The Paradox of Risk: Leaving the Monetary Policy Comfort Zone

by Ángel Ubide

Overview

For decades, economic policymakers have worshipped at the altar of combating inflation, reducing public deficits, and discouraging risky behavior by investors. That mindset made them hesitate when the global financial crisis erupted in 2007–08. In the face of the worst economic disaster in 75 years, they often worried excessively about the risks and possible losses from their actions, rather than moving forcefully to support financial institutions, governments and people. Ángel Ubide’s provocative thesis in The Paradox of Risk is that central banks’ fear of inflation and risk taking has hampered their efforts to revive global prosperity. In their confusion, he argues, policymakers made the recovery weaker. He calls on world leaders to abandon old shibboleths and learn the lessons from the financial crisis and its sluggish aftermath. Ubide mobilizes a wealth of research on the experience from the last decade, urging policymakers to leave their "comfort zone," embrace risk taking, and take bolder action to brighten the world’s economic prospects.

Product Details

ISBN-13:	9780881327199
Publisher:	Peterson Institute for International Economics
Publication date:	09/07/2017
Series:	Policy Analyses in International Economics , #108
Pages:	170
Product dimensions:	5.90(w) x 8.90(h) x 0.90(d)
Age Range:	18 Years

About the Author

Ángel Ubide is a managing director at Goldman Sachs and former senior fellow at the Peterson Institute for International Economics.

Table of Contents

Preface xi

Acknowledgments xv

Abbreviations xix

1 Introduction 1

The Paradox of Risk 3

Of Boring Central Bankers, "NICE" Economies, and the Power of Narratives 6

Just Blame the Central Banks 9

Roadmap of the Book 10

The Future Is Not What It Used to Be 17

2 The Intellectual and Political Background to the Crisis 19

It All Started in the 1970s: The Anti-Inflation Consensus 19

Deflation and Zero Interest Rates? That's Such a Japanese Thing 23

The European Obsession with Competitiveness and Reforms 26

The Diabolical Politics of Rescue Programs 28

Lean versus Clean-or How the Deep Origin of the Crisis Lies in a Bathtub 32

Bayesian Inference Meets Politicians in a Rush-and Austerity Is Born 35

Markets and the Crisis: In Search of Analogues 38

I Wouldn't Start from Here 39

3 The Great Experiment in Monetary Policy: Central Bank Actions since 2007 41

Conventional versus Unconventional Monetary Policy 42

How to Do Monetary Policy? Goals, Tools, Strategies, and Communication 43

Policy Goals: Is Clarifying Price Stability Enough? 44

Policy Tools 48

Policy Strategies: Forward Guidance to Sell Insurance on the Economic Outlook 80

Policy Communication: Opening the Doors of the Temple 87

Do or Do Not. There Is No Try 88

4 Has Monetary Policy Worked? Yes, No, Maybe 91

Did Monetary Policy Decisions Affect Financial Conditions in the Expected Way? 92

Did Policies Ease to the Extent Recommended by Simple Benchmark Rules? 127

Did Policies Achieve Their Objectives in Terms of Inflation and Growth? 141

Has Monetary Policy Had Any Negative Side Effects? 163

Monetary Policy Worked-But It Can Do Better 185

5 Have We Learned Anything? Crafting a Monetary Policy for All Seasons 187

Goals: A Program of Opportunistic Reflation 189

Tools: Be Ready to Use All the Tools at All Times 197

Strategies: Adopt Cyclically Adjusted Forward Guidance 206

Communication: Stop Calling It Unconventional 215

Institutional Design: Financial Stability as Part of Central Banking, Not Monetary Policy 217

A Game Plan for the Future 222

6 Conclusion: The Future Is Not What It Used to Be 225

The Brexit Easing 226

The Resetting of Abenomics 229

The Trump Surprise 231

Fiscal Policy in the Lead 232

It's All about Risk Management 234

Appendix A Selected Policy Announcements by Major Central Banks 239

Appendix B Impact of Quantitative Easing Announcements on Asset Prices 257

Appendix C Impact of Negative Rates on Asset Prices 267

References 271

Index 285

Tables

4.1 Results of event study on quantitative easing (QE), 2009-15 103

4.2 Results of event study on negative rates, 2014-16 118

6.1 Impact of 2016 US presidential election on asset prices 231

A.1 Important announcements by the Federal Reserve, 2008-15 239

A.2 Important announcements by the European Central Bank, 2008-16 243

A.3 Important announcements by the Bank of England, 2009-16 247

A.4 Important announcements by the Bank of Japan, 2008-16 250

A.5 Important announcements by the Swiss National Bank, 2008-15 256

Figures

1.1 Market value of bonds with negative yields, 2010-17 2

2.1 Target 2 balances in selected European countries, 1999-2016 31

3.1 Policy interest rates in selected countries, 1999-2017 53

3.2 Spread between Libor and three-month policy rates in the United States, United Kingdom, euro area, and Japan, 2002-16 55

3.3 Intervention in the foreign exchange market by Swiss National Bank, 2007-16 68

3.4 Negative central bank policy rates in selected economies, 2008-16 73

3.5 Government yield curves in selected countries, as of September 2, 2016 74

3.6 Selected interest rates in Switzerland, 2009-16 76