Head, Monetary and Economic Department, Bank for International Settlements [praised by the Economist and others]
1) How do we view equilibrium?
How can we tell if market rates are at an equilibrium or not? Inflation as disequilibrium or financial imbalances?
Monetary policy affects credit and growth. Output deviations are short-term, financial cycles are longer term 16-20 years.
Rates should be near what the equilibrium rate should be. [DM: how do you know that rate?]
2) Monetary neutrality — Financial crises create permanent losses of GDP. Debt overhangs, resource misallocation:
- Financial booms overcome productivity growth
- Labor gets reallocated to lower productivity areas
- Sectoral misallocation of resources — 6% of GDP lost
Allocation, not total amount of credit is key. Blancesheet reform and structural reforms. Macroeconomic models need to move beyond one simple benchmark.
3) Deflation can be good or bad — deflation is not always bad for output — the link between deflation and growth is weak, and nonexistent without the Great Depression
No evidence of Fisherian debt deflation, but property prices react to private debt levels. [DM: not sure what he is going for here]
Supply driven deflations are good, demand driven bad.
Thus move away from deflation to avoiding financial crises.
4) Different view of the fall in real rates — Global rise in debt, and rates go lower because it is difficult to incent people to take on more debt.
Low rates in one place can influence behavior elsewhere — thus the recent increase in external dollar liabilities. Also, low interest rates globally.
5) Early warnings of banking distress — if we focus on financial crises, how do you craft policy?
If you use credit measures — can get a better view of GDP
Macroprudential policy operates in a similar way.
Focusing on financial crises would neglect inflation.
His conclusion is that a monetary focus on financial stability will lead to the best growth in GDP.
1990s a disequilibrium situation, with asymmetric monetary policy leading to an explosion in debts.
Quotes Twain on what you know that just ain’t so is that which hurts you.
Q&A 1) Tavlas — low inflation makes it difficult to get out of debt. Eurozone deficit nations can’t regain competitiveness, can’t reduce wages enough.
B: You make good points, but asset prices matter highly — we need to look at those.
2) Selgin — if productivity-driven, it will not be deflationary.
B: repair is slow; monetary policy could not do much to fix a financial crisis
3) Real time, difficult to tell whether supply or demand-driven.
B: Booms and busts would be reduced if we did this.