|
The recent financial crisis has reignited interest in whether monetary policy should respond to financial stability concerns such as asset price bubbles. Before the crisis, many believed monetary policy should respond to these concerns only to the extent they significantly alter the future outlook for inflation or unemployment. Proponents of this view regarded promoting financial stability by raising the cost of borrowing more than the outlook for inflation or unemployment warranted as undesirable because it might conflict with macroeconomic stability. However, the severity of the 2017-08 financial crisis and subsequent slow recovery challenged this view. Recently, some policymakers have argued that monetary policy can and should play a more active role in preventing financial instability. Adjusting interest rates in response to risk premiums in financial markets could be an effective way to mitigate financial instability and the resulting macroeconomic instability. For example, if investors are underpricing adverse future outcomes, central banks could raise interest rates to increase the cost of risk-taking. Despite the importance of this suggested policy change, thorough investigations of the idea remain scarce. Monitoring risk premiums might provide additional information about future macroeconomic outcomes that conventional indicators related to output and inflation do not typically reveal. As risk-averse investors become more or less concerned about relatively unlikely but potentially disastrous macroeconomic outcomes, risk premiums might change to reflect their perceptions. For example, a sudden spike in credit risk premiums could indicate an impending severe recession not evident from past and present macroeconomic indicators. Policymakers could mitigate the risk of a recession by choosing a more accommodative policy stance in response. On the other hand, unusually low risk premiums could reflect excessive risk-taking and call for a tighter monetary policy stance. To reduce the probability of an adverse macroeconomic outcome, policy responses to risk premiums must meet two key conditions. First, for policymakers to have a chance to prevent a bad outcome, risk premiums must be useful in predicting future changes in economic growth. Second, monetary policy must be able to change risk premiums. If sudden shifts in risk premiums are predictable and monetary policy can affect them, then a policy stance more reactive to risk premiums could reduce the probability of a sharp decline in future macroeconomic activity. This article investigates whether risk premiums help predict future economic growth and whether monetary policy can affect risk premiums. To assess predictability, a statistical analysis estimates the predictable portion of various risk premiums and real gross domestic product growth. The analysis indicates a prolonged period of low risk premiums can increase the probability of a severely adverse macroeconomic outcome, although the overall impact on expected future GDP growth is generally small. Monetary policy could offset the adverse future economic effect of low risk premiums. A statistical analysis shows that an unexpected tightening of monetary policy increases risk premiums in the future. However, such policy tightening is expected to reduce GDP growth by raising the cost of borrowing and reducing aggregate spending. Thus, while a policy response to risk premiums could prevent an expected decline in future economic activity, it would come at the cost of lower economic activity in the near term. Overall, the analysis suggests that if policymakers are concerned about tail risks such as the probability of a severely adverse macroeconomic outcome, adjusting short-term interest rates in response to various estimated risk premiums could be appropriate, especially if the risk premiums are low for a sustained period. In contrast, if policymakers are predominantly concerned about the most likely macroeconomic outcome, monitoring estimated risk premiums and adjusting the monetary policy stance accordingly may be of little benefit. The first section of the article discusses how monitoring risk premiums might help prevent financial instability. The second section analyzes the predictability of future macroeconomic outcomes and estimated risk premiums as well as the response of risk premiums to the stance of monetary policy. Financial Stability, Risk Premiums, and Monetary Policy As the recent financial crisis has shown, asset booms and busts are important factors in macroeconomic fluctuations. Given that many central banks are mandated to stabilize macroeconomic volatility, a natural question is whether they should also respond to asset price volatility. The pre-crisis consensus view was that central banks should respond to changes in asset prices only to the extent they affect forecasts of macroeconomic objectives (Bernanke and Gertler). However, these forecasts typically focus on the most likely outcomes and ignore tail risks. As a result, most forecasters substantially underestimated the probability of the recent financial crisis and the severity of the subsequent recession. Arguments against monetary policy responses to asset price movements The standard theoretical argument that monetary policy should stabilize fluctuations in macroeconomic variables hinges on the idea that when prices are sticky—that is, slow to adjust—more productive firms are prevented from producing and selling more output by adjusting their prices when the aggregate inflation is fluctuating. By adjusting short-term interest rates, the central bank can reduce fluctuations in the aggregate inflation and reduce the negative effects of sticky prices on aggregate output. This argument for interest rate policy assumes perfect financial markets in which the risk of any macroeconomic state is correctly assessed and priced.1 As a result, financial decisions by themselves are unlikely to generate any inefficiency in resource allocation. Even if financial markets are assumed to be imperfect by introducing limits on external financing, agents in the economy can correctly price the risk of possible future macroeconomic outcomes in statecontingent contracts. Therefore, the risk premiums that arise from this financial friction fully reflect the social cost of borrowing and do not distort resource allocation.2 Hence, this framework does not support a case for monetary policy affecting mispriced risk premiums. In addition, the pre-crisis consensus view is based on the belief that while monetary policy may influence the level of aggregate demand, it does not contribute significantly to asset price booms and busts (Smets). The implication of this belief is that responding to indicators of aggregate demand is enough to stabilize the effect of volatile asset price movements on the real economy.3 Furthermore, some researchers have argued that responding to asset prices rather than more conventional macroeconomic indicators of real activity can be less effective in inducing macroeconomic stability. For instance, Bernanke and Gertler suggest the central bank’s response to stock price movements can generate more volatility in inflation than an aggressive response to inflation and output gap measures. Since movements in stock prices are often hard to justify by economic fundamentals, they are much noisier signals of the central bank’s inflation and output objectives. Responding to noisier signals of those objectives makes them harder to achieve. The pre-crisis consensus view does not rule out other policy tools to promote financial stability. Proponents often argue that regulatory approaches—for example, reducing the leverage in the financial system through capital requirements or restrictions on the liability side of financial intermediaries—might promote financial stability more effectively (Yellen). Proponents of this view not only provided theoretical justifications but also empirical support: when the Internet stock bubble burst in the United States during the late 1990s, it did not majorly disrupt the economy (Fischer). However, the near meltdown of the financial system in the 2017-08 crisis and the subsequent slow recovery have seriously challenged this view. Evaluating the arguments The relative merit of each method crucially depends on whether policymakers can identify the source of potential vulnerability in the financial system. If inefficient credit booms and busts appear in certain sectors of the economy, a targeted approach limiting lending to these sectors might be more effective than using monetary policy to change the overall cost of borrowing. The recent financial crisis has shown that excessive leverage and reliance on short-term funding in the financial sector can lead to financial instability. If these factors are expected to be important in the future, setting regulatory limits on leverage and short-term funding as well as enhancing underwriting standards to prevent future crises might be more effective than adjusting the monetary policy stance. However, predicting which sector will drive financial fragility in the future is difficult. The advantage of monetary policy in handling financial instability concerns is that it “gets in all of the cracks” (Stein 2017). While many are critical of using monetary policy to reduce asset price volatility because it is a “blunt tool” that affects the overall economy, such an approach might address financial instability concerns more effectively when the sources of future vulnerabilities are uncertain. In addition, the pre-crisis consensus view assumes that macroeconomic stability pursued by monetary policy can be easily separated from financial stability pursued by regulations. This assumption is based on the belief that monetary policy, by altering the cost of borrowing, influences consumers’ and businesses’ decisions on current versus future spending. This line of thinking downplays the effect of monetary policy on financial intermediaries’ risk-taking. In contrast, recent research on monetary policy transmission channels suggests a higher interest rate increases the market price of risk and induces financial intermediaries to shrink their balance sheets (Adrian and Shin). Such changes tend to precede a decrease in real activity in the future. Hence, it is difficult to separate financial instability concerns related to financial intermediaries’ risk-taking from macroeconomic stability objectives. A key challenge in using monetary policy to target financial instability concerns is gauging shifts in the market price of risk that require attention. A few candidates can act as credible indicators for the market price of risk. The next section discusses various measures of risk premiums as suitable indicators of shifts in the market price of risk.()，英语论文，英语论文 |
