Day 1: Monday 17 May 2021
09.45 – 10.00
Welcome and Introductions
10.00 – 10.45
Keynote address: The Future of Monetary Policy: Lessons from the European Monetary Union
Professor Lucrezia Reichlin (London Business School)
11.00 – 12.30 – Session 1
“Aggregate-Demand Amplification of Supply Disruptions: The Entry-Exit Multiplier”
By: Florin Bilbiie (University of Lausanne) and and Marc Melitz
Discussant: Andrea Ferrero (University of Oxford)
This session will focus on the amplification of aggregate demand to supply shocks, highlighting key differences that can potentially resolve observed discrepancies associated with the workhorse new-Keynesian model. The response of entry and exit to adverse supply shocks, such as COVID-19, is amplified by nominal rigidities, leading to further amplification in aggregate demand. Firms’ inability to adjust their prices induces further changes in profitability that generate additional entry-exit dynamics. These changes in net entry, in turn, amplify the initial response to the shock by generating additional curvature in the relationship between the shock and aggregate demand.
“The Transmission of Keynesian Supply Shocks”
By: Ambrogio Cesa-Bianchi (Bank of England) and Andrea Ferrero
Discussant: Ivan Petrella (Warwick Business School)
Sectoral supply shocks can trigger shortages in aggregate demand when strong sectoral complementarities are at play. U.S. data on sectoral output and prices offer support to this notion of “Keynesian supply shocks” and their underlying transmission mechanism. Demand shocks derived from standard identification schemes using aggregate data can result from sectoral supply shocks that spill over to other sectors via a Keynesian supply mechanism. This finding is not only a feature of the COVID-19 episode but a regular feature of the data in general. Understanding the origins of business cycle fluctuations requires breaking the dichotomy between aggregate demand and supply disturbances.
13.00 – 14.30 – Session 2
“Why So Negative? The Effect of Monetary Policy on Bank Credit Supply across the Euro Area”
By: Florian Heider (European Central Bank), Christian Bittner, Diana Bonfim, Farzad Saidi, Glenn Schepens and Carla Soares
Discussant: Skander van den Heuvel (Board of Governors of the Federal Reserve)
This session will discuss different modes of monetary-policy transmission via banks’ supply of credit to firms in the euro area utilising a unique combination of confidential credit-registry data from Germany and Portugal. In the wake of the sovereign debt crisis, deposit rates vary substantially across the euro area, impacting the degree to which monetary policy can stimulate bank lending. When exploiting the introduction of negative monetary-policy rates in the euro area, it has been found that when lower, negative policy rates do not translate into lower deposit rates, as is the case in Germany but not in Portugal, standard channels of monetary-policy transmissions, such as the bank-capital channel, are dominated by the effect on high-deposit banks’ cost of funding.
“Reversal Interest Rate and Macroprudential Policy”
By: Matthias Rottner (European University Institute), Matthieu Darracq Pariès and Christoffer Kok
Discussant: Kristina Bluwstein (Bank of England)
The prolonged period of ultra-low interest rates in the euro area and other advanced economies has raised concerns that further monetary policy accommodation could entail the opposite effect than what is intended. Specifically, there is a risk that a further monetary policy loosening might have contractionary effects for very low policy rates. The policy rate enters a “reversal interest rate” territory, in which the usual monetary transmission mechanism through the banking sector breaks down. This session will investigate the reversal interest rate and macroprudential policy.
14.45 – 16.15 – Session 3
“Hitting the Elusive Inflation Target”
By: Leonardo Melosi (Federal Reserve Bank of Chicago), Francesco Bianchi and Matthias Rottner
Discussant: Jenny Chan (Bank of England)
Since the 2001 recession, average core inflation has been below the Federal Reserve’s 2% target. This deflationary bias is a predictable consequence of the current symmetric monetary policy strategy that fails to recognise the risk of encountering the zero-lower-bound. An asymmetric rule according to which the central bank responds less aggressively to inflation corrects the bias, improving welfare, and reducing the risk of deflationary spirals (a pathological situation in which inflation keeps falling indefinitely). This approach does not entail any history dependence or commitment to overshoot the inflation target and can be implemented with an asymmetric target range.
“Falling Natural Rates, Rising Housing Volatility and the Optimal Inflation Target”
By: Oliver Pfäuti (University of Mannheim), Klaus Adam and and Timo Reinelt
Discussant: Caterina Mendicino (European Central Bank)
The decline in natural interest rates in advanced economies has been accompanied by a significant increase in the volatility of housing prices over the past decades. The monetary policy implications of these macroeconomic trends depend on the source of increased housing price volatility (in the presence of a lower-bound constraint on nominal rates). If housing price expectations are rational, increased housing price volatility reflects more volatile housing demand shocks. The Ramsey optimal inflation target then increases only minimally as average natural rates fall. Instead, if housing price volatility is partly due to speculative housing price beliefs, as suggested by survey data, then lower natural rates endogenously trigger larger fluctuations in belief-driven housing price fluctuations. This causes the volatility of the natural rate to increase and exacerbates the lower-bound problem. As a result, the Ramsey optimal inflation target rises much more strongly as the natural rate falls.
What Next for Monetary Policy?
Chair: Tobias Adrian (International Monetary Fund)
Panel: Argia Sbordone (Federal Reserve Bank of New York), Frank Smets (European Central Bank) and Gertjan Vlieghe (Bank of England)
Day 2: Tuesday 18 May 2021
09.45 – 10.00
Welcome and Introductions
10.00 – 10.45
Keynote address: The relationship between Treasury and the Bank of England: the search for credibility
Lord Macpherson of Earls Court (Permanent Secretary to the Treasury, 2005-2016)
The relationship between the finance ministry and the central bank is central to successful economic policymaking. Drawing on 25 years of working closely with the Bank of England, Nick Macpherson will examine how the relationship between the Treasury and the Bank of England has evolved; whether it is optimal; and what are the risks to it in a world where Quantitative Easing has become endemic.
11.00 – 12.30 – Session 4
“Financial Stability Governance and Central Bank Communications”
By: Juan M. Londono (Board of Governors of the Federal Reserve), Stijn Claessens and Ricardo Correa
Discussant: Stephen Hansen (Imperial College Business School)
This session will explore how central banks conduct their communication strategy, which eventually plays a role in the evolution of the financial cycle. Evidence finds that communications by central banks participating in an inter-agency financial stability committee are relatively more effective at alleviating financial conditions deterioration and preventing potential financial stability events. Furthermore, after observing a deterioration of financial conditions, central banks participating in financial stability committees transmit a calmer message, given observed financial variables and sentiment in news articles, than banks without these characteristics, among other things, because they can implement policy tools other than communication.
“Voting Right Rotation and the Behaviour of Committee Members – a Case Study of the U.S. Federal Open Market Committee”
By: Michael Ehrmann (European Central Bank), Robin Tietz and Bauke Visser
Discussant: Michael McMahon (University of Oxford)
Federal Reserve Bank presidents have the right to vote on the U.S. monetary policy committee on a mechanical, yearly rotation scheme. Rotation is without exclusion, and non-voting presidents customarily attend and participate in the meetings of the committee. This session will explore the effects of voting status on committee behaviour.
13.00 – 14.30 – Session 5
“Central Banking and Shadow Banks”
By: Quentin Vandeweyer (Chicago Booth), Adrien d’ Avernas and Matthieu Darracq Paries
Discussant: Roland Meeks (International Monetary Fund)
This session will explore how the presence of shadow banks affects the ability of central banks to offset a liquidity crisis, utilising an asset pricing model with heterogeneous banks subject to funding risk.
“How Does International Capital Flow?”
By: Andrej Sokol (European Central Bank), Michael Kumhof and Phurichai Rungcharoenkitkul
Discussant: Genevieve Nelson (Danmarks National Bank)
Understanding gross capital flows is crucial for both macroeconomic and financial stability policy. However, theory lags behind empirical work. This session will look at a new model developed featuring gross capital flows and a fresh perspective on important policy debates, such as the role of current accounts as indicators of financial fragility, the nature of the global saving glut, Triffin’s current account dilemma, and the synchronisation of gross capital inflows and outflows.
14.45 – 16.15 – Session 6
“Climate Actions and Stranded Assets: The Role of Financial Regulation and Monetary Policy”
By: Francesca Diluiso (MCC), Barbara Annicchiarico, Matthias Kalkuhl and Jan C. Minx
Discussant: Rick Van der Ploeg (University of Oxford)
Limiting global warming to well below 2◦C may result in the stranding of carbon-sensitive assets, posing potential threats to financial and macroeconomic stability. This session will view a dynamic stochastic general equilibrium model with financial frictions and climate policy to study the possible perils of a low-carbon transition and to evaluate the role of financial regulation and monetary policy.
“On the Dependence of Investor’s Probability of Default on Climate Transition Scenarios”
By: Irene Monasterolo (Vienna University of Economics and Business) and Stefano Battiston
Discussant: Paul Hiebert (European Central Bank)
Climate risk brings about a new type of financial risk that standard approaches to risk management cannot handle. Amidst the growing concern about climate change, financial supervisors and risk managers are concerned with the risk of a disorderly low-carbon transition. This session will explore a model developed to compute: the valuation adjustment of corporate bonds (depending on both climate transition risk scenarios and companies’ shares of revenues across low/high-carbon activities), and the corresponding adjustments of an investor’s Expected Shortfall and probability of default.
16.30 – 17.30
What Next for Financial Stability?
Chair: Nicolas Véron (Bruegel and the Peterson Institute)
Panel: Donald Khan (The Brookings Institution), Vitor Constancio (University of Navarra) and Carolyn Rogers (Basel Committee on Banking Supervision)
17.30 – 18.00
Young Economist Prize Giving Event
The above programme may be subject to change.