The IMF Research Bulletin, a quarterly publication, selectively summarizes research and analytical work done by various departments at the IMF, and also provides a listing of research documents and other research-related activities, including conferences and seminars. The Bulletin is intended to serve as a summary guide to research done at the IMF on various topics, and to provide a better perspective on the analytical underpinnings of the IMF’s operational work.


The IMF Research Bulletin, a quarterly publication, selectively summarizes research and analytical work done by various departments at the IMF, and also provides a listing of research documents and other research-related activities, including conferences and seminars. The Bulletin is intended to serve as a summary guide to research done at the IMF on various topics, and to provide a better perspective on the analytical underpinnings of the IMF’s operational work.

Giovanni Dell’Ariccia

On July 11, 2000, the IMF, the World Bank, and the journal, International Finance, jointly organized a conference on the future of monetary policy and banking. Speakers and discussants talked about issues related to the conduct of monetary policy in a hypothetical future economy where various forms of electronic media were to replace currency as the main vehicle of payment settlement. In addition, issues related to exchange rate defense, institutional design, and inflation targeting were discussed.

Can Central Banking Survive the IT Revolution?

Charles Goodhart, London School of Economics

Monetary Policy Implementation: Past, Present, and Future—Will the Advent of Electronic Money Lead to the Demise of Central Banking?

Charles Freedman, Bank of Canada

Monetary Policy in a World Without Money

Michael Woodford, Princeton University

A Response to Goodhart, Freedman, and Woodford

Benjamin Friedman, Harvard University

Electronic Finance: Reshaping the Financial Landscape Around the World

Stijn Claessens, Thomas Glaessner, and Daniela Klingebiel; World Bank

Toward a Common Currency?

Richard Cooper, Harvard University

An Interest Rate Defense of a Fixed Exchange Rate?

Robert Flood and Olivier Jeanne, International Monetary Fund

Monetary Policy Without Central Bank Money: A Swiss Perspective

Georg Rich and Michel Peytrignet, Swiss National Bank

Solbruchstelle: Mass Democracy, Deep Uncertainty, and the Design of Monetary Institutions

Susanne Lohmann; University of California, Los Angeles

The Present and Future of Monetary Policy Rules

Bennett McCallum, Carnegie Mellon University and NBER

Is Fighting Inflation a Just War?

Adam Posen, Institute for International Economics

Manuel Conthe and Adam Posen made the introductory remarks at the conference. Kemal Dervis, Michael Mussa, and Benn Steil chaired the sessions. Alan Blinder, Barry Bosworth, Agustín Carstens, Andrew Hughes Hallett, Donald Kohn, and John Williamson were discussants of the papers, which are summarized below.

Charles Freedman observes that the combination of the central bank’s monopoly power over the supply of reserves or settlement balances, and its ability to impose terms and conditions related to the excess or shortfall of reserves or settlement balances, is crucial for monetary policy implementation. The central bank’s control of the supply of reserves and settlement balances reflects its advantages as provider of the mechanism to settle payments imbalances among banks. These advantages, including the riskless character of the central bank and its ability to act as lender of last resort, make it very unlikely that other mechanisms, including variants of electronic money, will supplant the current types of arrangements for the foreseeable future.

Charles Goodhart challenges the view that development of e-commerce and associated computerization will eliminate the demand for a monetary base; and that such vanishing demand for a monetary base will, in turn, limit the central bank from setting nominal interest rates. He argues that the central bank’s ability to affect interest rates ultimately depends on the fact that it is the government’s bank and, thus, has the power to intervene in (financial) markets without concern for profitability (let alone profit maximization), while at the same time its credit rating is higher than that of any other entity. Hence, the central bank can always dictate the terms on either the bid, or ask, side of the money market. In addition, he stresses that currency has unique features that make it difficult to replace. Currency is anonymous in the sense that the recipient of a cash payment neither has to know, nor learn, anything about the counterparty in the process of trade, allowing free transferability between users without recourse to the underlying issuers.

Michael Woodford concludes that while advances in information technology may require changes in the way monetary policy is implemented, the ability of central banks to control inflation will not be undermined. He points out that the central bank only needs to be able to control the short-term nominal interest rate. This ability will always be preserved as long as the creditworthiness of the central bank remains unimpeachable. Under such circumstances, the central bank could control short-term interest rates by standing ready to accept overnight deposits or to lend overnight cash at a fixed rate. Indeed, the Bank of Canada, the Reserve Bank of Australia, and the Reserve Bank of New Zealand already control short-term interest rates by varying the interest rate paid on balances held with the central bank. The successful experiences of these central banks indicate that there is little reason to expect monetary control to be any more difficult following the development of new electronic media for making payments.

In their paper, Stijin Claessens, Thomas Glaessner, and Daniela Klingebiel, observe that the financial industry is undergoing dramatic changes due to technological advances and the advent of the Internet. In many countries, such evolution can accelerate the development of the financial sector by reducing costs, increasing breadth and quality, and widening access to financial services. They argue that advances in information technology are likely to reduce asymmetric information, diminishing the importance of banks’ “special” character. Consequently, there will be a need to reevaluate (and probably reduce) the role of the safety net and prudential regulation and supervision. On the contrary, the increasing globalization of financial markets calls for an international harmonization of competition policy, and raises important consumer protection issues.

In his paper, Richard Cooper reviews the experience of industrial and developing countries with fixed and flexible exchange rate regimes and observes that flexible exchange rates have not performed as their early advocates insisted they would. Nominal exchange rate flexibility has led to substantial real exchange rate volatility, creating a source of uncertainty for business decisions. He then argues that, as capital market integration deepens, financial movements will increasingly dominate changes in exchange rates. Financial movements will be only loosely linked to changes in economic fundamentals, developing their own short-term and medium-term dynamics, and the benefits that a flexible exchange rate provides as a macroeconomic shock absorber will be increasingly dominated and eventually overwhelmed by its costs as a generator of shocks unrelated to fundamentals. The worsening of this cost-benefit ratio will make the case for a common currency among the world’s major economies.

Robert Flood and Olivier Jeanne investigate the scope for policy tradeoffs involving interest rates, nominal-liability growth (money and bonds), the real government deficit, and international reserve management in the context of a Krugman-Flood-Garber (KFG) speculative attack model. They evaluate policies in terms of how long the policies preserve a given fixed exchange rate. By adapting the KFG model to allow for an interest rate defense, they show that increasing the domestic-currency interest rate makes domestic assets more attractive according to an asset substitution effect, but weakens the domestic currency by increasing the government’s fiscal liabilities. As a result, raising the interest rate hastens the speculative attack when speculation is motivated by underlying fiscal fragility.

In their paper, Georg Rich and Michel Peytrignet review the experience of the Swiss National Bank (SNB) with monetary targeting and its switch to a policy based on inflation forecasts. He observes that instabilities in base-money demand have been a factor in the SNB decision to change its policy framework, and that financial innovation and the spread of electronic money have contributed to errors in the SNB calculations. He also argues, however, that these were not the main reasons that led to the policy switch, and that there was no evidence that financial evolution has weakened the central bank’s control over monetary policy.

In her paper, Susan Lohmann argues that well-designed institutions are credibly committed to following a sound monetary policy, but are also flexible in the face of deep uncertainty. They respond to economic and social developments as well as to shifting understandings of the way the macroeconomy works. They accommodate political pressures, renege on promises, and change their institutional stripes, and, if they become obsolete, they disappear. She argues that mass democracy is uniquely well suited to support institutions that implement a favorable credibility-flexibility tradeoff in monetary policy. Indeed, the rationale for the creation of monetary institutions is to provide a public focal point for large audiences to coordinate on when to apply punishments associated with the implementation of bad policies. Optimal design then consists of setting up monetary institutions so they invoke the ideal audience: the guardians of the guardians will have an incentive and ability to inflict costs on the policymaker if he or she should break an agreement, thus generating credibility; but they would also have an incentive and ability to excuse defections when extreme shocks or unforeseen contingencies are realized, thus allowing for flexibility.

Bennet McCallum examines whether inflation targeting can be considered a rule-based approach to monetary policy and discusses the future role of monetary rules in general. Rule-based policies are characterized as policies that are conducted to satisfy relationships specified from a “timeless perspective,” that is, designed in a manner that is not affected by current macroeconomic conditions. If this perspective is taken, the rules or relationships can be updated periodically without imparting any inflationary bias, even if the central bank’s objectives specify a target output rate that exceeds the natural rate value. Within this framework, inflation targeting regimes largely represent rule-based policymaking. Regarding the effects of a gradually diminishing role for money in developed economies, McCallum argues that the feasibility and attractiveness of rule-based monetary policymaking will not be seriously impaired as long as a tangible medium of exchange has some importance, even if it is small.

Finally, Adam Posen compares monetary policy to war and uses that analogy to discuss whether fighting inflation is actually a just war. First, he establishes the relevance of “moral” reasoning for monetary policy by pointing out that not only policy goals, but also choices about how and when disinflation is undertaken are important. Second, he argues that monetary policy faces many of the same moral dilemmas raised by nuclear deterrence during the cold war. Third, he turns to the topic of what grounds and goals are sufficient justification for undertaking a costly disinflation. Fourth, he considers what means in the pursuit of those goals are ethically supportable, and whether some damage-limiting efforts are incumbent upon monetary policymakers. Finally, he looks at the duties of central bankers to keep their power to wage war on inflation subject to democratic control, and to reduce the likelihood of such wars over time.

The agenda and papers can be found in full-text format at

Proceedings of IMF conferences and seminars, including agenda and papers, can be obtained through the “Conferences, Seminars, and Workshops” link at the Research at the IMF website at