rethinking macroeconomic policy ii: getting granular - giovanni dell'ariccia - june 25 2013
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Rethinking Macroeconomic Policy II: Getting Granular - Giovanni Dell'Ariccia - June 25 2013 - First International Conference on Syrto ProjectTRANSCRIPT
Rethinking Macroeconomic Policy II: Getting Granular
SYstemic Risk TOmography:Signals, Measurements, Transmission Channels, and Policy Interventions
Giovanni Dell’AricciaInternational Monetary Fund (IMF)Centre for Economic Policy Research (CEPR)
Brescia, 25 June 2013The views expressed here are those of the authors and do notnecessarily represent those of the IMF or the IMF Board
How the crisis challenged the macro policy consensus
Take stock of post-crisis debate so far
Focus on relationship between monetary and regulatory (macro-prudential) policies
Leave fiscal policy and other issues (ZLB, LOLR, UMP etc.) aside for today
For more: “Rethinking Macro policy II. Getting granular” (Blanchard/Dell’Ariccia/Mauro)
“Rethinking Macro policy II”. April conference webcast. IMF website
Plan for this talk
Monetary policy to focus on inflation (and output gap): “divine coincidence”
Little attention to asset prices and credit aggregates: A concern only through their impact on GDP and inflation (exceptions RBA, Riksbank, some EMs)
Benign neglect approach to boom/busts: Bubbles difficult to identify Costs of clean up limited and policy effective Better clean up than prevent Bank risk taking important, but job of regulators
ZLB considered as an interesting theoretical concept, but unlikely in practice
Before the crisis …A policy gap
Regulatory policy focused on individual institutions
Limited attention to credit aggregates or asset price dynamics
Ill equipped to deal with booms:
Correlated risk taking
Fire sales and other externalities
Few regulators had necessary tools (exceptions: Spain/Colombia)
Before the crisis … A policy gap
Macro literature: Financial intermediation seen as macro neutral
Asset prices (including property prices) did matter. They could accentuate the cycle through financial accelerators (BGG etc.)
But macro model largely ignored their impact on bank risk taking. In equilibrium, no bank defaults
Banking literature Focused on excessive risk taking by intermediaries operating under limited liability
and asymmetric information
Defaults/crises in equilibrium
But there was little attention to macro and monetary policy conditions
Before the crisis … A theory gap
Before crisis … Macro looked OK
-3
-2
-1
0
1
2
2000 02 04 06 08:Q4
Output Gap2Core CPI Inflation
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
2000 02 04 06 08:Q4
Euro area United States Average of other economies1
1 Japan omitted.2 Estimate of output gap using rolling Hodrick-Prescott filter.
LVA
EST
LTU
IRL
UKR
JPN
RUS
DNK
HKG
SWE
SVN
GBRNLD
SVK
ESP
BGR
MYS
BOL
THAPHL
AUS
IND
KAZ
PAN
URY
DOM
NPL
VNM
BGD
MOZCHLMAR
SURIDN
CHN
y = -1.2852x + 12.969R² = 0.14
-50
-25
0
25
50
75
100
-30 -20 -10 0 10 20 30
Cha
nge
in c
redi
t-to-
GD
P ra
tio fr
om 2
000
to 2
006
Change in GDP from 2007 to 2009
Credit Growth and Depth of Great Recession
Bubble size shows the level of credit-to-GDP ratio in 2006.
House boom/busts and great recession
AKALAR
AZ CA
CO
CT DCDE
FL
GA
HI
IA
ID
IL
INKSKY
LA
MA
MD
MEMI
MN
MO
MS
MT
NCND
NE
NH
NJ
NM
NV
NY
OH OK
OR
PA
RI
SCSDTN
TX
UTVA
VT
WA
WI
WV
WY
y = 1.1159x + 20.457R² = 0.5501
-50
0
50
100
150
200
250
0 20 40 60 80 100 120 140 160
Cha
nge
in m
ortg
age
delin
quen
cy ra
te, 2
007-
09
House price appreciation, 2000-06
Subprime Boom and Defaults
Bubble size shows the percentage point change in the ratio of mortgage credit outstanding to household income from 2000 to 2006.
Monetary policy and risk taking Is the “divine coincidence” dead?
We already knew short-term trade-off inflation/output Is there also one between output/inflation eqlb and financial stability? Financial frictions imply that low/stable inflation is not enough any longer
(assuming systemic risk taking is excessive)
Other tools? Macroprudential (LTVs, DTIs, dynamic provisioning, cyclical CARs) But unlikely to work perfectly Potential need to lean against the wind
Many questions: What metrics (leverage, asset-prices, credit growth,…) Rules versus discretion General overhaul of IT and Taylor rules or case-by-case practical approach?
Definition? Financial regulation with a cyclical (macro) twist Objective: Contain “excessive” risk/imbalances associated with cycle
Standard macro policy works rather poorly: for instance: Housing booms: MoP a blunt tool Capital inflows: Lower or higher interest rates?
Macroprudential instruments can be more targeted: LTV ratios, DTI ratios Cyclical capital ratios FX borrowing/lending restrictions Taxes on short term inflows
A Role for Macro-prudential policy ?
13
If macro prudential tools worked perfectly → Monetary policy could focus on inflation (output).
How well do they work (useful to thin about K-controls)? Evidence: Perhaps not well enough.
LTVs/DTIs in Korea and Hong Kong Dynamic Provisioning in Spain
Many issues. Some transitory, some permanent: Hard to calibrate. Hard to aim: Many forms of risk taking. Circumvention Political economy issues
But there are several unresolved issues
14
Relationship with other policies How many agencies in charge of MoP/MaP?
Two instruments (Policy rate, MaP)/ Two objectives (Inflation/output, Stability) Each instrument affects both objectives If perfectly functioning, design does not matter
But, if not, separation improves credibility
Especially if CB’s mandate very clear Similar to fiscal/monetary policy divorce (think Barro/Gordon) At potential cost of second-best policy mix
Example, in a recession: CB cuts rate aggressively to stimulate demand FA reacts by tightening macro-prudential regulation to reduce risk-taking → CB eases even
more → FA …. Result: a policy mix with too low interest rates and too tight macro-prudential measures
Governance issues Outsourcing monetary policy to independent CBs was “easy”
A clear and measurable objective: low and stable inflation (sometimes with some attention to short-term output)
A clearly understood (almost mono-dimensional tool): the policy rate Accountability led to properly designed incentives for central bankers
But financial stability much more complicated
Is there a too stable banking system? Multiple objectives, difficult to measure Nobody sees the crises that do not happen Accountability complicated, potential for poor incentives Systemic nature makes problem worse than for MiP (no yardstick)
Implications for regulatory design How many agencies in charge of MaP/MiP?
Is it conceivable to keep macroprudential and microprudential regulators separate? MaP could set level of certain ratios over the cycle MiP enforcement and bank level variations
Yet, things are more multidimensional and there can be conflicts Set P(X)=probability that bank X fails Then probability of joint failures: P(X∩Y)=P(Y|X)P(X)=P(X|Y)P(Y) So you could have measures that lower P(X), P(Y), but increase P(X∩Y)
Think about completely separated versus integrated systems (Allen/Gale) Hedging across banks/Cross-border links What kind of strategic game can emerge between MiP and MaP agencies?
Cross-border issues Macroprudential policy with open k-accounts?
Cyclical CARs vs Basel I Borrower or activity based measures Risk of circumvention Especially an issues within currency areas
Interaction with CA balance Spillovers through capital flows Not a major issue if ER not a target; but problem if ER volatility is an issue Incentives of national regulators?
Is there room for greater coordination of MaP?
Conclusions Contours of new macro policy consensus still evolving
Flexible inflation targeting “plus”? Same basic framework But with attention to credit aggregates and other imbalances Discretionary/limited use of MaP tools
More ambitious redesign? Broader mandates for CBs Difficult political economy issues Do not throw the baby away with the bathwater
This project is funded by the European Union under the
7th Framework Programme (FP7-SSH/2007-2013) Grant Agreement n°320270
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This document reflects only the author’s views. The European Union is not liable for any use that may be made of the information contained therein.