Central banks are increasingly communicating their economic outlook in an effort to manage the public and financial market participants’ expectations. We provide original causal evidence that the information communicated and the assumptions underlying a central bank’s projection can matter for expectation formation and aggregate stability. Using a between-subject design, we systematically vary the central bank’s projected forecasts in an experimental macroeconomy where subjects are incentivized to forecast the output gap and inflation. Without projections, subjects exhibit a wide range of heuristics, with the modal heuristic involving a significant backward-looking component. Ex-Ante Rational dual projections of the output gap and inflation significantly reduce the number of subjects’ using backward-looking heuristics and nudge expectations in the direction of the rational expectations equilibrium. Ex-Ante Rational interest rate projections are cognitively challenging to employ and have limited effects on the distribution of heuristics. Adaptive dual projections generate unintended inflation volatility by inducing boundedly-rational forecasters to employ the projection and model-consistent forecasters to utilize the projection as a proxy for aggregate expectations. All projections reduce output gap disagreement but increase inflation disagreement. Central bank credibility is significantly diminished when the central bank makes larger forecast errors when communicating a relatively more complex projection. Our findings suggest that inflation-targeting central banks should strategically ignore agents’ irrationalities when constructing their projections and communicate easy-to-process information.

We experimentally test monetary policy decision making in a population of inexperienced central bankers. In our experiments, subjects repeatedly set the short-term interest rate for a computer economy with inflation as their target. A large majority of subjects learn to successfully control inflation by correctly putting higher weight on inflation than on the output gap. In fact, the behavior of these subjects meets a stability criterion. The subjects smooth the interest rate as the theoretical literature suggests they should in order to enhance stability of the uncertain system they face. Our study is the first to use Taylor-type rules as a framework to identify inflation weighting, stability, and interest-rate smoothing as behavioral outcomes when subjects try to achieve an inflation target.

This paper investigates the bidirectional relation between the Brazilian Central Bank communication and the yield curve. Using latent factors, observable macroeconomic variables, and observable variables representing Central Bank communication, we estimate a model that summarizes the yield curve. We find evidence of the effects of Brazilian Central Bank communication on the movements of the yield curve and the impact of the yield curve components in Brazilian Central Bank communication. In particular, Central Bank communication can shape yield curve curvature and slope. Additionally, we find a strong relation between Central Bank communication and the curvature of the yield curve. These results show that Central Bank communication impacts market players, making it a valuable instrument for monetary policy.

An idée fixe of Great Moderation economic policy was that central banks are only effective macroeconomic managers when they are segregated from electoral politics. That idea made a swift transition from radical heterodoxy to commonsensical orthodoxy during the 1980s and proved remarkably resistant to reality during the 2008 financial crisis. After almost twenty years of ‘unconventional’ monetary policy, scholars, policymakers, and politicians are justifiably searching for more credible ways to conceptualise and use the nation-state’s monetary authority. Two recent books provide vital energy for that intellectual exercise. Éric Monnet’s Balance of Power is a bold re-conceptualisation of monetary authority as a welfare-state support in liberal democracies. In addition to dissipating the illusion that central banks are simply interest-rate-setting inflation-fighters, Monnet presents a systematic argument for integrating them into a web of deliberative institutions (including public development banks and economically empowered parliaments) to bolster the legitimacy and effectiveness of monetary policy. Relatedly, Manuella Moschella’s Unexpected Revolutionaries attacks the idea that central bankers are responsive only to technocratic doctrine and private-market behaviour, showing how monetary authorities sculpt policies to bolster their reputation with political actors. Paying close reference to private-market liquidity guarantees and quantitative easing, Moschella maps the fortunes of unconventional policy in alignment with political support for financial-market backstops and exceptional economic stimulus. Both books provoke readers to jettison the anodyne generalities of central banks’ own glossy pamphlets and think afresh about the possibilities of economic policy’s new normality.

This paper introduces a global banking system in a small open economy DSGE model and features global relative price adjustments with incomplete asset market to investigate the role of international financial imperfections. We show that credit policy could be more powerful than monetary policy to alleviate foreign financial shocks since an expansionary monetary policy and alternative policy rules are not a sufficient tool in the global financial crisis. In particular, credit policy based on international credit spread outperforms credit policy based on domestic credit spread since the former attempts to remove distortions from international financial imperfections and reduces real costs of foreign loans. Accordingly, the lower costs of external finance further boost investment and effectively stabilize the economy without substantial asset purchases.

Quantitative easing (QE) has been a favourite tool of central banks in their post-financial crisis monetary policy apparatus. Social science literature has interpreted QE as a shift away from performative governance characterising pre-crisis monetary policy. With reference to the Bank of England’s experience, I offer a reinterpretation of QE as a performative intervention in the conditions of financial markets, as an attempt to alter the state of financial markets away from dysfunctionality and towards efficiency. I claim that, following the financial crisis, the model of complete and efficient markets – a mainstay in central banking prior to the crisis – was transformed from a real-world approximation to a ‘performative object’ to be achieved. In deploying the balance sheet, central banks attempt to performatively enact complete and efficient markets. The article rejects the claim of discontinuity between pre-crisis and post-crisis monetary policy, arguing that QE is a continuation of inflation targeting though with important innovations. While pre-crisis performativity relied on central bankers’ communicative framing of market expectations, QE is performative via the ontological shaping of financial markets, driven by epistemic models. The article relies on a set of 51 interviews with central bankers and financial market participants and a corpus of documents.

We find significant evidence of model misspecification, in the form of neglected serial correlation, in the econometric model of the U.S. housing market used by Taylor (2007) in his critique of monetary policy following the 2001 recession. When we account for that serial correlation, his model fails to replicate the historical paths of housing starts and house price inflation. Further modifications allow us to capture both the housing boom and the bust. Our results suggest that the counterfactual monetary policy proposed by Taylor (2007) would not have averted the pre-financial crisis collapse in the housing market. Additional analysis implies that the burst of house price inflation during the COVID-19 pandemic was not caused by the deviations from the Taylor rule that occurred during this period.

In a series of academic publications, Edward Nelson has contended that from the 1950s until the late 1970s, UK policymakers failed to recognise the primacy of monetary policy in controlling inflation. He argues that the highwater mark of monetary policy neglect occurred in the 1970s. This thesis has been rejected by Duncan Needham who has explored several experiments with monetary policy from the late 1960s and challenged the assertion that the authorities neglected monetary policy during the 1970s. Drawing on evidence from the archives and other sources, this article documents how the UK authorities wrestled with monetary policy following the 1967 devaluation of sterling. Excessive broad money growth during the early 1970s was followed by the highest level of peacetime inflation by 1975. The article shows that despite the experiments with monetary policy, a nonmonetary view of inflation dominated the mindset of policymakers during the first half of the 1970s. In the second half of the 1970s there was a change in emphasis and monetary policy became more prominent in economic policymaking, particularly when money supply targets were introduced. Despite this, the nonmonetary view of inflation dominated the decision processes of policymakers during the 1970s.

Monetary policy in the USA affects borrowing costs for state and local governments, incentivizing municipal borrowing and spending, which in turn affects economic outcomes. Using municipal bond indices and transaction-level data, I find that responses to monetary policy are dampened relative to treasuries and heterogeneous across location and bond characteristics. In my baseline estimate, muni yields move 26 bp after a 100 bp monetary shock. To study implications for local fiscal policy, I model US localities as small open economies in a monetary union with independent fiscal agents. In a calibrated model, monetary transmission is significantly affected by municipal borrowing costs.

Is the working capital channel big, and does it vary across industries? To answer this question, I estimate a dynamic stochastic macro-finance model using firm-level data. In aggregate, I find a partial channel —about three-fourths of firms’ labor bill are borrowed. However, the strength of this channel varies across industries, reaching as low as one-half for retail firms and as high as one for agriculture and construction. This provides evidence that monetary policy could have varying effects across industries through the working capital channel.

In this commentary, I argue that Leon Wansleben’s focus on financial plumbing as a source of central banks’ epistemic and instrumental power will be met by the profession with a mixture of relief, incredulity, and worry. More importantly, I maintain that central bankers’ relationship with finance varies according to whether or not they are independent from elected government, an under researched area. All this works as a point of departure for remarks, drawing on my own memories, on central banking’s relationship with neoliberalism in monetary policy, monetary operations, and banking. Finally, I urge that Wansleben’s method be applied to anti-trust and the micro-economic regulation of utility services.

Leon Wansleben’s new book, The Rise of Central Banks: State Power in Financial Capitalism, tells an intricately complex story of the world’s most influential central banks successfully harnessing the forces of financial globalization to build their institutional power as the principal managers of their national economies. The book argues that, regardless of central banks’ rationales and rationalizations, the resulting expansion of global money markets has failed to generate the intended macroeconomic and societal benefits. Instead, as became evident in the post-2008 era, the world’s most powerful central banks are now structurally dependent on the increasingly self-referential markets for financial assets. While the book’s narrative is focused on inflation targeting and other monetary policy innovations since the 1970s, it raises much broader questions and invites further reflection on the nonlinear dynamics of power in today’s financial markets and the uncertain future of central banks.

We follow Belongia and Ireland (2021) and investigate the role that the Center for Financial Stability credit card-augmented Divisia monetary aggregates could play in monetary policy and business cycle analysis. We use Bayesian methods to estimate a structural VAR under priors that reflect Keynesian channels of monetary transmission, but produce posterior distributions for the structural parameters consistent with classical channels. We also find that valuable information is contained in the credit-augmented Divisia monetary aggregates and that they perform even better than the conventional Divisia aggregates, in terms of highlighting the role of the money supply in aggregate demand.

We provide new evidence about US monetary policy using a model that: (i) estimates time-varying monetary policy weights without relying on stylized theoretical assumptions; (ii) allows for endogenous breakdowns in the relationship between interest rates, inflation, and output; and (iii) generates a unique measure of monetary policy activism that accounts for economic instability. The joint incorporation of endogenous time-varying uncertainty about the monetary policy parameters and the stability of the relationship between interest rates, inflation, and output materially reduces the probability of determinate monetary policy. The average probability of determinacy over the period post-1982 to 1997 is below 60% (hence well below seminal estimates of determinacy probabilities that are close to unity). Post-1990, the average probability of determinacy is 75%, falling to approximately 60% when we allow for typical levels of trend inflation.