The Central Bank Shift to Market Maker of Last Resort: The Unintended Consequences of Unconventional Monetary Policies

We analyze the transition of central banks from lenders to market makers of last resort. The adoption of unconventional monetary policies characterizes this transition. In their new role as market makers, central banks engage in the latter by extending and reinforcing interventions in other markets than the traditional bank reserves market. We then explain that the difference between the two roles is one of degree rather than kind. In both cases, the prevention of liquidity shortages is a primary concern. As conventional policies become inadequate, central banks resort to unconventional policies to escape a general liquidity shortage at the zero lower bound. However, these unconventional policies do not solve the structural problems in financial and real markets. Both conventional and unconventional monetary policies cause price distortions, in particular on asset markets. The policies of the market maker of last resort prevent necessary readjustments of cyclical divergences between real and financial markets.

The Stabilizing Effects of Publishing Strategic Central Bank Projections

Expectations are among the main driving forces for economic dynamics. Therefore, managing expectations has become a primary objective for monetary policy seeking to stabilize the business cycle. In this paper, we study whether central banks can manage private-sector expectations by means of publishing one-period ahead inflation projections in a New Keynesian learning-to-forecast experiment. Subjects in the experiment observe these projections along with the historic development of the economy and subsequently submit their own one-period ahead inflation forecasts. In this context, we find that the central bank can significantly manage private-sector expectations and that this management strongly supports monetary policy in stabilizing the economy. Moreover, published central bank inflation projections drastically reduce the probability of a deflationary spiral after strong negative shocks to the economy.

Monetary Policy Targets and Macroeconomic Equilibrium. Some Theoretical Remarks

Purpose: The article attempts to systematize the strategies undertaken by individual countries (groups of countries) after the 2007+ crisis with regard to stabilizing prices and supporting economic recovery. It is about highlighting the strengths and weaknesses of particular types of strategies as well as opportunities and threats related to their implementation. Methodology: In the theoretical analysis, three types of economies were distinguished, using as a criterion the orientation of a given economy towards securing price stability or supporting economic recovery. The classical dynamized AD-AS model, commonly used in macroeconomics, and the SWOT analysis were used as a research tool. Findings: The basis for differences in the approach of economic authorities of individual countries to the problem of stabilizing prices or supporting economic recovery is the mandate of the central bank. Depending on the type of strategy implemented by the central bank, individual countries and groups of countries react diametrically to exogenous shocks, which results in different results in terms of economic growth and employment. Practical Implications: The results can be utilized by central authorities (central banks) in formulating assumptions and forecasts of monetary policy. Originality / Value: The paper contains an original division of countries / groups of countries due to their orientation in the field of medium-term stabilization policy. The analyzes of these countries are also original, having no equivalent in the world literature on this subject.

Forecasting and Technical Comparison of Inflation in Turkey With Box-Jenkins (ARIMA) Models and the Artificial Neural Network

Inflation refers to an ongoing and overall comprehensive increase in the overall level of goods and services price in the economy. Today, inflation, which is attempted to be kept under control by central banks or, in the same way, whose price stability is attempted, consists of continuous price changes that occur in all the goods and services used by the consumers. Undoubtedly, in terms of economy, in addition to the realized inflation, inflation expectations are also gaining importance. This situation requires forecasting the future rates of inflation. Therefore, reliable forecasting of the future rates of inflation in a country will determine the policies to be applied by the decision-makers in the economy. The aim of this study is to predict inflation in the next period based on the consumer price index (CPI) data with two alternative techniques and to examine the predictive performance of these two techniques comparatively. Thus, the first of the two main objectives of the study are to forecast the future rates of inflation with two alternative techniques, while the second is to compare the two techniques with respect to statistical and econometric criteria and determine which technique performs better in comparison. In this context, the 9-month inflation in April-December 2019 was forecast by Box-Jenkins (ARIMA) models and Artificial Neural Networks (ANN), using the CPI data which consist of 207 data from January 2002 to March 2019 and the predictive performance of both techniques was examined comparatively. It was observed that the results obtained from both techniques were close to each other.

What Could or Should Replace Existing Monetary Arrangements?

In this chapter, three main approaches to creating a new, more stable monetary system, which is under wide discussion today, are considered in turn. First, the feasibility of reviving the use of gold as backing for currencies is a never-ending controversy, kept very much alive by those who argue that “In a crisis, there is nothing else.” Second, the rapidly growing use of the internet for decentralised finance or “DeFi” services is offering the public a growing range of new, reliable, low-cost financial services. Among these is the use of “crypto-currencies,” which are growing rapidly but which still suffer severe instability and uncertainty. Third, the world's central banks are developing their own internet-based currencies, known as central bank digital currencies (CBDC). However, these are unlike private crypto-currencies since their use would give government control over all transactions – a degree of power which would risk enabling tyranny.

The Green Challenge for Central Banks and Households

Central banks should not be excluded from the list of responsible institutions to address climate change. They already have a bias in their balance sheets toward polluting industries, which should be reduced. Next, the government should design green policies that do not overburden middle class households.

Management of Foreign Exchange Reserves of the European Central Bank

The aim of the article is to analyze the foreign exchange reserves of the European Central Bank and the methods of their modern management. As a result of the study, it was proven that when implementing foreign reserve management policy, the European Central Bank and national central banks should pursue the objectives of the current monetary policy for future generations. Foreign exchange reserves are a special good that only the current generation and the current government cannot use. The character of the article implies different research methods: analysis of the sources of law, legal dogmatic, comparative dogmatic method. The analysis carried out as part of the study indicates that management of foreign exchange reserves of ECB has an impact on intergenerational justice.

Second Thoughts About Central Bank Digital Currencies

Sustained decline in central banks’ monetary liabilities (reserves and currency in circulation), which the emergency of cryptocurrencies may have hastened, has been enabled by technological innovations that over time have allowed financial institutions and their customers to execute transactions and settle their debts without resorting to central bank currency. Policymakers are concerned about their ability to guarantee public’s access to government-backed currency. This has implications for central banks’ balance sheet and income position, which central bank digital currency might reconstitute. But the introduction of central bank digital currency (CBDC) comes with its own risks and could be disruptive for financial markets. We believe that retaining the option to have access to government-guaranteed currency is of utmost importance, despite the sporadic demand for physical currency in the modern society, but it could be addressed within existing institutional structures without the introduction of CBDC. However, policy authorities are right in seeking oversight and regulation for cryptocurrencies to address the destabilizing potential of cryptocurrencies for financial markets, and they should continue modernizing payment infrastructures to bring retail settlement systems at par with cryptocurrencies in terms of settlement speed but without associated liquidity and credit risks. These steps would preserve the status quo and allow private sector to continue innovating while limiting central banks’ footprint in the financial markets.