A Monetary Meeting in the Midst of Market Turmoil

The Bank for International Settlements (BIS) held its annual monetary conference in Luzern Switzerland over the past two days. I presented a paper on cross-border monetary policy spillovers, which was unexpectedly and vividly brought to life by the turmoil in financial markets following last Wednesday’s FOMC meeting and its global impact. Many central bank governors from emerging market countries who attended the conference had to spend a lot of time on cell phones and Blackberry’s monitoring the financial market situation back home. Others had to cancel their trip.

Though their views might have understandably been overly influenced by the recent turmoil, I noticed several interesting areas of agreement among the central bankers and others who spoke at the conference. First, many longed for a return to the type of rules-based monetary policy associated with the so-called great moderation of the 1980s, 1990s, and until recently.  Second, they agreed that monetary policy has become overburdened with too many tasks far removed from the traditional monetary policy objectives. Third, they admitted that there were significant monetary policy spillovers on emerging market countries of the current unconventional policies in advanced countries.  Fourth, they lamented that it would be a long uncertain road back to normalization.

In my paper I argued that deviations from rules-based policy at several central banks, including the Fed in recent years, created incentives for other central banks to deviate from such policies and that this had created the current Global Great Deviation.  Another view—which I reviewed in the paper—is that the global state of monetary policy is either not a deviation from good policy or that such deviations are benign and appropriate.  I was surprised that there was considerable support for the first view rather than the alternative at the conference, though there was by no means a consensus and probably not a majority. I had thought that there would be more support for the alternative view and for unconventional monetary policies.

Eventually all the papers and comments by the discussants will be posted on the BIS website as with last last year’s conference papers. (My discussants were Arminio Fraga and Ken Rogoff). In the meantime I am off to Basle for the Annual General Meeting of the BIS which many more of the world’s central bankers will attend.

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