A new consensus is emerging for how monetary policy should be conducted. However, using the Czech experience as an example, Jan Frait, Zlatuše Komárková and Luboš Komárek argue that it may be di...
Author: Jan Frait, Zlatuše Komárková and Luboš Komárek
Source: Central Banking | 17 May 2011
Categories: Financial Stability
Topics: crisis, monetary policy
"The modern central banker needs to be open to the reality of the ongoing structural changes around him, and to keep an open mind as to how monetary policy might best be used to enhance the welfare of the citizens for whom he or she is responsible."
William R. White (2002)
In the second half of the 1980s, in response to the high inflation of the previous two decades, central banks made achieving low and stable inflation their primary objective. In most countries, price stability was achieved relatively quickly - in advanced countries by the early 1990s and in emerging and developing ones in the second half of the 1990s. Inflation expectations in many countries started to be strongly and successfully affected by explicit or implicit inflation targets. In this environment of low inflation and stable inflation expectations, moreover, central banks did not have to respond to the economic recovery by rapidly tightening monetary policy as they had in previous boom-and-bust cycles. This fostered a reduction in the short- to medium-term volatility of real economic activity. The view started to prevail that a "Great Moderation" had occurred in the world economy and that a long period of low and stable inflation and high and stable economic growth lay ahead. Although the financial markets experienced no such stabilisation, financial institutions also gradually started believing that the Great Moderation, together with better risk management by financial institutions, would lead to a fall in credit and market risks.
The onset of the Great Moderation coincided with the development of the theory and models of inflation targeting. In the years before the crisis, a consensus reflecting the theoretical and empirical studies published over the previous two decades completely prevailed among mainstream theoreticians and policymakers. Bank of England deputy governor Charlie Bean and others talk about this consensus as a synthesis of the rigour of dynamic general equilibrium modelling with the empirical realism of sticky-price Keynesian thinking.2 Frederic Mishkin, a former governor of the Federal Reserve, refers to it as the "science of monetary policy"3 based on the new neoclassical synthesis4 and transformed into a system of flexible inflation targeting. One of the major effects of the strength of this consensus was a strong belief in the potential of monetary policy and in central banks' ability to leverage this potential. However, the financial crisis that started in summer 2007 severely damaged the existing consensus regarding monetary policy strategy, and a search for a new consensus began.
Monetary policy and financial stability in the new consensus
The crisis that started in 2007 made monetary economists aware of some deficiencies in the prevailing flexible inflation-targeting framework. Following the lessons of the crisis, both academic economists and central bankers have started to discuss the possibility of reaching a new consensus. Before we describe this, let us restate the basic characteristics of the "old" view.
Central banks thought the dynamics of the economic system had not significantly changed since the 1970s and 1980s despite the Great Moderation. In particular, growth in aggregate demand outpacing that of supply, and so a wider output gap, was seen as generating upward pressure on prices. This type of view tended to rely heavily on models where there was a close correlation between output gaps and inflation and where the inflation rate itself was a key variable reflecting distortions in the economy. The role of financial markets in the policy framework was fairly modest. It reflected primarily the marginal contributions that such variables make to forecasts of output and inflation over a policy horizon of one to three years. Similarly, possible financial imbalances, including rising household or business debt burdens, were seen as suggesting downside risks to the outlook, but they were not generally expected to play a central role. In a period of rapid non-inflationary growth, high investment and strong productivity gains, fast growth in leverage was seen as justified by more rapid anticipated growth in incomes and higher returns on investment.
The changes in the financial sector had, however, had a far greater impact on economic activity than previously assumed. Though the principle according to which financial frictions play an important role in business cycles was well understood, it was not explicitly part of the models used for policy analysis in central banks. One of the key reasons was that the models work with a representative-agent framework in which all agents are alike, whereas financial frictions require that agents differ. Mishkin has concluded5 that the representative-agent framework together with the linear-quadratic framework are two key elements of the pre-crisis theory of optimal monetary policy that are undermined by the lessons from the crisis. A more realistic description of financial sectors in macroeconomic models will also have to deal with the limited rationality of agents and imperfect efficiency of financial markets.
Rethinking monetary transmission
Economists now broadly agree that the way monetary policy transmission is described in macroeconomic models needs to be fundamentally reworked. Transmission was clearly oversimplified, especially as regards various channels related to financial institutions' activities and the tendency to behave procyclically. Mark Carney, the governor of the Bank of Canada,6 believes that central banks have effectively treated the transmission mechanism as uncertain but fixed when it is in fact highly variable and procyclical - it is a function of regulation, which changes over time; financial innovations, which often evolve to circumvent regulation; and confidence, which is influenced by monetary policy in ways not commonly acknowledged. Even the models that did encompass financial intermediation usually worked only with a simple ‘bank lending channel' or ‘broad credit channel'7 containing a financial accelerator mechanism in which interest rate changes affected the credit market through changes in asset and collateral values.
Some suggest concentrating more on the ‘credit supply channel' or ‘risk taking channel', which differs from the broad credit channel in focusing on credit amplifications due to financing frictions in the lending sector, not in the sector of non-financial borrowers. This channel considers the link between monetary policy, the perception and pricing of risk by economic agents, and credit provision. It provides an explanation of how monetary policy in a booming economy may promote excessive risk-taking leading to higher leverage, maturity- and other asset-liability mismatches which make the financial system more fragile.
There are three forces behind the channel. First, low returns on investments, such as government bonds, may increase incentives for banks, asset managers and insurance companies to take on more risk, for example to meet a target nominal return. The second stream focuses on the impact of changes in policy rates on either risk perceptions or risk tolerance and hence on the degree of risk in portfolios, on the pricing of assets, and on the availability of credit. Third, as explained by Claudio Borio and Haibin Zhu, both of the Bank for International Settlements (BIS), risk-taking may be boosted by central bank communication, especially by the asymmetric commitment to clean as and when crises occur (the Greenspan put). The existence of the risk-taking channel has been supported by the empirical findings.8
There is another important mechanism interconnected to the credit supply channel - the ‘bank capital channel', in which monetary policy affects bank lending through its impact on bank equity capital. If monetary policy actions affect bank profits, then over time this will accumulate to changes in bank capital. Starting from a position of a binding capital requirement, any change in bank capital can in turn have a potentially large effect on lending. This particular channel becomes rather important in times of stress, when it restricts lending activity by threatening banks to breach minimum capital requirements.
Economists have already started trying to incorporate the newly defined channels into the monetary policy framework. Vasco Cúrdia and Michael Woodford propose a simple adjustment of the Taylor rule by a factor proportional to the increase in the credit spread (the spread between the interest rates available to savers and borrowers).9 However, capturing the impact of financial frictions on macroeconomic dynamics only by implementing changes in credit spreads in the Taylor rule is clearly just a partial solution. Woodford himself states10 that what is needed is a framework in which intermediation plays a crucial role and in which frictions that can impede the efficient supply of credit are allowed for. The construction of such a framework will constitute a major challenge for monetary economists in the years ahead.
The dangers of asymmetry
The next significant move in monetary economists' and central bankers' thinking is the gradual acceptance of the opinion long held by BIS economists11 that the asymmetric ‘can't lean, but can clean' approach to monetary policy creates sources of long-term instability and that optimal monetary policy should be much more symmetric. There is considerable, though not full, agreement that monetary policy should clean to a certain extent after the effects of a financial crisis surface. There are also signs of agreement regarding the recommendation to respond in good times to the financial cycle and the build-up of risks to financial stability with monetary policy instruments even when no major risks to price stability are yet apparent. This applies primarily to episodes characterised by fast growth of real estate prices with a simultaneous credit boom.
Such a move may reflect recognition that macroeconomic dynamics are strongly non-linear due to the excessive elasticity of the system. In such a system, fundamental sources of systemic risk arise at times when banks as well as their clients consider the risk to be at its lowest. If, during a boom, corporations, households and the government observe low interest rates relative to current income growth, they succumb to the illusion and start regarding it as a new longterm trend. This further increases their willingness to take on more and more debt, which is extended by banks with softened lending standards. Subsequently, a positive feedback loop between credit, asset prices and incomes starts to operate, the eventual result of which - if it remains unchecked - is financial crisis.
The New Consensus
As a result of such lessons, academic economists started to come up with proposals to increase room for manoeuvre in their models of flexible inflation targeting, which are essentially based on the mechanisms long described in by BIS economists.12 We sum up these proposals below and describe the outcome as the New Consensus. By this we mean an amended model of flexible inflation or price-level targeting in which the central bank "should sometimes lean but can still clean". In this framework, financial stability becomes a separate objective of the central bank, affecting its short-term behaviour without changing its longterm commitment to price stability. The primary instruments for safeguarding financial stability are still financial market regulation, capitalisation of financial institutions and macroprudential policy measures (these should also involve the modifications in the regulatory framework aimed at reducing its procyclical features). Since these instruments may not be sufficient to curb the enthusiasm in the financial network and reduce the risks to financial stability, monetary policy cannot ignore the risk of financial instability and acts pre-emptively when financial imbalances occur. Central banks start to lean against the wind and become ready to justify, via convincing public communication, the desirability of inflation slipping below the target for some time through the setting of interest rates at a level different from that consistent with achieving the inflation target (the pure inflation targeting rate in Figure 1). We have to stress again two critical assumptions. First, the pre-emptive reaction described above is relevant in cases of joint credit and real estate booms. Second, the bulk of the action has to be taken on the prudential policy level, while monetary policy can only provide co-insurance.
The cornerstone of this framework is that the object of the reaction of the monetary authority should be the growing financial imbalances generated by a credit boom, which may potentially result in strong macroeconomic fluctuations, and not the asset price bubbles themselves. The risk of financial instability, or the risk of a future crisis, assessed and quantified in a certain way, rather than the target for credit growth or for the credit-to-GDP ratio, should determine the reaction. Since the monetary cycle is on average considerably shorter than the financial cycle, the reaction to the risk of financial instability will be occasional, irregular and strongly non-linear. At normal times, the monetary policy framework should therefore still behave almost identically to orthodox flexible inflation targeting. Financial stability considerations will become a factor of monetary policy reaction only if times are departing from normal conditions, ie, when the authorities conclude that a certain threshold of financial vulnerability has been exceeded, leading to a high risk of financial instability. In such a situation policymakers will consider the need to restrain lending growth and excessive risk-taking. Following the simple Taylor rule in the crisis materialisation phase will not suffice either. If it occurs, it will be necessary to supplement the rule with a reaction to an increase in risk margins in response to the reassessment of credit risk or other risks, ie, to offset the sharply increased risk margins with a more pronounced fall in monetary policy rates (meaning that monetary policy should clean to a certain extent) in periods of the immense risks for financial stability.
In the following passages, we will provide our own interpretation of the properties of the new framework in terms of the understanding of the recent crisis, the reaction of monetary policy to it and current views of the macroprudential policy framework. For the sake of simplicity, we will present the variables linearly and depict the crisis as a point in time. This description is intentionally extremely stylised.
Figure 1. The financial cycle, financial stability and monetary policy
Leverage too lagging an indicator
The key concepts of the model are leverage and the risk of financial instability (marginal risis risk), which determine the dynamics of monetary policy or its reaction to financial tability objective. Leverage in panel I of Figure 4 approximates characteristics of the inancial cycle (credit dynamics, the debt ratio of economic agents, the financial investors' lever length, the extent of maturity transformation by banks, etc.). The level of leverage increases until the point when the crisis breaks out, then gradually declines, although remaining high in the initial phase of the crisis. Although the level of leverage is high on both sides of the crisis point, the situations are very different - the level is increasing in the optimistic phase (when many agents do not realise that they are only in temporarily good times) and declining in the pessimistic phase (when agents may be well aware that bad times are on the way). Since leverage adjusts to changed economic conditions with a significant lag, it cannot be a monetary policy response variable - such a variable must be a forward-looking one that describes the current level of risk for future financial stability. In panel II this variable is termed the risk of financial instability.
Act on overly optimistic expectations
The (marginal) risk of financial instability in panel II is a strongly discontinuous variable that increases in good times as leverage rises and falls sharply when crisis occurs. It describes marginal contribution of current financial environment to the risk of a crisis in the future. A fundamental requirement for growth in the risk of financial instability - in addition to the availability of cheap credit - is the emergence of overly optimistic expectations about future income and asset prices, which lead to the development of a bubble. When the bubble bursts and the financial crisis becomes openly visible, the level of this risk changes dramatically. Banks revise their perception of the risks to their balance sheets by increasing risk margins, tightening lending standards and limiting the availability of credit. Economic agents become over-pessimistic and reduce their demand for credit. A phase of deleveraging sets in. It is the factors of expectations and risk perception which cause such a strong discontinuity. Monetary policy should respond to the risk of financial instability by raising interest rates sharply when it is rising. By doing so, it will partly offset the underestimation of risk by banks and their clients. After the crisis erupts, monetary policy should be eased rapidly in response to sharp upward risk revaluation by financial market participants (higher than the normal credit spreads occur) and can keep cleaning, if necessary, during the period when the risk of financial instability is rising from negative values to zero.
The need for forwardlooking indicators
Panel III in comparison with panel II shows the difference between the build-up and materialisation of risks. In good times, when the risk of financial instability is rising, current default rates drop, the non-performing loan ratio declines, banks create fewer provisions and report low credit losses. In this period, the resilience of the financial sector seems very high. When the crisis breaks out, the situation is reversed and banks and their regulators start to assess - by means of stress tests - whether the financial sector will withstand the materialisation of risks. The panel in Figure 4 emphasises the rule that financial stability analyses must be focused in good times on assessing the risk of financial instability and in bad times on measuring the magnitude of the problem related to the materialisation of risks that were previously ‘allowed' to build up. Given the forward-looking nature of monetary policy, central banks' staff in their analyses have to focus on the identification of the latent future risks brought about by current developments in the financial sector. This is rather difficult since the contemporanous indicators (such as asset prices, incomes, trading volumes or provisioning costs) talk about the materialisation of systemic risk, not about the probability of financial instability in the future. What is needed is a set of forward-looking indicators providing insight into the potential for financial imbalances. Those that are based on the deviations of the current values of the indicators such as credit-to-GDP or ratio of real estate prices to income from their long-term trends appear most promising.13
Panel IV shows a monetary policy reaction in which the necessary nonlinearity is deliberately ignored. In the risk build-up period, when the risk of financial instability is rising, monetary policy rates should at some point rise sharply above the neutral level consistent with "pure" inflation targeting (ie, inflation targeting that does not take into account aspects of financial stability). When the crisis breaks out, the central bank should respond with sharp rate cuts. As the economy recovers, rates would then start to be increased back to the neutral level.
Influence on policymaking
Where are the advanced Western economies in the above stylised framework at the start of 2011? Probably in the immediate post-crisis period, in which monetary policy rates should remain low, as "underlying" monetary policyrelevant inflation remains below the target level and the negative marginal crisis risk prescribes keeping monetary policy rates even further below the level consistent with pure inflation targeting. In a real, non-model economy, however, monetary policy decision-making is always complicated by other factors. The rise in commonly used inflation measures, stemming from global growth in prices of food, commodities and energy, has been just such a factor since the end of 2010.
At this juncture, it may be very difficult to evaluate the current economic environment and the contribution of monetary policy to it - and not only in large advanced economies. The monetary policy rates of key central banks like the Fed or the ECB may currently appear abnormally low given the recovery in economic activity. However, the countries hit hardest by the crisis are still experiencing low credit growth and continuing deleveraging, which may have repressive effects, especially in overindebted economies where pessimistic expectations are prevalent. Monetary policymakers are thus facing the dilemma of whether to tighten monetary policy and thereby limit the risks associated with the search for yield, or to maintain an easy policy and thereby dampen the adverse effects of deleveraging. If they simultaneously applied the logic of price-level targeting, they would have to keep interest rates low for a sustained period in order to rectify the previous undershooting with a period of overshooting by means of an intentionally irresponsible policy.
Consequences elsewhere
However, the monetary policies of large advanced economies have considerable implications for many countries, especially emerging ones. Their central banks are attempting to maintain very easy monetary conditions by keeping interest rates very low or by using quantitative easing or other ways of supporting banks' balance-sheet liquidity. Owing to the low yields on assets denominated in key currencies, smaller countries may become exposed to the search for yield resulting from efforts to invest the unliquidated portion of liquidity from the boom period in some higher-yield assets. If the central banks of smaller countries started to normalise monetary policy rates rapidly in line with flexible inflation targeting while the large central banks were de facto implementing price-level targeting policies, it would imply future nominal appreciation of the smaller countries' currencies against the key currencies. And as financial markets respond in a forward-looking and non-linear way, it could lead to a Dornbuschian overshooting appreciation of the smaller countries' currencies.
The impact of the low nominal yields in some large advanced countries on the developments in fundamentally sound emerging economies via capital flows driven by the search for yield became a hot topic in the economic policy debate in 2010.14 This topic has become relevant to quite a large group of countries, some of which are relatively large and therefore have a stronger voice. For some countries, at least for the Czech Republic, this is not a new issue.
The Czech experience
Even pre-crisis, discussions on the topic of monetary policy frameworks between central bankers in small open economies were different to those occurring in large, closed economies. More structured views could be found.15
The exchange rate played a very important role indeed in the monetary conditions in small economies in the pre-crisis years. And perhaps surprisingly, rather positive outcomes in terms of price and financial stability were achieved in the countries in which central banks responded to exchange rate pressures broadly in a flexible inflation-targeting style. In particular, a strategy of reacting to the appreciation pressures pragmatically by cutting policy rates a bit and simultaneously allowing for some appreciation was working rather well. The explanation for this success is not straightforward. Basically, central bankers in small and open economies have been much more willing to accept that bubbles can emerge without signs of inflationary pressures and that inflation measured in terms of consumer prices has not always signalled when imbalances have been building up in the economy. In some countries, they felt - partly as a result of their own experience - that strong credit expansion and increasing asset prices preceded almost all banking crises and the majority of deep recessions.
Some central banks therefore understood that the risks of a hard landing from the build-up and bursting of large asset-price bubbles warranted taking some risks in an attempt to moderate the problem. There were cases where the asset price misalignment was sufficiently obvious that one could be confident enough to take the risk. In such cases, tightening monetary policy and accepting somewhat lower inflation relative to the target in the short term provided some chance to avoid a subsequent collapse in asset prices that could lead to large losses in terms of real output. By doing this, these countries avoided to some extent the adverse effects of a general asymmetry of pre-crisis monetary policy making which consisted of a much greater readiness to accept some depreciation of the domestic currency relative to appreciation. They applied, albeit sometimes unwittingly, the prescription of the BIS approach, in which a successful leaning-against-the-wind policy requires the central bank tightens monetary conditions above the level consistent with fulfilment of the inflation target and reduces inflation below the inflation target. After all, it is reasonable nominal appreciation of the currency that represents a direct and rapidly effective mechanism for achieving this in small open economies.
An exemplary case of an inflation targeting economy with sustained appreciation pressures and an implicit history-based macroprudential mandate in central bankers' minds (thanks to a previous crisis) was that of the Czech Republic. The local financial crisis that occurred at the end of the 1990s was resolved relatively quickly and the period since 2000 has been characterised by renewed economic growth, low inflation, stable and low interest rates and an appreciating currency.
Due to the fact that from the outset of the economic transition until the present time the Czech currency has appreciated strongly in nominal terms against both the dollar and the euro, the koruna has gained the status of a safe haven currency. However, with this status it has also become quite sensitive to changes in global financial markets, especially to the search for yield by the international investors. This became so primarily after the key central banks resorted to accommodative monetary policies following the events of September 2001. Since then the Czech koruna has tended to appreciate, sometimes quite sharply. Despite the fact that the Czech economy is export-oriented and has a large manufacturing sector, the Czech National Bank has openly adopted the position that it cannot and will not try to artificially soften the conditions for domestic producers. This kind of approach has contributed to the flexibility of the economy - something that a small economy in the global competition crucially needs. Though initially it was quite difficult and for some painful, exporters have learned how to live with the tough exchange rate conditions and have factored in the future evolution of these conditions into their expectations.
The tendency of the koruna to appreciate over time has had a significant impact on the conduct of monetary policy. As a consequence, Czech inflation has often undershot the inflation target. In such a situation, the Czech National Bank naturally has had to keep its policy rate also at a similar or even lower level relative to the key central banks in order to avoid protracted and deep undershooting of its target. It has repeatedly communicated that its natural reaction in the inflation targeting framework is to cut the policy rates in case of strong disinflation pressures. On first impression it might appear that a policy of low interest rates in a converging economy must be rather suboptimal since it must lead to a credit boom. However, in reality this policy has served more as a shield against the risks coming from the external environment.
Important lessons
The case of the Czech economy provides important lessons about how the expansionary effects of low short-term interest rates may be curtailed by the effects of nominal appreciation of the domestic currency. Currency appreciation can contribute to financial stability, especially in a booming economy, by lowering nominal income growth, thereby restricting over-optimism regarding its future trend and in so doing temper the growth in loan demand. Though, in reality, the purchasing power of nominal income will be increasing relatively fast thanks to the currency appreciation, households will not reflect it in their decision-making.
Evidence of this is provided across Central and Eastern Europe. Sustained currency appreciation should create an incentive to borrow in a currency that is becoming cheaper over time, ie, in foreign currency. Nevertheless, the share of foreign currency loans provided to households has been lowest in two countries with a history of profound and sustained nominal currency appreciation - the Czech Republic and Slovakia. Households have ignored the opportunity to take advantage of the appreciation by deciding that when borrowing they would do so in the domestic currency only.
The Czech Republic was not the only country that permitted for strong appreciation of its currency, inflation target undershooting or both in the precrisis period. Similar patterns could be observed in other inflation targeters, for example Switzerland, Slovakia, Canada, Korea, Norway and Sweden.
The impact of the search for yield
Many central banks in small open economies have, therefore, had to discuss the effect of foreign investors' search for yield on the exchange rate, and therefore also on monetary policy decisions, regularly since before the crisis. The general lesson derived from the Czech experience, which we have focused on here, is that in small open economies, in certain periods under a given setting of external monetary policies and the financial markets' expectations about domestic antiinflationary monetary policy strategy, the first best monetary policy solution (higher rates and slower nominal appreciation of domestic currency) may not be available and it therefore may be necessary to implement the second best policy (low rates and a relatively fast appreciation of the currency). In other words, the desired monetary conditions were achieved in the given period, but mostly thanks to the exchange rate component, whereas the interest rate component remained probably sub-optimally relaxed.
Bank of England rate-setter Adam Posen16, in a paper written before joining the Bank, uses the constraints faced by small open economies as an argument against leaning against the wind. We believe, however, that this thinking reflects an unwarranted use of the closed economy approach. In these instances, open economies should instead set rates on the basis of a monetary conditions index.17
Such logic is consistent with the approach recommended by Stephen Cecchetti, Hans Genberg and Sushil Wadhwani,18 who conclude that when external financial disturbances hitting the economy are the sole source of shocks, it is desirable to lean against the wind of exchange rate changes, since doing so prevents these shocks from destabilising the real sector of the economy. In the cases discussed above, open economies therefore have to achieve the desired monetary tightening via a combination of currency appreciation and policy rate adjustment, and simultaneously to try to cut off part of the boom using various macroprudential measures, including fiscal ones.
Due to the current state of the world economy, or, more precisely, lingering global imbalances, a significant number of central banks from emerging market economies or small advanced economies will probably have more than enough opportunities to test alternative approaches to coping with financial pressures originating in the external environment. The availability of the New Consensus optimal solution may become questionable indeed.
The authors note that everything contained in this paper represents their own views and not necessarily those of the Czech National Bank. All errors and omissions remain entirely the fault of the authors. The research behind this paper is supported by Grant Agency of the Czech Republic. Project no. 403/11/2073.
Notes
1. The article is an excerpt from the following paper: Jan Frait, Zlatuše Komárková and Luboš Komárek, Monetary Policy in a Small Economy after the Tsunami: A New Consensus on the Horizon? Czech Journal of Economics and Finance 61, No. 1, pp. 5-33. 2011.
2. See Charles Bean C, Paustian M, Penalver A, Taylor T, Monetary Policy after the Fall. Federal Reserve Bank of Kansas Economic Policy Symposium, Jackson Hole, Wyoming, August 26-28. 2010.
3. See Frederic Mishkin, Monetary Policy Strategy: Lessons from the Crisis. Paper presented at ECB Central Banking Conference Monetary Policy Revisited: Lessons from the Crisis, Frankfurt, 18-19 November, 2010.
4. See Clarida R, Gali J, Gertler M, The Science of Monetary Policy: A New Keynesian Perspective. Journal of Economic Literature, 37(4):661-1707. 1999.
5. See Frederic Mishkin, Monetary Policy Strategy: Lessons from the Crisis. Paper presented at ECB Central Banking Conference Monetary Policy Revisited: Lessons from the Crisis, Frankfurt, 18-19 November, 2010.
6. See Mark Carney, Some Considerations on Using Monetary Policy to Stabilize Economic Activity. Remarks to the Federal Reserve Bank of Kansas City Jackson Hole Symposium, Wyoming, 22 August. 2009.
7. See, for instance, Ben Bernanke and Mark Gertler, Inside the Black Box: The Credit Channel of Monetary Policy Transmission. Journal of Economic Perspectives, 9(4):27-48. 1995.
8. See, for instance, Leonardo Gambacorta, Monetary Policy and the Risk-taking Channel. BIS Quarterly Review, December:43-53. 2009, Claudio Borio and Haibin Zhu, Capital Regulation, Risk-taking and Monetary Policy: A Missing Link in the Transmission Mechanism, Bank for International Settlements, Working Paper No.268, 2008, and Tobias Adrian and Hyun Song Shin, Money, Liquidity and Monetary Policy. American Economic Review, 99(2):600-605. 2009.
9. See Vasco Cúrdia and Michael Woodford, Credit Frictions and Optimal Monetary Policy. BIS Working Paper, no. 278. 2009.
10. See Michael Woodford, Financial Intermediation and Macroeconomic Analysis. Journal of Economic Perspectives, 24(4):21-44. 2010.
11. See Claudio Borio and William White, Whither Monetary and Financial Stability? The Implications of Evolving Policy Regimes. BIS Working Paper, no. 147. 2004, and William White, Should Monetary Policy "Lean or Clean"? Federal Reserve Bank of Dallas, Working Paper, no. 34. 2009.
12. See Michael Woodford, Inflation Targeting and Financial Stability. Presentation at the Conference The Future of Monetary Policy, EIEF, Rome, 30 September - 1 October. 2010.
13. See Claudio Borio and Mathias Drehmann, Assessing the Risk of Banking Crises - Revisited. BIS Quarterly Review, March:29-46. 2009.
14. See Economist. What You Going to Do About It? Emerging Economies Respond to the Federal Reserve's Quantitative Easing. The Economist, November 13th:84. 2010.
15. See, for instance, Stephen Cecchetti, Hans Genberg, John Lipsky, and Sushil Wadhwani. Asset Prices and Central Bank Policy. Geneva Reports on the World Economy, no. 2, Centre for Economic Policy Research, London.2000, as well as Stephen Cecchetti, Hans Genberg, Sushil Wadhwani, Asset Prices in a Flexible Inflation Targeting Framework. NBER Working Paper, no. 8970. 2002.
16. See Adam Posen, Finding the Right Tool for Dealing with Asset Price Booms, Speech to the MPR Monetary Policy and the Economy Conference, London, 1 December. 2009.
17. See David Mayes and Virén M, The Exchange Rate and Monetary Conditions in the Euro Area. Review of World Economics, 136(2):199-231. 2000.
18. See Stephen Cecchetti, Hans Genberg, Sushil Wadhwani, Asset Prices in a Flexible Inflation Targeting