Some interesting reads in the FT. Here's one of them:
Gillian Tett has an article on the McCulley-Pozsar paper that delves into a sort of formal mapping of the interaction of monetary and fiscal policy in certain situations or cycles of deleveraging etc. This plays on the approach a few years ago to map the shadow system in a detailed manner and what they essentially propose this time is a quadrant-based approach to central banking reactions that argue against the whole idea of independence in unusual times. The charts are really interesting, I'll try and post them up as well.
Perhaps it simplifies things once you take the diametrically opposite approach, i.e: either the private sector is leveraging or deleveraging and the fiscal stance is that of consolidation or stimulative. If both are stimulative, there could be rapid credit growth (which the central bank needs to keep under control). When one is and the other isn't, a mixed pattern is likely and when both sectors are deleveraging, there is likely to be a deflationary environment - when monetary policy hits the ZLB and loses traction, a boost to the monetary base does nothing to stimulate spending and the economy experiences a liquidity trap.
This is the main point that Tett takes away and it's primarily the reason for the paper - that in this special circumstance of a dual lack of stimulus, could central bank independence (price stability) be counter-productive? Because loose money won't work, perhaps an MoF needs to work in tandem to ensure fiscal support as well.
Tett ends with this:
" We are not in the same place today: the US, say, faces modest inflation, not deflation. But it would be a bold investor who would assume history could never be replayed, if the economic crises grind on.
Gillian Tett has an article on the McCulley-Pozsar paper that delves into a sort of formal mapping of the interaction of monetary and fiscal policy in certain situations or cycles of deleveraging etc. This plays on the approach a few years ago to map the shadow system in a detailed manner and what they essentially propose this time is a quadrant-based approach to central banking reactions that argue against the whole idea of independence in unusual times. The charts are really interesting, I'll try and post them up as well.
Perhaps it simplifies things once you take the diametrically opposite approach, i.e: either the private sector is leveraging or deleveraging and the fiscal stance is that of consolidation or stimulative. If both are stimulative, there could be rapid credit growth (which the central bank needs to keep under control). When one is and the other isn't, a mixed pattern is likely and when both sectors are deleveraging, there is likely to be a deflationary environment - when monetary policy hits the ZLB and loses traction, a boost to the monetary base does nothing to stimulate spending and the economy experiences a liquidity trap.
This is the main point that Tett takes away and it's primarily the reason for the paper - that in this special circumstance of a dual lack of stimulus, could central bank independence (price stability) be counter-productive? Because loose money won't work, perhaps an MoF needs to work in tandem to ensure fiscal support as well.
Tett ends with this:
" We are not in the same place today: the US, say, faces modest inflation, not deflation. But it would be a bold investor who would assume history could never be replayed, if the economic crises grind on.
If there is one thing we learnt in the 2008 financial crisis, it is that events which once appeared unimaginable do sometimes occur. In retrospect, the only reason we were surprised by events was that we had a bad (or limited) mental map of how the world worked. Shadow banking was one case in point. It is unlikely to be the last."
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