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This chapter discusses some of the topics the Bank of England Monetary Policy Committee has spent a lot of time on. It first examines the rapid rise in household debt and its implications for monetary policy. The next section looks at the role of asset prices in monetary policy, with particular reference to the recent UK housing boom. Finally, the chapter discusses the implications of the switch in the inflation target at the end of 2003.

Throughout the twentieth century the view was taken by consecutive governments that the United Kingdom's constitution was incompatible with the concept of central bank independence. New Labour departed from this position and instead sought to square the circle by granting independence but within the contours of the Westminster Model.

This chapter analyses the monetary policy oversight hearings of the two congressional banking committees from 1976 to 2009 (as well as the reconfirmation hearings for Volcker, Greenspan and Bernanke) in order to assess how well Congress holds the Fed to account for its decisions on monetary policy. Surprisingly, partisan ideology plays very little role when it comes to effective monetary policy oversight. Decade after decade, Fed chairman after Fed chairman, one feature is, however, evident in the discourse between central bankers and US legislators: Fed chairmen tend to talk about the technicalities of monetary policy while senators and representatives talk about other things, such jobs, fiscal policy, energy policy, education, and so on. All too often they simply talk past one another.

This chapter uses interviews with participants from both the FOMC and congressional banking committees to provide context and understanding of the motivations of central bankers and politicians as they discuss monetary policy. Among the many findings is that deliberation can adjust and alter the preferences of individual FOMC members, though this usually occurs over a series of meetings rather than within the space of a single meeting. With regard to congressional oversight of monetary policy, Congress is perceived to be constrained by specific institutional features—particularly, (1) the electoral incentives of members (which limit their ability and time to learn from deliberation), (2) the lack of technical expertise in monetary policy, (3) the extreme transparency of the oversight hearings, and (4) the large membership size of the House and Senate banking committees. In short, the finding is that Congress as an institution for holding monetary policy makers to account is limited at best.

The first part of this chapter analyses FOMC transcripts from 1979-99, finding shifts in the substance and style of deliberation, and a shift in the contributions of governors and reserve bank presidents. Part two focuses on the case of the Volcker Revolution in 1979, and the subsequent years of 1980-81. Textual analysis reveals a crucial role for Paul Volcker as chairman in laying out, and subsequently modifying, a major change in policy that enabled colleagues with quite disparate views on the objective and immediate setting of policy to coalesce around Volcker’s position. Part three of this chapter examines monetary policy making in 1999, twenty years after the Volcker Revolution. Persuasion plays a role in FOMC deliberation in that members adopt clear strategies of persuasion (e.g., cumulative argumentation around a consistent theme; emphasis on new argumentation; and explicit evidence-based argumentation where the consistent theme is more implicit).

Most countries in sub-Saharan Africa have made great progress in stabilizing inflation over the past two decades. In about half, a hard peg provides the nominal anchor. In the rest, which are the focus of this book, policymakers have more recently been asking more of monetary policy—to avoid policy misalignments and respond appropriately to shocks such as export and food price spikes and swings in fiscal policy—in support of overall stability and growth. And they are, in many cases, finding current regimes lacking, with opaque and sometimes inconsistent objectives, inadequate transmission of policy to the economy, and difficulties in responding to supply shocks. This chapter reviews this history and the analytic and policy challenges of modernizing monetary policy regimes in the region. Drawing on the results from the rest of this book, it charts a way forward.

This chapter sets out the aim of the book—to examine systematically deliberation on monetary policy in the U.S. in two different institutions, the Federal Reserve and Congress. It establishes reasons why deliberation may matter in US monetary policy. For instance, even though the legal framework for the independence of the Fed has remained constant, (1) interpretations of this independence among policy makers and politicians have changed considerably — and so it may be important to gauge how their thinking and arguments on this have evolved; (2) policy makers do not generally envisage their decisions on monetary policy as falling along a single dimension, and so there are potential trade-offs to be made across dimensions, which may entail argued reasoning; (3) the uncertainty inherent to monetary policy decision making creates questions that in turn create the opportunity for deliberation; (4) studying the Fed and Congress together allows us insight into the ways in which each institutional setting shapes the ways that monetary policy is understood and discussed; and (5) studying deliberation provides insight into the effects of changes in transparency and the chairman’s leadership on the committees’ discussions.

Chapter 5 studies the rules of bimetallic game. It discusses the constraints and opportunities of bimetallic regimes for monetary authorities. It shows that, contrary to a widespread view, a bimetallic system does not provide fundamentally different opportunities than a monometallic one, and thus places fairly tight constraints upon monetary authorities. In fact, it is during the years of bimetallism that a high degree of European monetary integration was first achieved.

Norway was, like many small open economies, adversely affected by the recession that followed the global financial crisis. But in an international perspective, the Norwegian economy and institutions were less affected by the crisis than many other countries. Norway's approach to monetary policy, flexible inflation targeting, was already in place when the crisis hit, and it benefitted from having established a credible and transparent framework for communication of Norges Bank's policy intentions. One lesson was that monetary policy is more than setting the policy rate. Appropriate and adequate liquidity measures were required to improve the functioning of the financial markets. The international experience shows that inflation targeting per se is not sufficient, neither for price stability nor for financial stability. Although Norway benefited from lessons from the Nordic financial crisis in the 1990s, the recent crisis revealed weaknesses in the policy framework for financial stability, suggesting a need to look creatively for macroprudential instruments, and improvements in the resolution regime for troubled banks. Flexible inflation targeting proved to be a robust framework for monetary policy during the crisis, and successfully provided the necessary room for maneuver for Norges Bank in its pursuit of price stability and financial stability.

This chapter analyzes monetary policy and systemic risk, and the interrelation with macroprudential policy. It analyzes the role of monetary policy to reduce ex-ante build-up of financial imbalances by leaning against the wind and to combat ex-post credit crunches and fire sales in asset prices. It discusses also the importance of short versus long term interest rates for financial institutions, notably banks. It explains the risk-taking channel of monetary policy, its relation with the credit channel, and summarizes the empirical evidence around the world on these channels. Moreover, the chapter explains that, as monetary policy affects credit and asset prices (thus influencing systemic risk), coordination between monetary and macroprudential policy is key. It also describes how macroprudential policy and its objective of financial stability could be in conflict with the price stability objective of monetary policy.

In the eyes of some, the great financial crisis has raised questions about whether price-stability oriented monetary policy frameworks – that, until only a few years ago, were credited with supporting a long period of global economic stability – remain appropriate. This chapter evaluates these claims on the basis of the ECB's experience. It argues that: (a) nonstandard policy measures targeted at repairing malfunctioning markets are potentially more efficient instruments to address financial crisis than reducing policy rates to their lower bound. By tackling malfunctioning financial markets directly and re-establishing monetary policy transmission, such measures enhance the effectiveness of the standard interest rate policy instrument and thus serve to achieve macro-stabilisation without inducing greater interest rate volatility; (b) a solid anchoring of inflation expectations stemming from the establishment of credible price stability-oriented policy frameworks has played a crucial role during the crisis, both as an automatic stabiliser and in preventing the emergence of a debt-deflation spiral; (c) analysis of monetary developments helps identify the excessive credit expansion underlying the creation of financial imbalances. All in all, the chapter concludes that the conduct of monetary policy should neither be changed fundamentally nor overburdened with additional objectives.

K. Kanagasabapathy, Rekha A. Bhangaonkar, and Shruti Pandey address the issue whether the rate and quantum channels were complementary to each other over the period April 2001 to December 2017. Reserve Bank of India’s (RBI) monetary policy framework is characterized by use of multiple instruments combining adjustments in policy rate with a complex use of liquidity management operations, despite changes in the functioning of the monetary policy. They study easing and tightening phases of the policy cycle and bring out stylized facts on several relationships highlighting the impact of policy rate changes and liquidity conditions on short and medium term market interest rates and output and prices. An empirical analysis confirmed the linkage between the repo rate and the market related rates. On the quantum side, a bi-causal relationship is observed between repo and liquidity. Money and financial transmission market transmission is better established than that to the real sector. Shruti Pandey and K. Kanagasabapathy have worked on the revised version for the new edition.

Turkey is an interesting case study because it was one of the hardest hit countries by the crisis, with a year-over-year contraction of 15 percent during the first quarter of 2009. At the same time, anticipating this fallout from the crisis, the Central Bank of the Republic of Turkey (CBRT) cut policy rates by an astounding 1025 basis points over November 2008–November 2009. In this context, this chapter addresses the following question: If an inflation targeting framework underpinned by a flexible exchange rate regime was not adopted, how much deeper would the recession have been? Counterfactual experiments based on an estimated structural model provide quantitative evidence which suggests that the recession would have been substantially more severe. In other words, the combination of exchange rate flexibility and the interest rate cuts implemented by the CBRT substantially helped soften the impact of the crisis.

This chapter describes the role of the Bank of England in monetary policy; there is also coverage of the role of the European Central Bank. It concentrates on the role of the Bank’s Monetary Policy Committee in setting interest rates and undertaking quantitative easing. Particular attention is paid to the remit of the Committee, its relations with the Treasury and its accountability to Parliament. It is argued that the arrangements for an independent Committee with a defined remit have significantly increased transparency and accountability, but this will be more difficult to employ when difficult trade-offs have to be made between control of inflation and other values, in the field of monetary policy and elsewhere.

A model in which monetary policy pursues fully fledged inflation targeting is adapted to Ghana. Model features include: endogenous policy credibility; non-linearities in the inflation process; and a policy loss function that aims to minimize the variability of output and the interest rate, as well as deviations of inflation from the long-term low-inflation target. The optimal approach from initial high inflation to the ultimate target is gradual; and transitional inflation-reduction objectives are flexible. Over time, as policy earns credibility, expectations of inflation converge towards the long-run target, the output-inflation variability trade-off improves, and optimal policy responses to shocks moderate.