Homework for monetary policymakers

Donald Kohn, Fed Vice Chairman  lists 4 homework tasks for policymakers:

The events of the past few years have raised many questions for central bankers. Although prompt and innovative actions by the Federal Reserve and other central banks helped prevent a severe economic downturn from turning into something even worse, our experience also highlighted a number of areas we need to study further to see whether we can improve the conduct of monetary policy. I’ve titled my presentation “Homework Assignments” because I don’t think the answers are clear, though I will venture some tentative thoughts. I have four assignments on my list; I could easily have more. And others would have yet a different list. I recognize that the complexity of these questions could keep us profitably engaged for a whole semester, but let’s see if I can outline some of the challenges and possible responses in an evening.

The fours tasks are:

  • Liquidity facilities – Fed started number of liquidity facilities in this crisis and as crisis has eased, has closed most of them as well. The question is what should be the design if liquidity facilities going forward? Should these facilities become
    permanent tools in Fed’s kit? If not, then how should Fed be using them in future?
  • Fed’s asset purchases – Fed purchased Treasuries, mortgage backed assets and agency debt etc. What is the impact of these purchases on the economy and fin markets? A related aspect is to understand the impact of large volumes of bank reserves which Fed has created to buy assets. Ideally these reserves should go into increasing money supply and credit. But this has not happened.
  • Should Fed use interest rates to dampen asset bubbles/financial instability? This is the evergreen question. Parallelly, do low interest rates lead to asset bubbles?
  • Should we have higher inflation targets? This was suggested by IMF’s economists lately and has been criticised by most central bankers. Kohn does not agree to this proposal and says it will lead to higher inflation expectations. He also looks at the idea of price index targeting as an alternative. He likes the concept but finds it difficult to implement and communicate.

Nice summary of the key issues ahead for central banks. Nice Phd topics as well.

One Response to “Homework for monetary policymakers”

  1. Twilight fans, can you help me find quotes? Says:

    […] Homework for monetary policymakers « Mostly Economics […]

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