Book Reviews

Recently, although inflation in the U.S. has cooled down, the Federal Reserve is expected to cut interest rates only once this year. Powell remains open to the timing of the interest rate cut, which makes the entire financial system pay close attention to the Federal Reserve's interest rate adjustment. This paper aims to explore the impact of the Federal Reserve's interest rate hikes and cuts on the financial market, especially its impact on the banking system and stock markets. This paper also identifies the Federal Reserves role in mediating the economy. It uses a combination of theoretical analysis and case analysis to explore the impact of the Fed's interest rate adjustments on the banking system and the stock market. After analysis, this paper found that the Federal Reserve has coordinated the financial system by using the monetary policy of raising and lowering interest rates and supervising banks, maintaining the health and stability of the economy.

Under ordinary circumstances, the fiscal implications of central bank policies tend to be seen as relatively minor and escape close scrutiny. The global financial crisis of 2008, however, demanded an extraordinary response by central banks which brought to light the immense power of central bank balance sheet policies as well as their major fiscal implications. Once the zero lower bound on interest rates is reached, expanding a central bank's balance sheet becomes the central instrument for providing additional monetary policy accommodation. However, with interest rates near zero, the line separating fiscal and monetary policy is blurred. Furthermore, discretionary decisions associated with asset purchases and liquidity provision, as well as with lender-of-last-resort operations benefiting private entities, can have major distributional effects that are ordinarily associated with fiscal policy. In the euro area, discretionary central bank decisions can have immense distributional effects across member states. However, decisions of this nature are incompatible with the role of unelected officials in democratic societies. Drawing on the response to the crisis by the Federal Reserve and the ECB, this paper explores the tensions arising from central bank balance sheet policies and addresses pertinent questions about the governance and accountability of independent central banks in a democratic society.

This article focuses on the governance of national or supranational central banks, and discusses the important elements of governance, which include independence, accountability, and transparency. It explains the distinction of these elements from others that pertain to the internal governance of the central bank's monetary policy committee. The article also analyses central bank independence, reviews central bank accountability and transparency, and discusses internal governance procedures of central banks.

This paper studies the effect of the governance of modern central banks on the ratings assigned by the credit rating agencies Standard and Poor's and Moody's. Until recently, the rating process was not public. Even still, the factors or precise methodologies used by the agencies remain uncertain and analyst judgment remains important. We argue that, given uncertainty over the future paths of countries, the quality of the central bank governance serves as a useful heuristic for a stable and favorable country trajectory. In particular, the central bank's independence signals that the government is committed to general macroeconomic stability, including debt repayment. Additionally, central bank transparency clarifies who is the principal of the bank and provides information about how the central bank understands the economy and monetary policy. Finally, tensions between the central bank and the government, as reflected by irregular turnover of central bank governors, raise doubts about countries’ future prospects. Empirically, we use a variety of models, including mediation analysis, to ensure that the effect we identify stems from the central bank governance itself, as a heuristic for the future paths of countries, and not the central bank's direct contribution to the macroeconomy, as reflected in the available data.

Contents: Introduction Claude Gnos and Louis-Philippe Rochon PART I: MONETARY AND MACROECONOMIC POLICY 1. Wage Bargaining and Monetary Policy in a Kaleckian Monetary Distribution and Growth Model: Making Sense of the NAIRU Eckhard Hein 2. Price and Wage Determination and the Inflation Barrier: Moving Beyond the Phillips Curve Philip Arestis and Malcolm Sawyer 3. Central Bank Governance, the Euthanasia of the Rentier and Interest Rate Policy: A Note on Post-Keynesian Monetary Policy after Taylor Louis-Philippe Rochon 4. The Macroeconomic Governance of the European Monetary Union: A Keynesian Perspective Angel Asensio 5. Inflation Targeting and Monetary Policy Governance: The Case of the European Central Bank Sergio Rossi PART II: MACROECONOMIC POLICY AND THE GLOBAL ECONOMY 6. Enforcing the IMF in the Global Economy: An Institutional Analysis Jean-Pierre Allegret and Philippe Dulbecco 7. Too Much Consensus Could Be Harmful: Assessing the Degree of Implementation of Stabilization and Structural Policies and their Impact on Growth Eric Berr, Francois Combarnous and Eric Rougier 8. The Political Economy of Global Economic Disgovernance Luiz Carlos Bresser-Pereira 9. Tobin, Globalization and Capital Flows Robert W. Dimand 10. The Impact of FDI on Capital Formation: The Case of Mexico Claudia Maya 11. Financial Liberalization, Economic Growth and Rents Domenica Tropeano 12. The Argentine Jefes Program: From a Post-Financial Crisis Emergency Safety Net to a Long-Run Policy Promoting Development Corinne Pastoret Index

Monetary Policy in a Changing World: Rising Role of Expectations and the Anticipation Effect

Monetary policy can be so dicey or delicate that it requires great tact from the monetary authority. Contractionary monetary policy, when pushed too far, drags the economy to recession while` extreme expansionary monetary policy sinks the economy to liquidity trap. Central banks are in charge and are expected to favorably run the monetary policy by adjusting interest rates, influencing local lending rates, buying foreign currency, printing money, and use of other tools to modulate currency exchange rates, manage inflation, etcetera, with a sole target of creating a healthy economy. This study looks into the effect of money supply rate, exchange rate and interest rate on inflation rate in Nigerian economy between 1991 and 2021. With secondary data, the variables are found to be of mixed order of integration and, therefore, the ARDL model is our parameter estimator. Our model is found to be stable and our empirical investigation reveals that both money supply rate and interest rate in Nigeria have no significant effect on Nigeria’s inflation rate while exchange `rate has a significant inverse effect on Nigeria’s inflation rate – the less favorable the exchange rate, the more biting the inflation. The study is wrapped up `with a recommendation that Nigerian government/authorities should rise up to occasion of fixing the insecurity challenges of the nation so as to create safe environment that can attract local investments as well as foreign direct investments which, among other benefits, will be favorable to Nigeria in exchange rate.

This article argues that policy-makers’ non-expert or ‘folk’ ideas can affect policy outcomes in a way that challenges the assumption of economic policy-making being guided by expert ideas emanating from the realm of economics and other sciences. To substantiate this argument, the article invokes literatures on audience costs as well as on economic folk theories to highlight the power of analogies and fallacies in the formulation of policy. While political economists have focused exclusively on the power of the ‘household analogy’ in the area of fiscal policy, much less is known about its monetary policy equivalent, which the article introduces as the ‘bank analogy’. Empirically, the analogy is assessed in the context of what is arguably a least likely case for the power of folk ideas to hold: the European Central Bank's governance of its balance sheet, the most powerful balance sheet in Europe.

This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy.

The “Quantitative and Qualitative Monetary Easing” enacted immediately after the inauguration of Bank of Japan Governor Kuroda brought violent fluctuations in the prices of government bonds and deteriorated market liquidity. Does a central bank's government bond purchasing policy generally reduce market liquidity? Do conditions exist that can prevent such a decrease? This study analyzes how the Bank of Japan's purchasing policy changes influenced market liquidity. The results reveal that three specific policy changes contributed significantly to improving market liquidity: (i) increased purchasing frequency; (ii) a decrease in the purchase amount per auction; and (iii) reduced variability in the purchase amounts. These policy changes facilitated investors' purchase schedule expectations and helped reduce market uncertainty. The evidence supports the theory that the effect of government bond purchasing policy on market liquidity depends on the market's informational environment.

The Monetary Phoenix: Central Bank Independence from the Great Inflation to the Great Recession

This article presents a game-theoretic model analyzing the strategic competition between hard and fiat money, involving a representative player and a consolidated bank (including the central bank). The findings reveal counterintuitive interactions between inflation, interest rates, and monetary policy. When hard money becomes more favorable, through higher interest rates, lower transaction costs, or stronger preferences, the bank responds by withdrawing fiat money, reducing inflation but paradoxically lowering the player’s utility. Conversely, increasing the fiat money interest rate leads to money printing and inflation, benefiting both the player and the bank, but ultimately driving hard money out of existence. The model demonstrates how banks use selective fiat money printing and withdrawal to optimize their holdings at the expense of individual players. This study provides insights into currency competition, inflation control, and strategic monetary interventions, relevant for policymakers, financial institutions, and individuals navigating dual-currency economies. By analyzing 26 key parameters, the research uncovers both intuitive and unexpected economic dynamics, offering a structured approach to understanding the power of fiat money in shaping financial systems. These results highlight the importance of monetary policies, transaction costs, and interest rate adjustments in determining the long-term viability of competing monetary systems.

Purpose: The general objective of the study was to analyze the impact of monetary policy on stock market volatility. Methodology: The study adopted a desktop research methodology. Desk research refers to secondary data or that which can be collected without fieldwork. Desk research is basically involved in collecting data from existing resources hence it is often considered a low cost technique as compared to field research, as the main cost is involved in executive’s time, telephone charges and directories. Thus, the study relied on already published studies, reports and statistics. This secondary data was easily accessed through the online journals and library. Findings: The findings reveal that there exists a contextual and methodological gap relating to the impact of monetary policy on stock market volatility. Preliminary empirical review revealed that monetary policy exerts significant influence on stock market volatility through various channels such as interest rate adjustments, quantitative easing, and forward guidance. It highlighted that the timing and clarity of policy announcements play a crucial role in shaping market reactions, with unexpected shifts often leading to heightened volatility. Global interconnectedness amplified these effects, underscoring the need for coordinated policy responses. Behavioral factors also contributed, as investor sentiment and market psychology could magnify volatility independently of economic fundamentals. Understanding these dynamics is crucial for effective policy design and market stability amidst evolving financial landscapes. Unique Contribution to Theory, Practice and Policy: Efficient Market Hypothesis (EMH, Rational Expectations Theory and Keynesian Economics may be used to anchor future studies on monetary policy on stock market volatility. Recommendations from the study included integrating behavioral finance models into economic frameworks to enhance predictive accuracy. It advocated for clearer and more consistent central bank communications to align market expectations with policy actions, reducing uncertainty-driven volatility. Collaborative efforts among central banks were emphasized to manage international spillovers and enhance global financial stability. Adaptive policy frameworks were proposed to respond flexibly to changing market conditions while promoting regulatory measures to safeguard against excessive risk-taking. These recommendations aimed to foster a stable financial environment supportive of sustainable economic growth and market confidence.

Monetary Policy Adjustments on the Final Passage Towards the Euro

This stimulating and original Handbook offers an updated and systematic discussion of the relationship between central banks, financial regulation and supervision after the global financial crisis.