Central Banks, Financial Regulators, and the Quest for Financial Stability: 2011 IMF Annual Research Conference

By Olivier Blanchard

The global financial crisis gave economists pause for thought about what should be the future of macroeconomic policy. We have devoted much of our thinking to this issue these past three years, including how the many policy instruments work together.

The interactions between monetary and macroprudential policies, in particular, remain hotly debated. And this year’s IMF Annual Research Conference is an important opportunity to take that debate another step forward.

Looking back, it is striking how many papers from last year’s conference—on post-crisis macroeconomic and financial policies—have been so immediately relevant to events on the ground. Just to give you an example: the paper on fiscal space is obviously front and center in the policy debate on the European sovereign crisis, the United States’ budget, and challenges faced by advanced country governments more generally.

This year’s topic—monetary and macroprudential policies—is equally relevant. It goes to the core of central banks’ mandates, and their role in achieving macroeconomic and financial stability. The financial crisis triggered a fundamental rethinking of these issues, but much research, both conceptual and empirical, remains to be done. The conference provides an excellent opportunity to engage with prominent academics, policymakers and private sector practitioners. I hope the conference will contribute to expanding the frontier of knowledge on this topic.

The conference program lays the ground for an exciting debate.

Professor Hyun Song Shin of Princeton University will give the keynote Mundell-Fleming address. He will talk about the role of international factors in determining domestic financial conditions. We saw a good illustration of this in the run-up to the recent financial crisis, when European global banks intermediating U.S. dollar funds eased credit conditions in the United States. Clearly, such international linkages need to be taken into account when choosing an appropriate mix of monetary and macroprudential policies.

Eleven other papers we have on the program each touch on a critical aspect of the intersection between monetary and macroprudential policies. Just to give you a flavor of what to expect, here are some of the questions we will be discussing:

  • Should monetary policy lean against credit and asset price bubbles, or should this task be delegated squarely to macroprudential policy?
  • What if macroprudential policy is only partially effective because it encourages regulatory arbitrage and other “leakages”? Does this imply that monetary policy should weigh in, too?
  • What if the government does not have full information on the riskiness of new financial instruments? Will it be able to set macroprudential policies at the levels that will ensure lasting financial stability?
  • How can policymakers guard against the possibility that monetary tightening may encourage excessive risk-taking by financial institutions that find themselves in distress at higher interest rates?
  • How should macroprudential policies be coordinated internationally if they have cross-border repercussions?

In addition to the Mundell-Fleming Lecture, the conference will feature three other policy-oriented events. David Lipton, the IMF’s First Deputy Managing Director, will open the conference. The luncheon speech, by Jean-Pierre Landau, Second Deputy Governor of the Banque de France, will be an opportunity to reflect with a central bank insider on the role of central banks in maintaining financial stability and how that role is set to evolve in light of the lessons from the crisis.

And we will conclude the conference with an Economic Forum on “Monetary and Macroprudential Policies: Challenges and Solutions.” A panel of experts—including Lewis Alexander (Nomura), Joe Gagnon (Peterson Institute of International Economics), Andrew Lo (MIT), and John Williams (Federal Reserve Bank of San Francisco)—will discuss how synergies between monetary and macroprudential policies can be best achieved to reduce the risks of future financial crises, without imposing undue costs on the economy.

I would like to take this opportunity to thank the Conference Organizing Committee and the Editor of the IMF Economic Review, Pierre-Olivier Gourinchas, for drawing up such an outstanding program. Some of the conference papers will be featured in the IMF Economic Review, which is becoming a required reading for everyone interested in questions related to global economic policies, open economy macroeconomics, and international finance and trade.

As always, the IMF’s Annual Research Conference is intended to be a forum for discussing innovative research, and facilitating an exchange of views among researchers and policymakers. Like in the past, we hope that research presented at this conference will contribute to new policy thinking both here at the IMF, and among economists and policymakers more broadly.

I hope you can find the time to read the papers posted online, and to join us via the broadcast of the Economic Forum at www.imf.org or by commenting here.

8 Responses

  1. How is it possible that there is an economical solution to the problem? I think the governments are not interested in finding a solution, but it is impossible to get along without solutions.

    • If there is anything with this crisis that is clear, it is that bank regulations failed, and some of us are even convinced the extremely flawed bank regulations were in fact the most important cause of the crisis … and of not getting out of it.

      And then ask yourself, where are the failed regulators? And the answer is, still regulating, based on the same flawed regulatory paradigms… and some of them are even, as technocrats, now taking over the leadership of some European countries … and so how are our chances of finding solutions? For the time being, “slim” would be to exaggerate them. Sorry!

  2. There should be a balanced blend of macroeconomic, monetary, and macro-prudential policies, enabling the financial regulators to anticipate risks for the timely resolution and by extension ensuring financial stability.

    We will however wait to see as to how all the questions raised by Olivier Blanchard are tackled by the participants of the Annual Research Conference.

  3. [...] the original here: Central Banks, Financial Regulators, and the Quest for Financial Stability: 2011 IMF Annual Research… Source: International Monetary Fund [...]

  4. Pause for thought and quest for financial stability! Just words that mean nothing to those who aren’t the 1%.

    The financial sector knew what would happen but did not care as long as they got their money, and now it seems that the Global Financial Crisis will last a generation until the next financial crisis.

    • Yes. I have for many years now held that the Financial Stability Board should be renamed the Financial Functionability Board… because the world wishes and needs so much more than the “stability” of their banks. Stability? Well get enough of that in our graves.

      And to top it up we have a FSB that can´t even get that of a safe-mattress right. By pushing the banks more and more into the corner of what is officially perceived as “not-risky” they are simply murdering our banks… and unfortunately those who could and should speak up, the IMF and the World Bank, are basically silent bystanders… because their professionals are also much risk-adverse.

      By the way, even though I am one of the very few who for about a decade have been arguing about the risks of this induced artificial-risk-adverseness and even, as one of the 24 Executive Directors while Basel II was being discussed, left written statements at the Board that warned about the impending crisis… do you think I have been invited to the conference? No, because they feel much more comfortable and safe inviting their Monday-morning-quarterbacks.

    • Yes, agree with you on that on. It will definitely last a generation.

  5. If some bankers risk models fail, our best hopes are that not all bankers use the same risk models and, similarly, if regulators use failed risk models, our best hopes, as a world, is that not all regulators use the same regulatory paradigms. But, what was and is real lunacy, is how the regulators stacked their risk model, their risk-weights, on top of the bankers.

    The results, as should have been expected, was to stimulate the creation of excessive and dangerous exposures to what was officially ex-ante perceived as “not risky” like triple A-rated securities, and “solid” sovereigns, like Greece, and to stimulate an equally dangerous underexposure to what was perceived as “risky”, such as small businesses and entrepreneurs.

    Let us see if this regulatory mistake will be discussed this time around… I have been arguing about it since before the approval of Basel II in 2004, even in formal statements at the Board of the World Bank as one of the 24 Executive Directors … but a paradigm, no matter how faulty, is incredible powerful.

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