Central banks into the breach : from triumph to crisis and the road ahead

345 Pages·2017·4.99 MB·English

by  Pierre L. Siklos

Central Banks into the Breach

Central Banks into the Breach
FROM TRIUMPH TO CRISIS AND
THE ROAD AHEAD
Pierre L. Siklos
1
1
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Library of Congress Cataloging- in- Publication Data
Names: Siklos, Pierre L., 1955– author.
Title: Central banks into the breach : from triumph to crisis and the road
ahead / Pierre L. Siklos.
Description: New York : Oxford University Press, 2017.
Identifiers: LCCN 2016047402| ISBN 9780190228835 (hardback) | ISBN 9780190228842 (updf) |
ISBN 9780190228859 (epub)
Subjects: LCSH: Banks and banking, Central. | Monetary policy. |
BISAC: BUSINESS & ECONOMICS / Banks & Banking. | BUSINESS & ECONOMICS /
Economics / Macroeconomics. | BUSINESS & ECONOMICS / Economics / Comparative.
Classification: LCC HG1811 .S363 2017 | DDC 332.1/ 1— dc23
LC record available at https:// lccn.loc.gov/ 2016047402
9 8 7 6 5 4 3 2 1
Printed by Sheridan Books, Inc., United States of America
To Nancy, with whom I have had the good fortune of staying
young with over these many years

CONTENTS
Note: Data and other ancillary materials are posted on
http:// www.pierrelsiklos.com/ into_ the_ breach.html.
Preface xi
Acknowledgments xv
List of Abbreviations xvii
1. Moderation Before the Storm 1
The Backdrop 1
The Way It Was 4
A Turn for the Worse 6
A Bird’s Eye View of Global Macroeconomic Activity
and Institutional Developments 9
Conclusions 40
2. When Finance and the Real Economy Collide 43
Policymaking, Fast and Slow 43
Monetary Policy Meets the Financial Stability Motive 47
Patience Meets the Need for Action 53
The Inevitable Collision? 60
Whither Monetary Policy Strategies? 65
Lessons in Communications 69
Surprising Lessons 72
Conclusions 78
3. The Anatomy of Financial Crises and the Role of Monetary Policy 81
Varieties of Financial Crises 81
Does the European Monetary Union Serve as a Cautionary Tale? 87
The Eurozone in the Global Context 91
The Pivot Toward Financial Asset Prices 94
Politics Meets Economics 100
Exiting Is Hard to Do 105
The Consequences of Staying Too Easy for Too Long, Without
Empathy for Others 111
Together Apart: Plus ca Change? 118
Conclusions 123
viii { Contents
4. The Decline of Simplicity and the Rise of Unorthodoxy 126
Ambition Stymied 126
Of Crises and Tail Risks 128
Why Did No One See It Coming? 134
From Rules as Orthodoxy to the Great Digression 142
Where to Go from Here? 148
From Prices to Quantities: The Zero Lower Bound and the Central
Bank Balance Sheet 158
This Time Is Different, at Least for Monetary Policy 160
When Words Are the Only Game in Town 165
Conclusions 170
5. The Over- Burdened Central Bank and the Shift Away from Autonomy 173
Overwhelmed and Overreaching? 173
Wanted: A New Deal for Central Banks? 177
Whither Central Bank Autonomy? 182
Ambiguity Makes a Comeback 187
The Curious Case of Japan 189
Is Overwhelming Force the Answer? 193
Is Japan Special? 195
Vanishing Faith in Central Banks? 199
Conclusions 201
6. Disquiet on All Fronts? 204
Sources of Disquiet 204
Confidence Gaps 206
Confidence Hangs on a Thread 209
The Constituents of Institutional Trust 210
Words Matter 218
Confidence and Monetary Policy Objectives 224
A Failure of Responsibility or Curiosity? 231
The New Frontier: Combining Financial Stability and
Monetary Policy 237
Conclusions 246
7. Trust, But Verify: The Road Ahead 248
Where We Have Been and Where We Are Now 248
A Few Essential Ingredients 256
Should the Unconventional Become Conventional? 257
Changing the Message and Improving the Strategy 261
The Inflation Solution and Deflation Mongering 266
Evaluating the Unobserved: The Natural Rate Question 273
Contents } ix
The Uses and Abuses of Rules 279
Leaving the Status Quo Ante Behind 281
Bretton Woods Reimagined? 286
Conclusions: Use as Directed 287
Epilogue: The Twilight Zone? 294
References 301
Index 321