24 April 2020
Central Banking in Turbulent Times
Francesco Papadia with Tuomas Välimäki
2018, Oxford University Press, 325 pages,
Reviewer: Mario Pisani
This is a thoughtful treatment of a topic of significant relevance to macroeconomists involved in policy work. The main author is Francesco Papadia, a senior fellow at the Bruegel Institute and a university lecturer, with some 40 years of experience working at the Banca D’Italia and the European Central Bank. Key sections of the text are authored by Tuomas Välimäki, the Chief Economist at the Bank of Finland and a visiting expert at the ECB. There are shorter contributions from other academics and central bankers.
The authors’ key motivation is to review central banking theory and practice before and after the Great Recession – also known by many as the global financial crisis – which started around 2007 and 2008 in most advanced economies. It primarily focuses on the approach to policy followed by the United States Federal Reserve and the European Central Bank, touching every now and then on the experience of other central banks.
There are three chapters. Chapter 1 looks at central banking practice in the period before the Great Recession. The chapter starts with an examination of the longer history of monetary policy – from the mid-19th century and even further back into the past. The majority of the chapter is devoted to dissecting the dominant model of central banking practice, which emerged in the early 1990s. The authors explain how this model prevailed during the period known as the Great Moderation, with the result that “financial stability did not fit easily within the then prevailing paradigm” and therefore feeding “the illusion that advanced economies had graduated from financial and banking crises”.
The second chapter looks at central bank policy during the Great Recession. This is the longest chapter in the book, covering policy interventions to ensure price stability, as well as policies to manage the banking crisis, and the approach to communications at the Fed and the ECB. The authors explore in detail the use of balance sheet management policies, which were the consequence of quantitative easing programmes. The combination of a changed economic context and a new policy toolkit created a number of dilemmas and tensions for central banks, in the opinion of the authors.
The third chapter explores how central banking may change after the Great Recession. While a shorter chapter in length, its coverage is extensive. This section covers both strategic and operational approaches, across the full spectrum of central banking functions: monetary policy, financial stability, regulation and supervision. This is a courageous undertaking by the authors, given how much innovation we are seeing across central banks in advanced economies – one obvious example is the impact of technological developments on central banking practice – which means that it is very hard to choose the right moment to assess what the future may bring.
There are a good number of succinct and insightful thematic boxes, many by other contributors other than the main authors, covering a selection of topics from “Changes in the Phillips Curve” to “An example of Diamond-Dybvig pricing: central bank swaps during the Great Recession”.
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