IS THE FEDERAL RESERVE SYSTEM REALLY NECESSARY?

Comment

Frequency Dependence in a Real-Time Monetary Policy Rule

Objective: The objective of the article is to determine whether the policy of the National Bank of Poland (NBP) as conducted in recent years may be the basis for bringing the president of the NBP before the State Tribunal for violating the Constitution of the Republic of Poland. Research Design & Methods: The independence of the central bank is of undoubted value in terms of controlling the price level (inflation), but the ban on supporting the government during periods of financial crisis, for example the COVID-19 pandemic crisis, cannot be inviolable. In the detailed analysis of the subject literature, the significance of the activities of other central banks, primarily the European Central Bank, in 2007, is included. An analysis of the NBP’s activities during the COVID-19 pandemic was carried out, with particular emphasis on inflation, independence from the government, communication with the public, and financing the government’s borrowing needs. Findings: Analysis of allegations regarding the NBP policy, including the validity of criticism (inflation). However, there are a number of counter-arguments against taking such drastic steps against the president of the National Bank of Poland, whose actions resulted in government support (redemption launched on the secondary market) during the COVID-19 pandemic period, for violating the Constitution. Implications/Recommendations: It is necessary to introduce a provision into the Constitution allowing the NBP to purchase treasury bonds on the secondary market during periods of extraordinary difficulties on financial markets. Consideration should be given to changing the method of appointing members of the Monetary Policy Council (MPC) in order to prevent a single political grouping exercising political power for more than one term. Contribution: The policies of many central banks in the world, including the ECB, the Fed, the Bank of England, and others, confirm the hypothesis that central banks cannot be (and are not) inactive during periods of crisis, in which the fiscal policy resources available to the government are insufficient. The paper draws particular attention to the need for a pragmatic approach in Poland in extreme/crisis conditions. It also points out the need for institutional coordination of fiscal and monetary policy at the Financial Stability Committee.

Central Bank Communication on Fiscal Policy

THE PURPOSE OF THIS paper is to examine the possibility that the effectiveness of monetary policy has been impeded by growing rigidities within the commercial banking system. The paper will attempt to demonstrate that these rigidities have increased during the last decade and that their development can be ascribed to the growing cost pressures in commercial banks. Since the monetary authorities can, in effect, impose their decisions on the economy only through the commercial banking system, the efficiency of banks as a means of policy transmission is of paramount importance. In recent years monetary policy has been criticized as an economic weapon incapable of achieving the degree of effectiveness that has been claimed on its behalf. Milton Friedman and others have suggested that the errors in cyclical diagnosis and the lags inherent in monetary policy between implementation and effect are such that discretionary central banking should be abandoned in favor of an automatic system of increasing the money supply at a constant rate, regardless of cyclical conditions.' J. G. Gurley and E. S. Shaw have proposed that the powers of the Federal Reserve System be widened, in order that the relative decline in the share of the financial markets commanded by the commercial banking system be offset by bringing under the control of the Federal Reserve System other types of financial intermediaries.2 The Gurley-Shaw thesis is essentially a criticism of the effectiveness of the commercial banking system as a vehicle of policy transmission because of the system's decline in importance. Commercial banks are profit-motivated institutions, and their response to central bank actions is largely influenced by the manner in which these actions affect their profit opportunities. However, if

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.

After the fall of Lehman Brothers in September 2008, the financial crisis turned into a global crisis and had a negative impact on the real economy. During the crisis, there has been a significant decrease in key macroeconomic indicators, such as GDP, short-term interest rates, unemployment and inflation. The GDP growth rate had taken a negative value in developed countries. Inflation was below 1 percent, and deflation was observed in Japan, which in turn slowed down economic development. Central banks responded to the crisis with a change in interest rates, but this was not enough to calm financial markets and improve the real economy. Most central banks have developed many new monetary policy tools, including communication strategies, credit policies, and large asset purchases. These new measures are often called “unconventional” monetary policies. The purpose of the article is to study quantitative easing as one of the unconventional measures of monetary policy. Methodology. The article uses general scientific and special methods: generalization, systematization, economic and statistical analysis, graphic and comparison methods. This allowed us to study the theoretical foundations of the quantitative easing policy, determine the economic background for these measures application, analyze the development stages and the basic rules of functioning policy. The quantitative easing policies usage was also examined on the examples of the Federal Reserve, the European Central Bank, the Bank of England and the Bank of Japan. Results. The main trends and economic conditions, under which these methods can be used in future, were identified using an analysis of the quantitative easing application background. The policy’s main components analysis provides a clear understanding of the quantitative easing essence. As a result of the unconventional monetary policy usage, there has been a significant expansion of the USA, Japan and the Eurozone central banks' balances, which amounts to more than 10 trillion USD. Due to this process, central banks have become key bondholders. Practical meaning. The given results analysis will determine that kind of unconventional monetary policy effectiveness and the possible consequences of a significant increase in the central banks’ balance sheet assets. Value/originality. In the article, the conditions, under which unconventional monetary policy has been applied, are systematized and the four central banks’ quantitative easing policy is compared.

Monetary Policy by Committee: Consensus, Chairman Dominance or Simple Majority?

The article analyzes the effectiveness of the NBU's monetary policy. During the period of independence, the National Bank never performed any of the functions stipulated by law. The main instruments of monetary and credit policy at the disposal of the central bank are not used as intended, and therefore do not ensure the performance of the functions entrusted to the National Bank of Ukraine, in particular: they do not ensure the stability of the hryvnia exchange rate, price stability, accelerated socio-economic development of the state and the adopted inflation level. The monetary and credit policy of the National Bank must be radically changed to ensure the implementation provisions of Art. 6 of the Law of Ukraine ‘On the National Bank of Ukraine'. The central bank's efforts must be coordinated with the government's efforts, and the central bank's monetary policy must be coordinated with the government's fiscal policy. In the paper, we propose to change the monetary policy instruments of the NBU in order to direct it to the support of the real sector of the economy and the stability of the exchange rate. The proposed changes provide for the establishment of refinancing rates up to 2%, placement of deposit certificates -2% (minus 2%). At the same time, it is necessary to make changes to the Tax Code of Ukraine regarding the introduction of progressive floating rates of taxation of the profit of financial institutions, limitation of the right to deduct losses from the tax base of financial institutions in certain cases. . . For the actual production of goods with a high added value, provide the reduction of the tax base for the part invested in production, and set the tax rate for the distributed part of the profit at the level of the personal income tax rate. Non- traditional methods of stimulating development are also proposed, in particular the purchase of government securities. The marginal value of government debt securities should be limited to 2-3% of GDP.

Behind productive and prosperous economies are independent central banks that implement effective monetary policies. This observation is especially valid for the G20, which comprises the world’s top twenty economies in terms of gross domestic product and the largest stakeholders of the global economic system. These economies include Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United Kingdom, the United States, and the European Union. Three features of this book, which focuses on central banking and monetary policy in the G20, an intergovernmental platform, stand out: Firstly, as contemporary theories and global practices confirm, the main purpose of central banks is to ensure monetary and price stability, not despite the government but in cooperation with it. This principle is strongly emphasized here. Governments, which must maintain fiscal discipline, are key to the success of central banks in combating inflation and deflation. Secondly, since the authors of the book chapters come from various countries and academic institutions, the book offers a range of perspectives and intellectual richness. Without deviating from the book's main axis, the authors examine the changing paradigms in central banking and the increasing challenges of monetary policy. This examination is based on developed and emerging economies, integrations, financial organizations, and economic crises within the G20, informed by significant sources. Thirdly, this book offers university researchers, professional business practitioners, and curious readers the opportunity to explore and reflect on new concepts such as green central banking, digital money, and interest-free monetary policies, which have gained prominence in the wake of the global COVID-19 pandemic, alongside mainstream topics. It is hoped that this book, consisting of 14 chapters, will inspire those who wish to conduct new and renewed academic studies on global central banks and monetary policies and will fill a gap in the literature.

The U.S. housing bubble and the fallout from its bursting are not the results of a laissez-faire monetary and financial system.They happened in an unanchored government fiat monetary system with a restricted financial system. What Happened and Why?Our current financial turmoil began with unusual monetary policy moves by the Federal Reserve System and novel federal regulatory interventions.These poorly chosen public policies distorted interest rates and asset prices, diverted loanable funds into the wrong investments, and twisted normally robust financial institutions into unsustainable positions.There is no doubt that private miscalculation and imprudence have made matters worse for more than a few institutions.Such mistakes help to explain which particular firms have run into the most trouble.But to explain industry-wide errors we need to identify price and incentive distortions capable of having industry-wide effects.Here I will make two main points.First, the Federal Reserve's expansionary monetary policy supplied the means for unsustainable housing prices and unsustainable mortgage financing.Elsewhere (White 2008) I have discussed the growth in regulatory mandates and subsidies that exaggerated the demand for riskier mortgages, most importantly the implicit guarantees to Fannie Mae and Freddie

This article revives the comparative political economy of central banking. Drawing on growth models theory, I argue that export-led and debt-led growth models imply fundamentally different versions of central banking and rely on different combinations of monetary, financial, and exchange-rate policies. Historical institutionalists plausibly argue that central banks have learned to pursue these policies because dominant coalitions have shaped central banks’ institutional roles. But since the 1970s, policy activism has become more important. To explain why the Bundesbank and Federal Reserve have come to support the German and US growth models during Post-Fordism, I look at how sense-making processes informed policy innovations. In the German case, the Buba carved out a powerful disciplining role for itself in corporatist coordination, which aligned with the demand-restraining features of Germany’s export-led model; corporate profit expectations signaled economic health. A dilemma arose with deteriorating price competitiveness that the Buba resolved by imposing an export version of secular stagnation. In the US case, Paul Volcker’s aggressive interest rate hikes to eliminate ‘inflation scares’ ushered in an area in which monetary policy became focused on bond market credibility. Greenspan consolidated central banking for financialization by hardening the Fed’s bail-out promise and its focus on ‘wealth effects’.

• Fed monetary policy is based on a nominal short-term interest rate, which is an unreliable guide. The Fed interprets a low rate as indicating monetary ease, a high rate as indicating monetary tightening. A low rate, however, may in fact be consistent with contraction if the growth rate of the quantity of money has been declining, and a high rate may be consistent with expansion if the growth rate of the quantity of money has been rising. Moreover, monetary authorities who rely on an interest rate instrument are prone to delay a needed increase to combat inflation because they believe that it will produce a rise in the unemployment rate. Action is often late and excessive. Prescription: Monetary policy should be based on a credible, pre-announced, longrun stable growth rate of a monetary aggregate, preferably the monetary base or M2. • The Fed instructs the Manager of open market operations at the Federal Reserve Bank of New York to maintain money market conditions that it specifies in its directive to him, with a proviso that credit does not unduly expand. The directive leaves open to the Manager the interpretation to be placed on money market conditions and therefore makes it impossible to hold him accountable for the open market operations that he chooses to execute. Prescription: The Fed should not conduct M onetarists 40 years ago had a double objective. They sought to persuade the economics profession that (i) monetary policy, not fiscal policy, was the key to economic stability and (ii) the control of inflation required limiting money balances, not incomes policies and wage controls. Monetarists also sought to persuade the Federal Reserve to alter the way it conducted monetary policy to conform to monetarist doctrines. In the three years (1979-82) under Volcker, disinflationary monetary policy, announced as being designed to contain growth in money aggregates, brought down the U.S. inflation rate from 10 percent to 4 percent. Since then the inflation rate has remarkably declined even more. A victory for monetarism? During the Volcker era monetarists did not think so. Missing from the retrospective on the Volcker era at the special conference held at the Federal Reserve Bank of St. Louis was a consideration of the complaints against the Federal Reserve expressed by monetarists. The conference papers celebrated Volcker’s achievement and deemed the changes in monetary theory and practice since his time as virtually unqualifiedly successful. I propose to review past monetarist strictures (Shadow Open Market Committee, 1974-1982) and ask whether current Federal Reserve practice provides a satisfactory response to them. Twenty-five years after the Volcker era, has the contest between the U.S. central bank and its critics been resolved?

This chapter surveys unconventional monetary policies adopted by the Federal Reserve (Fed), the European Central Bank (ECB), and the Bank of England (BOE). It begins by discussing the details of the respective programs implemented by each central bank. The chapter then describes the theoretical channels, namely portfolio balance channel, signaling channel, credit and capital constraint channel, and preferred habitat and asset scarcity channel, via which the unconventional policy might operate. In general, large-scale asset purchase (LSAP) may have an impact when the assets being swapped by the central bank are not perfectly substitutable. In this case, agents may not be indifferent to a LSAP decision and the Ricardian equivalence fails. A potential source of limited substitutability is the different liquidity value of short- and long-term assets. Finally, the chapter reviews the empirical evidence on the effectiveness of unconventional policy operations from the perspective of financial markets.

Subject. The information policy of the central bank plays an important role in increasing transparency and confidence in the actions of the central bank. It also has a significant impact on the expectations of economic agents. In recent years, the Bank of Russia has taken a number of measures aimed at increasing the transparency of the monetary policy. Its information policy has undergone significant changes due to the transition to the inflation targeting regime in 2014-2015. For a long time, economists and researchers have had controversial opinions about the impact of central banks’ information transparency on the economy. The development of financial institutions, monetary policy instruments, and its goals have created new conditions for and requirements to the regulators’ information policy. Objectives. An original study of the content of the information policy of the Bank of Russia and the central banks of other countries, as well as its evolution stipulated by the transition to the inflation targeting regime, their comparison to determine common or distinctive features. An assessment of their adequacy and whether it is reasonable to adjust the information policy of the Bank of Russia in order to increase its credibility and to stabilise inflation expectations. An analysis of changes in the awareness of the population of Russia about the monetary policy during the period preceding to the complete transition to the inflation targeting regime and at present time. Methodology. In our study, we used the empirical method of comparison and the following theoretical methods: dialectical and the method of analysis and synthesis based on the study of relevant literature dedicated to the topic. MS Excel package was used to analyse and visualise the results. Results. The study involved comparing the communication policy of the Bank of Russia during the period preceding to the introduction of the inflation targeting regime and preparation to it (2012) and after several years of its operation (2021). It also analysed the influence of the expansion of communication channels on the dynamics of expectations of the population of Russia regarding future annual inflation. The communication policies of central banks of other countries targeting inflation were studied and used to develop recommendations on how to improve the effectiveness of the information policy and the monetary policy of the Bank of Russia as a whole. Conclusions. A comparison of information materials of the Bank of Russia for the period preceding to the preparation for the transition to the inflation targeting regime (2012) and the present time (2021) showed that the Bank of Russia increased the number of regularly published information messages and analytical materials by almost 3 times. A comparison of the information policy of the Bank of Russia and central banks of other countries revealed that taken as a whole the number and content of published materials corresponds to generally accepted international standards, including the practice of countries with a longer experience of inflation targeting. Works dedicated to the topic were studied and the benefits of using certain types of communications in other countries were assessed. As a result, recommendations were developed on how to improve the effectiveness of both information policy and monetary policy as a whole.