Governors, taking office in October 2010, when she simultaneously began a 14-year term as a member of the Board that will expire January 31, 2024. Previously, she was President and Chief Executive Officer of the Federal Reserve Bank of San Francisco, Chair of the White House Council of Economic Advisers under President Bill Clinton, and Professor Emeritus at the University of California, Berkeley, Haas School of Business. She also chaired the Economic Policy Committee of the Organization for Economic Co-operation and Development from 1997 to 1999. She also served as President and Chief Executive Officer of the Federal Reserve Bank of San Francisco from 2004 to 2010. Dr. Yellen is a member of both the Council on Foreign Relations and the American Academy of Arts and Sciences. She has served as President of the Western Economic Association, Vice President of the American Economic Association and a Fellow of the Yale Corporation. Dr. Yellen has written on a wide variety of macroeconomic issues, while specializing in the causes, mechanisms, and implications of unemployment.
Michel Camdessus assumed office as the seventh Managing Director and Chairman of the Executive Board of the International Monetary Fund (IMF) in January 1987, and served until February 2000. To date, Mr. Camdessus is the longest serving Managing Director of the IMF. Previously, Mr. Camdessus held several senior positions in the French government, becoming Director of the Treasury in 1982. From 1978 to 1984, he also served as Chairman of the Paris Club, and was Chairman of the Monetary Committee of the European Economic Community from 1982 to 1984. Mr. Camdessus served as Deputy Governor of the Banque de France, and Governor of the Banque de France from November 1984 until his appointment as Managing Director of the IMF. Mr. Camdessus is currently an Honorary Governor of the Banque de France. He is a member of the Africa Progress Panel, a group of ten distinguished individuals who advocate at the highest levels for equitable and sustainable development in Africa.
Christine Lagarde is the eleventh Managing Director of the International Monetary Fund. Previously, she served as Chairman of the Global Executive Committee of Baker & McKenzie in 1999, and subsequently Chairman of the Global Strategic Committee in 2004. Christine Lagarde joined the French government in June 2005 as Minister for Foreign Trade. After a brief stint as Minister for Agriculture and Fisheries, in June 2007 she became the first woman to hold the post of Finance and Economy Minister of a G-7 country. From July to December 2008, she also chaired the ECOFIN Council, which brings together Economics and Finance Ministers of the European Union. As a member of the G-20, Christine Lagarde was involved in the Group’s management of the financial crisis, helping to foster international policies related to financial supervision and regulation and to strengthen global economic governance. As Chairman of the G-20 when France took over its presidency for the year 2011, she launched a wide-ranging work agenda on the reform of the international monetary system. In July 2011, Christine Lagarde became the eleventh Managing Director of the IMF, and the first woman to hold that position.