 Okej, I will use my time to report a natural experiment of monetary policy, which can be seen as a premature attempt to normalize, permanently normalize monetary policy, but also possibly as a test of the neopiserien. Okej, sorry, let me do this. Okej, så för att man kan först ask, kan man, kan, kan man ta det policy, stil, deliver? I mean, does it work? Inflation on target and full employment. Kan man ta policy, deliver? And a natural experiment. For this is arguably the risk bank policy rate hikes. The summer of 2010 to 2000 summer of 2011 from 25 basis points to 200 basis points. So what happens to inflation on employment? When a central bank for no good reason, I would argue raises a policy rate by 175 basis points. There for no good reason means that it's, it's, can be seen as a kind of experiment. So we can also, this, the reasons for this, this experiment or this, this action was never particularly well articulated. I was in the executive board of the risk bank at the time. My colleague Carolina Ekholm and I dissented vigorously against this policy. So full, full, full disclosure. I didn't like it. And I can, I can't, I also see this as a test of the new officially review. I mean, does inflation really increase when you raise the policy rate this much and it can seen or be interpreted as a more or less permanent normalization of policy back to normal, the policy rate back to normal levels. Why for no good reason? I mean, I don't want to spend too much time on that, but this shows inflation forecast for the FMC, for the Fed and for the risk bank. And this shows the unemployment forecast for the two central banks in June 2010, 10, very similar forecasts. Polis is extremely different. You know, we know what the Fed did, kept the policy rate down close to zero and used forward guidance and started preparing and later initiated Q2. At the risk bank, the majority raised the policy rate 175 basis points. Both cannot be right. And as I said, Carolina and Ekholm and I dissented vigorously. Innehav, så this is what it looks like. This is the Ionia rate for the euro area, the policy rate for the other economies. When you see the rate hike standing out there, 175 basis points. What happened to inflation? Well, inflation died down to zero. Okay, what happened to the real interest rate defined here as a short rate minus 12 months inflation? Well, the real interest rate went from way down negative to positive. An interest rate gap opened up between Sweden, real interest rate gap between Sweden and the other economies. Large gap, what happened to the exchange rate? Well, appreciated strongly. Okay, what happened to unemployment? Unemployment was on its way down. But then it flattened out and actually even increased a bit. I mean, so far like the textbook would say. Then I left the bank in May 2013. Spring 2014, there was a big turnaround. And you see the rate, there were rate cuts down first to zero and then down to minus a half. Okay, what happened to inflation? Well, it came back towards close to zero. So really interest rates fell. I mean, now the real interest rate is one of the lower of these economies. And the Krona depreciated back. And unemployment, what happened to unemployment? Well, it started coming down. So I mean, monetary policy seems to work like clockwork in Sweden. And I'll also see the neophiserien, at least from this experiment seems to be rejected. I mean inflation did not move up, it moved down. And when the interest rate was lowered, inflation moved up back again. One might ask, is there something particular in Sweden that makes monetary policy so, so powerful? Well, I mean, it is a small, very open economy, flexible exchange rates, flexible inflation, targeting. There is a strong exchange rate channel and we saw the big moments of exchange rate. Of course that has an impact. And then there is what some, what not everybody has thought about. There is a strong household cash flow channel. I don't need to spend any time on the exchange rate channel, but the household cash flow channel. Here we have high household debt and we have a large proportion of the mortgages or variable rates. So that means that we have a strong household cash flow channel. If the spread between the policy rate and the mortgage rates are stable, the policy rate has a big impact on the cash flow of indebted household. And here you see on the left here we have a graph over household interest payments over disposable income. When you see how that went up during the tightening and how it came down during the easing, so that this had an impact on households cash flow. So when you have a lower policy rate and the mortgage rates, that reduces interest payments and improves indebted household cash flows. The more indebted you are, the more variable rates you have, the bigger the impact. Usually we talk about monetary policy requiring three to four quarters to have an impact on aggregate demand. I mean here it comes with it after a quarter you have affected the variable rate. Så det är en ny parfölj kanal. Vi har det i en Sweden. Is also in the UK, a high proportion of variable rates in Denmark and Norway. Papps in other countries that I'm not aware of. This means that we actually have some. If you have high debt and variable rates, you have some insurance against recessions because nowadays when we have a flexible change rate, we get lower interest rates in recessions. So the cash flow improves the kind of automatic stabiliser. Important. This works if you have a flexible exchange rate regime and independent monetary policy. It was completely opposite in Sweden in the 90s crisis. When we had a fixed exchange rate and a deep recession and very high interest rates because the risk bank was defending the crown against speculative attack. So things are different. I think this is worth thinking on. Thanks. 10 minutes. Thank you Lars. I think I was I was thinking I was right to start the sequence. It was pure coincidence. I think it was right start. So I'm very curious Chris how you're going to introduce your topic now given what Lars was saying. I'm not sure I have anything to disagree with Lars about. We were asked to think about some topics one or to talk address some topics. One was our view of unconventional monetary policy tools that have been developed recently and should they remain in the central bank tool kits as we pull away from the crisis. As I've already said my view is that quantitative easing and balance sheet expansion after the initial period where it was an intervention in frozen markets probably had rather minor effects. And I think it also creates some political economy risk for central banks to have such large balance sheets. Having large balance sheets means the ratio between the size of the balance sheet and the currents and currency which is the base for senurage and therefore also the base for central bank independence is risky with a large balance sheet with long duration and with assets like in the US where mortgage back securities as well as government debt have gone on to the balance sheet. There is some small risk of the market value balance sheet of the Fed going into the red. This is not in some sense not a problem if we can consider it all from the point of view of the unified government budget constraint. But in the US at least the central bank is a separate institution and preserving its independence is a constant battle and it could be a problem in the course of that battle if the Fed had to go to the Treasury and ask for support or even if the Fed had to drastically cut its senurage payments to the Treasury. I think getting the balance sheet back down to what used to be a normal level would be a good idea. Some people have argued to the contrary. Jeremy Stein in particular has argued that so long as short rates on government debt are so much below long rates on average permanently. That's suggesting that short government debt is providing a liquidity service that the government can after all provide for free. And so he argues that that short government liabilities particularly interest bearing deposits at the Fed should be issued until the yield curve goes flat until people are saturated with liquidity services of short term government debt. And he argues that that can be done with a balance sheet of the size that the Fed currently has and it would be a good idea. My I'm skeptical of that argument for a number of reasons. But the simplest way to argue against it is to say that if that is a good idea it's not clear why it shouldn't be implemented by the Treasury itself by shortening the term structure of the debt outstanding and particularly in favor of that is the fact that Treasury bills are available to any market participant whereas deposits at the Fed are available only to banks. So that's my basically my comment on on unconditional monetary policy. I think it would be a good idea to back off from it basically. And and thereby preserve the possibility of large interventions in the market if we should again get a situation like the fall of 2008. We were also asked whether we had what our current stylized model was and have we had the change. I think of my model now that I think about for monetary policy probably doesn't seem that stylized to most people. It's the structural VAR with 10 variables on monthly data that is that I have worked on with my three co-authors Brunermeyer, Pelea and Sastry. It's I would it's of course it is stylized. I mean 10 variables is it's amazing. You can do as well as you can with 10 variables in modeling the whole economy. It's a structural VAR. It's multivariate. A discouraging thing is how hard it is to get people to think in terms of models with more than one equation. The we do. We do sometimes write down three equation, Keynesian New Keynesian models but people have a hard time keeping that in their head. So when you get into arguments about policy, the number of equations even seems to collapse. Ed Limer once argued at length with me that that nobody can understand a model with more than two variables. So all you need to do is describe core covariance matrices, two by two covariance matrices beyond that. It's hopeless, but I'm I still have faith that eventually we can get people to think about two, three, even 10 equation models. Now in that model, it's different from what I would. It's it's structure and it's conclusions are a little different from my models I would have used before 2008, not just because it's bigger, but it's bigger because we include some financial sector variables. We include two credit aggregates and we conclude that they are not very useful for predicting crises or predicting future rises or declines in in output. And on reflection, that's not surprising. Credit expansion is generally good, though people seem to have the idea that credit expansion is generally dangerous in many of the discussions we've had in this conference. Rich countries have higher credit to GDP ratios. Development economists for a long time have used something they call financial development as an explanatory variable for growth. Financial development is the ratio of credit to GDP in most countries. And it's it's we understand why why expansion of credit markets is generally good. It helps allocate investment better. So if there is a negative connection, if there are credit expansions that are dysfunctional, they have to be a part of a general scheme in which in the long run credit expansion is good. We there's no way to model that coherently without a multivariate model. You have to recognize that there must be more than one source of variation in credit. If you think that credit expansion can be bad and you're going to need a multivariate model that distinguish credit expansions that are good from credit expansions that are bad. Our model generates actually about the same impulse response of output to GDP growth as the three variable VAR that me on Sufi and Werner report. And it's often cited as showing us that credit expansion produces declines and output. But their impulse responses show a positive response followed by a negative response. And the negative response brings you back to a point that's insignificantly different from the initial steady state. That's the same thing we find credit expansions. If you if you so if you look at three year growth and credit and compare it to three year growth subsequent three year growth in output, you find a negative coefficient. But that's because the three year growth and credit involves an initial expansion and a later decline. So next round of if I were using these kinds of models, I would expand the number of interest rates, spreads and measures of direct stress in financial markets that we include in the model and maybe just drop the credit aggregates. They don't explain very much. The spreads that we included, we included the Euro, the T-bill, the interbank spread and the Gilchrist-Zarachek bond spread and they both have lots of predictive and explanatory power and including them in the model sharpens identification of monetary policy shocks and actually makes the monetary policy shocks look stronger and makes them look like a more important determinant of business cycle fluctuations. So that's how my model has changed. The paper that where we do all this is on my website. It's called feedbacks, colons, something like that. I can't remember what the rest of the title is. And your horizon is what sort of time span that you have. Is this talking about the credit aggregates? I just discussed yesterday evening also, you know, the sort of short term, longer term. But your horizon is what? On the credit? This is a dynamic model which makes forecasts at many horizons. Let's continue. Then I will try to wrap up the discussion. Okay. So thanks very much for the opportunity to talk about these particular issues. I'm going to kind of use the lens that I have right now to kind of focus on both the economics issues as well as on the sort of the financial market perspective. So the first question was QE effective. And I think the answer is yes. It was very effective, but perhaps not quite the way it was expected. And I think to get at that conclusion you have to examine the data with more granularity than we tend to do when we look at macroeconomic aggregates. For example, in terms of the model of transmission, it was always expected that there would be a credit channel and that there would be an asset channel and both of those do get implemented, but maybe not exactly the way we thought they were going to be implemented. For example, for firms the credit channel had much less of a role than expected because the policy rate fell dramatically, but the hurdle rate did not. And so from the standpoint of making investment decisions, real investment decisions firms tended to focus on the hurdle rate, not the policy rate. And so you got stuck a little bit there. Then from the standpoint of the household certainly there was again dramatic reductions in the interest rates that many of them might be able to enjoy if they wanted to buy a house. But then again they couldn't sell the one that they were in because it was under water. Or else they didn't have the credit scores that were necessary in order to buy a house in the newly regulatory environment. And for example credit rate, credit card interest rates didn't fall at all. So the credit channel perhaps didn't work as well as expected and we might have been able to identify that a little bit better had we approached this from a much more granular perspective. On the asset price side, again model of transmission, we expected asset prices to rise as an outcome of QE. But again the sort of the effectiveness of that channel is affected by income deciles and who owns wealth. And that of course is very concentrated so that you can't look at the asset price channel and conclude how effective it is. It was effective in widening some income distribution issues coming on the wealth side that was relevant, notwithstanding some improvements in housing after QE was implemented. On the asset side again firms, what did they use the asset channel for in terms of it being effective? Well buybacks probably not as effective a channel as we thought that they would use it for a wealth side investment. On the other hand there are other issues, other ways in which we can talk about QE effectiveness in terms of not just effective in the secondary market but some of the work that I did early on was how effective QE was in the auction market. Even though the instrument was used or the policy was used in the secondary market it had implications for the auction price as well. And the players in the auction markets are also a very important set of granularity that the foreign buyers play a very big role in the longer dated treasuries. They improved the effectiveness of the policy by keeping interest rates relatively low because they went to the auction and bid very low. So turning now to sort of models or I guess I'm going to put frame that as now that we talked about QE our job now is to get out of it is to exit from QE. So the starting point of this exit strategy has to take into account the constellation of asset prices that are in the marketplace. This constellation has as characteristics very, very narrow credit risk spreads and equity risk premium that is consistent with a low 10 year yield. A term premium which is zero or negative depending on your point of view and inflation premium on top of that that is also very muted. So this constellation of asset prices that we observe are internally consistent. It's internally consistent but the collection of it is predicated on a low policy rate and a low inflation rate. So quantitative easing having been successful in that regard now has to kind of figure out how to unwind that in order to successfully exit. So there have been some ructions in the marketplace over the last couple of weeks with the 10 year yield moving up. Of course there's a policy rate moving up as well. We don't know quite frankly whether inflation has risen or whether real rates have risen. I think my colleagues think that they know but I think they don't know actually since we certainly don't observe real rates. It's a residual. There's been some equity correction but you know it's a correction but from a really high base and there really hasn't been much movement at all on the credit risk premium or the term premium. So I'd say that this constellation of asset prices is relatively stably in place as opposed to blowing apart as part of the exit. Now why is that? Is that this constellation predicated on low policy rates and low inflation really hasn't started to adjust. So I think there are a couple of things first. There are significant gaps between what the market believes the Fed is going to do and what the Fed says it's going to do. There's about a 50 basis point gap missing between the market's expectation of the policy rate for next year and what the Fed says it's going to do. That gap is going to close but along the way and it's closed for 18 but it's still quite wide for 19 and we're kind of almost in 19. The second one is on the 10 year yield. There is a huge gap between the median market forecast for 10 year yield next year which is at 3.5 and the implied forward yield in the market which is at 3.1. So that also has to close by the time we get there. There are problems and there are gaps between them what the market believes and what either the policy maker is going to say they're going to do or what other participants in the marketplace the survey of professional forecasers that was what something Riccardo brought up earlier today but this is the one I'm talking about, the median market forecast. So that's median at 3.5. It could be a lot higher obviously that. So those gaps have to close as part of the achievement of exit of QE. There haven't been enough triggers yet to move from a situation where the financial markets continue to have a dominant view of the Fed will move to us because after financial crisis they did. The Fed is going to move to us. They believe that and they also believe that the inflation rate is going to not increase so they do not need to price that into the 10 year. So that financial dominance that picture of a portfolio constellation that has these characteristics continues to dominate the investor community and the question then becomes what are the triggers that are going to move from a financial dominance to what I would call a fundamental dominance. Some of those triggers might be a burst in inflation some of it might be a more significant correction to equities but the going comment in my crowd is inflation and maybe credit risk premia in the leveraged loan market. So my final comment is in order to actually complete the exit in order to help in creating an environment where the financial markets move from what I call financial dominance situation which is not consistent with a normal constellation of asset prices what can the Fed do to sort of push or get the markets to move from one equilibrium to the two equilibrium. Well they have three tools actually. They have the policy rate. They have the balance sheet runoff and they have a third tool which I would say is the timing of implementation of those things. We know our targets are unemployment or objectives are unemployment inflation and financial stability and financial stability is not the same as no financial turbulence by the way. So how do we get to are we at you know are we at there are we there yet and I'd say well some people say we're at unemployment objective and we're at the inflation objective so done go home. I would say that by virtue of these gaps that are on the policy rate side and on the ten year rate side we're a long way from financial stability or lack of financial financial gaps. So to get to the you know the choices that the Fed has let's be very concrete and talk about whether or not there should be a rate hike in December because that makes it very concrete. A lot of people say yes but I would like to make a movement in December because after all the Fed moves every other meeting and it always moves in the meetings where they have press conferences and so therefore December is clearly it. Number two, Trump has been telling them not to move so that probably means that they do have to move so that makes December more likely and then up until the time we had this these problems in the equity markets everybody was saying that you know definitely there was about 80% and 90% probability that means I'm done. Sorry. Yes self-discipline. So in terms of in terms of moving in December let me tell you why I think they should not. They shouldn't move in December because there's not yet durable inflation. It is not at expectations of 2%. The market does not believe that inflation is anchored at 2%. They think it's below 2%. So they haven't made it there yet. So there needs a period of time above 2% in order to get there and I think a little bit of extra time at the current policy rate will get us there. On the other hand they have moved enough on the policy rate and that has helped to precipitate some repricing of risk. So you're going to have to move further next year but don't do it now in order to promote more inflationary impetus. So use the policy tool next year. Wait it out now. And so to conclude is the market talks a lot about Powell puts now and I say to Jay tie yourself to the mast because the markets are going to be whining. That's what you mean with financial dominance. No. Rika. Okay, great. Well thank you very much for having me. I had written a slide to summarize my point but if it doesn't go up it's not a big deal. So the mandate that I was given by Carlin Company was to discuss what should be the new monetary policy framework or strategy. It's just one slide so it's just a summary of what I'm going to do. So if you can put it up it's fine but if not I can live without it. And so let me comment on that just so based on it turns out that I have answered that question a few months ago in so called the Phillips lecture and so I'm just going to summarize the main points of that in these ten minutes so that you can also see the expansion of those points as if you wish to after I make the points. So what should be the monetary policy new strategy and framework given that we've learned a lot in the last ten years from the much experimentation from the shock of last eight years from the many new different policies of the last ten years. First when it comes to the size of the balance sheet I think we've learned that saturating the market for reserves sometimes known as having a floor policy works and there's very few downsides of it it turns out that the money markets didn't stop working the overnight repo is very active in Europe there's enough segmentation of financial markets that if you saturate the market for reserves or satiate the market for reserves the money markets will survive turns out that communicating that the new policy tool is the interest on deposits as opposed to the interbank rate people understood it very well without much problem turns out that when you have a satiated market that is when you have reserves above a certain level such that the interbank rates and the rates on deposits are the same means that liquidity shocks and there have been many according to several measures in the last ten years will have no macro effects you've neutralized them by having abundant reserves in the system and fourthly it means that the Friedman rule a great target of all monetary economists has been achieved, is achievable and is a good thing that you should pay interest on the monetary base at its opportunity cost that is the interest in the economy so the strategy given that satiated market for reserves is achievable is good and I see close to none of the downsides that people were talking about ex ante before we did this I would say the strategy is to continue with it that policy committee should set interest on deposits as opposed to federal funds rate say or even MROs MRO rates but rather say the interest on deposits is this and they will change as in part they have done and then tell the markets team you're in charge of varying the size of the balance sheet to ensure that the interbank rates the federal funds rate in the US either identical or very close to it the size of the balance sheet is not a policy variable in the same way that the quantity of market operations is not a policy variable the interest rate is the policy variable it is a market operational question then how should that size evolve knowing that it has to be in the case of the Fed somewhere around half a trillion and one trillion of reserves in order to be at the stage but the exact number I don't need to know let the markets team in this building deal with it and at the federal reserve second on the composition of the balance sheet which is separate from the size and here I can be short because Chris has already stated some of the points I was going to make which in turn come from work that I did with Robert Hall six or seven years ago and which is that besides the question of the size comes the fact that if you have a balance sheet whose liabilities which again are overnight deposits are unmatched in a significant way with your assets insofar as they stop being bill short term government bonds but start being at the long term government bonds or even in the case of the Bank of Japan equities real estate investments or in the case of the Fed mortgage backed securities then you have to take risk management seriously that is there are then several scenarios in which you will have negative net income you will have losses and if you have those losses then it is not about like Chris well put it about the balance sheet capital it is about the market value of your balance sheet position that will affect the flow of dividends or seniority that you pay to the fiscal authorities and to what extent that flow as constraints as a central bank independence can really make it impossible for you to keep committed to your inflation target so strategy in that regard is that you should in some ways I understand why the composition of the balance sheet may be unmatched I talked about it in my address this morning so I didn't want to repeat myself you may want to go long in unconventional times particularly when the ZLB is binding but you have to keep very much in mind what is the fiscal backing of these unconventional policies do you have an indemnity letter that insulates you from the risk that deals with the risk management like the Bank of England did where they engage in QE do you have more or less fiscal backing depending on what operation you have where the fiscal backing is understood or if you want the risk management of which this institution has a very good department that does it but the risk management should not be the same the risk management of insurance company of a hedge fund or of investment company the risk management is inseparable from a discussion of what fiscal backing there is there is only income risk of central bank in so far as what the fiscal authorities response will be to the fluctuations and dividends that result from those third liquidity and lending policy discount windows and other lending policies of that type I think the new framework has to be one that recognizes that in the US or let me say in the euro area, in the euro zone there are many foreign banks non euro zone banks, British banks Australian banks, American banks that have significant investments in euros this is particularly true of the UK having significant investments in euros means that if there are liquidity shocks or problems in the funding markets for euros institutions will need euro funding emergency euro funding very much along the lines of what Badger told us the lender of last resort central bank should be now in the current scenario an institution that is based outside of Europe would have a lot of difficulty coming to the ECB since after all it is a British, Australian or American institution and what we discovered in the last ten years is that it then became very important to have the central bank swap lines that provided the emergency funding the functions of the lender of last resort that a central bank needs to provide design this in a way that deals with the fact that you do not regulate the Australian banks is important, the swap lines we established had a particular way of doing it with some pros and with some cons but I think it's part of the strategy realize that the lender of last resort applies not just to your banks but to those who invest in your jurisdiction in a world of global banks is an important rethinking of the framework there it must do the strategies expanding these swap lines may be certainly a good thing to do at least insofar as we think lender of last resort is a good idea but if anything more important is to think about the multilaterally right now swap lines are bilateral arrangements which means that for instance the case of the dollar swap lines the federal reserve has an enormous amount of power and this has been controversial last few years to give one say to the ECB but not one to the reserve bank of India which clearly has an effect on the ability in banks or investors to affect it not to mention that these being somewhat discretionary policies they can be easily used as bargaining tools in international relations and others we have understood this for a long time we created an institution called the IMF to deal with these multilaterally agents when it comes to liquidity and financing rethinking the global financial architecture with their regard not involving central banks insofar as they have to always be somewhat part of the lender of last resort is an important new strategy fourth and finally I want to talk slightly about about the connection to fiscal policy not more just because Chris already talked quite a bit about it this morning and others have as well and so I want to do it just in the perspective of macro-prudential policy with interaction with fiscal policy to consideration of rethinking the framework Mac regulation of banks or even macro-prudential policy that tells banks that to be safe they need to hold some government liabilities can very quickly become financial repression saying you have to hold this because it is safe and it is good for you or you have to hold it because it is safe and it is good for me the government is a very very small step especially when the government wants to inflate the debt and when it wants the banks to hold underpriced government bonds or sorry overpriced government bonds that will pay a very low interest rate in order to fund the government the use of required reserves of taxation that pays zero interest is a classic form of financial repression that is very tempting for a country to use if it needs to inflate away some of its debt or to collect the revenues second and related in so far macro-prudential policy increases the safety premium that is lower the interest rate pain on the government debt because it is carrying this large safety premium on the fiscal authorities in order to fix fiscal deficits and that may be a good thing or it may be a bad thing but it is clearly an implication a direct implication of macro-prudential policy and fiscal policy strategy and related to both I did not say in any way that macro-prudential policy is good or bad in these two observations but only that central bank independence which is something we understand quite well in the context of generating escalating the debt setting interest rates for the part of the central bank must be redefined and rethought when we think of a central bank that is not just conducting monetary policy but is also conducting macro-prudential policy to what extent do we need the central bank to be independent from the fiscal authorities knowing that its setting of macro-prudential policy has very direct and clear fiscal channels which is not a problem in itself so does the setting of interest rates or the purchase of government bonds or the setting of this independence as opposed to just transplanning the one from monetary to macro-prudential policy thank you let me briefly comment my take from what I hear first I mean you ask the question monetary policy can deliver can still deliver you use the term I think what was for me amazing I mean all over these years I'm talking about the last 10 years if we were with a lot of unknown because we had this banking crisis the sovereign debt crisis heterogeneity in the transmission across countries we had the zero lower bond or the effective lower bond in the end the biggest story actually is that you could deliver you had a sort of relatively good control of the OS curve all over the place with different tools the tools were basically communication on interest rates and then was the APP and the guidance on the APP you mentioned the liquidity provision which in that difficult time was key you mentioned the swap lines the currency swap lines were at some points extremely key in stabilizing but at the end of the day when I look backwards and the unknown because we didn't know anything about the transmission and the effect of this the volumes think about recalibrations the main thing actually is that we had a reasonably good control of the OS curve in general including now including the rotation that we announced recently what we get is broadly what we wanted to have which is a big strange ex ante if you would think about the challenge in front of you so that's my observation now to go to Cathy you had this one way street you call it financial dominance in all these episodes that I see it is I call it always a two way street because you don't know you say something you look at market reactions you read what market people write you read just and it goes both ways is the Fed right or is the market right at some points probably in the US market are going to overreact and the Fed will have to follow that's one scenario where the Fed was considered behind behind the curve big market reaction and then later the Fed loosens very quickly after because your economy would slow down so there are many scenarios like this now when you think about the toolbox for the future and this is the point we discuss you mentioned the political economy problems when you look, we use the asset purchase program but of course you don't speak about the counterfactual because you say what does the risk if you deliver but with the tools that people don't like because they have some distributive effects while compared to the other situation where you don't deliver, very simple but that may be a worse situation but I would say all of these years so far I'm not saying that everything is good but when you look at the challenges that we had I mean my biggest surprise is broadly speaking it worked actually now for the future I suspect and this is a very big issue was Ricardo saying given also what Kathy was saying about markets I suspect that the conditions under which you provide liquidity for the next stress will be the key question of course and you see what I mean if one day we have an asset price correction if you have big redemptions in asset management companies what will be the reaction of central banks because markets as Kathy was saying overreact will be the reaction of the central bank that will be a big story including what you said about the swap lines because many of these things in asset managers are currency hedged so the toolbox basically will adapt all what I said guidance balance sheet you didn't mention by the way the negative rates which I was surprised because our experience to avoid the liquidity trap was very important because when you say rates are zero if you lower this negative or even lower even more negative you get a bunch of people continuing to buy on the markets because they know that even if the prices are very high they can go even higher for a while so that proved to be very helpful and it's a combination of all these switch but it's amazing because ex ante it would have been very difficult to design this package of measures ex ante and for me is that it worked reasonably well given the circumstance I mean just to launch the discussion you want to react each other and then we give the floor to the if I may just make a small point on that I mean you saw in my graphs that the policy rate went down to minus a half and I think it's first I think we should all stop saying zero lower bound we should say the lower bound or the effective lower bound under below zero and also we don't know how far we can go down I mean the lower bound it's not hard but soft and it depends where it is one should never ever announce that we have reached the lower bound if you do that it's like a commitment not to go further and that means that the distribution of future interest rates become asymmetric the mean is higher than it you should always say I mean regardless of what you plan to do we can go further down if needed I don't remember how specific I mean we did that but it has to be credible also you know at some point if you need it then you I mean I think that helps a lot that helps a lot I wonder exactly what you mean by it worked I mean in Japan they certainly their tools have worked to control the yield curve they showed you can get the 10 year rate down to zero but if you ask did they get inflation back the target the answer is different and I think even in the Eurozone the same questions arise you may achieve your objectives and in controlling the yield curve do you achieve your objectives in hitting the inflation target ticks time, ticks time and now on negative rates this is another place where I think recognizing that the fiscal background of a monetary policy action is very important as I think Stephanie pointed out and as Marcus Brunnenberg and some co-authors have pointed out negative interest rates in an environment where banks transactions deposits are competing with currency, negative interest rates turn into attacks on banks they are in general even if they are not attacks on banks they are attacks they are reducing the flow of spending to the private sector they don't have an expansionary effect unless they are accompanied as is assumed in the standard passive or rikardian fiscal policy rule the negative rates should feed through to expansionary fiscal policy if they don't, you don't have rikardian fiscal policy and in that case they are actually contractionary rather than expansionary and people have recognized that as they see the effects on banks of low negative rates Peter, may I add a point on Japan? I don't think we should say now that things don't work because look at Japan which had zero interest rate for a very long time we should make a thought experiment suppose the current governor and the current prime minister had been in power in 2000 when several of us western economists were there and several were saying that the Japanese were deeply wrong and should go for various expansionary monetary policy suppose they had done that back in 2000 instead of now I mean 15, 16, 17 years later and meanwhile they have gotten into what the current governor calls deflationary mindset and inflation expectations have been anchored at zero and once that has happened it's very difficult to get out but I think if they had done what has been done recently back then things would look very different including of course they could have used the foolproof way of escaping from a liquidity trap Some reaction here Kevin? I think that your point Lars is that the monetary policy choices for sure maybe other ones as well but are legacy dependent very legacy dependent and so that mistakes made a while ago can have very long term consequences and that's why I'm so concerned about the potential role that a comfortable constellation of asset prices could make the policy authorities not move when they should because the process of exiting QE is going to be messy because you have to put risk back into the system you have to price risk and that's messy for 10 years and the market think of it as tectonic plates or something mixing some metaphors you got some plates moving now are they going to relaxing the tensions in the market so you don't have a big blow up later I don't know I don't know that but to sort of say that somehow we can exit QE really easily and everybody will just smoothly to higher policy rates and inflation that's kind of anchored at 2% instead of below that I just don't see that happening and so how much turbulence is the real economy able to be to withstand and how much turbulence are the policy authorities able to accept is going to determine monetary policy going into the next decade sure but it's not necessarily it can be bumpy that's what you said it's not necessarily financial instability you said it also some people say bumpiness it means unstable I'd say it's a path it's part of the path in stable ok so let me I want to actually come to Peter's support when he says it's been a great success I didn't say great it's been a success now I'm not sure if it's the responsibility of the people in this building or if it's just good luck indeed in an evaluation I wrote a year ago I called it is a good policy or good luck but I don't think we should question success in the following sense so a year ago it was a celebration of 20 years of the independence of the Bank of England and I was gladly asked to give a small talk and I did the following simple exercise because for England luckily we have data that goes back 4 centuries on prices what was average inflation and the variance of inflation I think we'd all agree that we're on average inflation kind of close to 2 we want variance of inflation as low as possible the last 20 years in 400 years of English history have the closest ever inflation to 2% the other one close to was 3 and in variance half of the variance of inflation of any other 20 year period in 400 years of history I think it has been unbelievably stable I mean we now I think Goiti was saying that earlier we now panic and say oh my god the model is wrong because inflation is 1.2% as opposed to 2 inflation was a problem when it got to 20 1.2, 1.1 measurement error of CPI alone is 0.3% so it's an incredible success when it comes to inflation control so it's the first point I want to say because I think it's easy to lose track of the economic history of what inflation was including gold standard if you happen to be a lover of gold and bread and woods and all this inflation targeting over the last 20 years maybe by luck my policy is an unbelievable success I said it not you Peter in terms of inflation control secondly and when it comes to Europe when the Europe the Eurozone has suffered or the European Union has gone through a really rough time in the last 8 years trust in European institutions has fallen in many of them and we've had certainly a questioning even of the whole European Union construction yet in the last Gallup survey what is the one institution that Europeans trust as much now as they did 8 years ago actually more than 8 years ago unlike any other institution that's European and including also most of the national ones it is this institution it is also an institution in the last 8 years in the midst of this crisis has been the boldest it's been the one that did unconventional things there are things that were criticized there was a head of the curve and not waiting for oh but some people will oppose this or not so again in terms of lessons for Europe and especially now as we saw in recent summits it's the whole banking union fanstability all seems to be starting to be forgotten and it's all about instead discussing and deciding to do very little when it comes to any other problems it's important to note that the institution as much as politicians have advised that if you take brave measures you end up getting punished by them I think the success institution in the last 5 years shows the opposite that being bold and being brave and addressing the problems as they come and trying to control things and respond to them does get rewarded by the people now on that success because I'm an economist I need a glass half full and a glass half empty so let me tell you though what I think there are the fears that this success is in danger one I think a fear and this was very shocking to me at the celebration of the Bank of England a year ago and inflation has been so much in the control people seem to think that inflation is a solved problem by which people I mean not us who are obsessed about inflation that's our professional defect but people outside of this building and generally in the population as a whole in England I saw this conference more than half of those people were questioning maybe we don't need central bank independence at all after all the central bank is a macro potential regulator oh yes there's also this inflation thing but now that's been solved that's a solved problem we don't have to worry about that whether we want an independent or not and that was part of my talk macro potential regulator instead I find that very dangerous and like Chris was saying earlier this morning I think there's a danger of fighting the wars of the past of looking at because financial stability has been so important last few years forget that inflation is still in many ways the big mandate and second and this is I think is much more debatable is was this ability of inflation last ten years the output or unemployment or real activity measures have not been so good in the dual mandate in the last ten years clearly so we had a very big recession the question is was that because of the inflation stability have we had a two hawkish central bank to focus on keeping inflation stable and that caused the huge recession we had or not I think the vast weight of the evidence says not that the inflation stability in any way constrained the central banks and Peter discussed the liquidity policies and others that allowed it to still try to fight the real activity procession without having to compromise on the inflation target but it is I think a question that especially as we see discussion research and Tobias Adrian's dinner address yesterday and others make is to what extent should we trading off inflation for financial stability and or recession I think is a question that's up for grabs in some ways and even though my view is that not that it is a success and that the stability inflation did not did not come with a negative too big output gap or too big stability no that's right thank you for the compliments you gave but it's not yet the end of the story of course that's what we're just saying now so we'll see history will tell yeah no questions from the audience who wants to jump in Jack there I see two one two let's start there and there thank you very much question on the international dimension of monetary policy and interconnectivity between central bank policies last gave a pretty good descriptive of a small upon economy having difficulties to raise raise while others had low interest rates I'd be curious to have the panel's view on larger economies and the urea and the US we've had the beginning of normalization in the US and we're starting to observe stark differences in levels of interest rates so it would be interesting to see whether you're thinking about the international dimension of that and the speed over effects that one may have from on both directions it's an interesting question let's take the other one and this is a question for Ricardo on his new monetary policy strategy now you have allocated keeping a large balance sheet satiating the market for reserves so in the language of the ECB this is a structural liquidity surplus strategy which basically makes the interest reserve of the deposit facility rate as the policy rate the alternative is of course what we had before the structural liquidity deficit and the ECB was lending at the marginal rate my refinancing rate to the banks now are these two strategies not essentially equivalent or put it this way is your preference for the surplus satiating the market weak or strong Cathy you want to take the first one and then Ricardo the question about monetary policy spillovers was something that occupied a lot of time for those of us who are drafting the G20 communicates I think I can almost remember exactly all the language about communicate carefully and consistently that monetary policy actions to address spillbacks spillovers and spillbacks so the issue is certainly on the radar certainly was on the radar of all the finance deputies at the G20 and that's not everybody but it's a representative sample so that said it is still the case that the monetary policy authorities have domestic mandates really is the operational piece of information there is the operational word there is spillbacks at what point is there turbulence is turbulence generated by monetary policy action in large country A going to generate a spill turbulence in emerging markets B through Z does that collectively end up spilling back to large country A and induce them to change their monetary policy the Federal Reserve has done a lot of work on this they have had day long conferences and multiple papers being written and the problem is that monetary policy doesn't affect emerging markets all in the same way A monetary policy tightening or whatever from the Fed is not going to affect all emerging markets in the same way and so that collection of emerging markets B through Z even if you could imagine them acting as some sort of like you know borre or cartel they wouldn't hold it wouldn't hold because they have differential response so once you get to that point where you say well lots of different things happen to a whole set of countries when monetary policy is undertaken in a large country then it's very hard to talk about what it is that the large country should do differently beyond doing the things it tries to do which is communicate and so forth the related point though that I think is important is when monetary policy stays at its current configuration which is a very accommodative stance for an extended period of time or tries to mitigate movements and exchange rates we know that that sets up an environment where borrowers choose to borrow in the dollar denominated asset they take on dollar denominated liabilities and that because it's cheaper and whose responsibility is that is that the responsibility of monetary policy in the United States or is it appropriate to put the onus of macro prudential or micro prudential on the shoulders of the countries in question so the two things is heterogeneity and kind of who's responsible for taking evasive action if appropriate if I can add Jacques let's say Helen Ray's dilemma story that is behind your question doesn't really apply for us so you can well because the zone is sufficiently large and basically what we have seen since 2014 when we came with the guidance at the time of the Tantrum you had a quite decoupling of the curves very much and it stretches to the short medium term of the risk curve and the rest of course becomes another story but we have been reasonably able to uncouple very much from the US monetary conditions financial conditions is a bit broader concept of course because you have equity prizes and other things but we had I thought a satisfactory degree of uncoupling now the question given what is happening in the fat in the coming periods of course is it going to inflation in the US and faster to what extent can this isolation continue all guidance so far has shown that we can uncouple when conditions are very different of course there are spillovers I'm talking finance now and I'm talking the short medium end of the curve and we have seen that so far and so we are we are not buying this story for the continent again history will tell it applies well for emerging market that's clear and smaller economies as well but that was your question actually let me let me agree exactly the characterization with a slight comment that I was defending a structural liquidity surplus of epsilon or in that sense more of a structural liquidity balance in that I said the market should make sure that we are at the surplus situation and just there but no more because I do worry about a very large balance sheet that would be the minimum of what one needs to get a structural liquidity surplus and backed by short term assets as I said because of the composition issues but then your question is how strongly do I feel about this I mean I had listed some of the reasons for it but let me emphasize what I think are the two main ones the first one is because something that I have learned the last ten years is that there can be wide variations in the demand for liquidity in the sense of the demand for liquidity from the central bank if I worry that if I am in a structural liquidity deficit a persistent one then the Lagrange multiplier if you want or the value of the constraint and to what extent the constraint the deficit can fluctuate quite a bit in ways that transmit into financial shocks so that's one two the freemen rule the freemen rule is a good thing it's a free lunch Bob Lucas once called it and why not achieve it the freemen rule is achieved at a structural structural liquidity deficit is the same as saying just when the two interest rates equate now these are the two reasons how strongly do I feel them if you were to tell me the MR the ECB is going to have an MRR rate that is 25 basis points above the deposit rate that's far enough along on the freemen close enough to the freemen rule and close enough to bounding that Lagrange multiplier that I'd be happy as opposed to it being zero but what I was saying is that going back to when it was 200 that gap 200 basis points say that's structural liquidity deficit I think it's not the worst thing in the world but I think it's something that the world of monetary economic policy is better because we're in the circles rather than in the deficit basically what happened is that the supply of base money was demand driven and then it became central bank driven so we were supplying liquidity sometimes as we learn there's huge demand driven and let's accommodate by committing to always accommodate total reversal of course and now let's shrink it ten years or whatever but it was a big change we'll see when banks normalize at some point but we are not far from that situation well unfortunately let's continue we have 20 minutes left also from this side if you have an ID Frank it's more a reaction to what Chris said about what I thought was a negative assessment of negative rates I mean in our case I think this worked very well of course in conjunction with the other tools APP and the targeted operations basically the pass through to the lending rates was even stronger than in normal times and again that's partly not just because of the negative rates but also because the long rates and the market rates were low now it is true that the deposit rate has a clear lower bound and so as a result the profit margins of banks particularly those that have a lot of deposit household deposit funding were squeezed now then the question is what do we mean macroeconomically now macroeconomically at least in our standard models if the bank lending rates fall if the market rates fall the whole real term structure has fallen I mean this is expansionary the question is a little bit if this lasts long then of course and the other thing I wanted to say is that because of these indirect effects on the economy and on loan losses for the banks actually our estimates suggest that the effects on bank profitability actually cancel out so in the end the profitability of banks was not very much affected if I may add a little to that Sweden probably can take lower negative rates and many other countries and certainly Swedish banks can take lower negative rates because the major Swedish banks would dominate the financial sector they finance their lending only to about a half through deposits and the other half through borrowing in the wholesale market so when interest rates go down they borrow a cheaper rate they can't they have decided not to go below zero on retail deposits but they could negative on wholesale deposits but anyhow they are borrowing their covered mortgage bonds that finance their mortgage lending they borrow at roughly zero and they issue mortgages 1.5 % or a bit below so it's a healthy interest margin there and also they are in a cozy oligopoly the four major of them so they make money in booms they make money in recessions they always make money so from a financial stability point of view it may be not so bad like Canada having an oligopoly there but the net of it here is that for these reasons the financial sector can take lower rates or negative rates perhaps in several other countries exactly who bears the negative spending effects of negative interest rates is perhaps not so important from the point of view of the macro effects the aggregate effects it may be that banks can adapt but if the but negative rates on government liabilities are extracting resources from the private sector and there has to be a fiscal offset to that if it's going to be on the whole expansionary one interesting way to think about this is to is to ask suppose as a thought experiment we could eliminate the zero lower bound as some people have proposed currency should be outlawed all transactions done electronically and then negative rates become perfectly feasible would it be good if there were no lower bound well you remember Stephanie's graphs there's this unstable equilibrium and then there's a stable equilibrium at the zero lower bound what happens to that diagram if there is no zero lower bound then there's just the unstable equilibrium once you start down there's no bottom the notion that there might be an accelerating deflationary horror story is actually not internally consistent if there's a zero lower bound but we know from historical experience that accelerating upward horror stories on inflation are possible they've occurred historically if there were no zero lower bound it's perfectly possible that bad policy configurations could lead to accelerating deflation with lowering interest rates causing reducing demand and causing an accelerating decline we ought to welcome the existence of the zero lower bound but you write one has to be open you had a two handed frank and then let's say there is a two handed comment I think your argument about lowering negative from zero to negative and the question who bears the cost I mean the same thing if you go from 3 to 2 so there's nothing special about negative rates in that argument can I have the two handed I think we must be careful about these discussions of this particular graph is conditional on a Taylor rule no sensible bank follows a Taylor rule and any central bank would not mechanically follow a Taylor rule when things go haywire you would do whatever it takes to get out of that situation central bank can't do whatever it takes without the fiscal power I agree that no sensible fiscal authority would allow this to happen I agree with that too haha Actually Chris remark on what happens in a digital world leads into my question maybe Peter is going to rule out that question but I think it's a rolling this 10 years forward to suppose we meet again and talk about monetary policy given the ground spell of technology developments on financial markets I wonder whether we're going to talk about an entirely different world we're seeing the developments of crypto currencies that are known competition to government in the issuant currencies we're seeing central banks issuing digital cash I guess Sweden is going the way of abolishing currency entirely cash in the hands of people entirely and going completely towards people holding digital cash at the central bank and other central banks are thinking about this too we're seeing fintech developments the model that banks give out these mortgages out of the window I think the biggest mortgage provider in the United States and it's the whole intermediation the whole way of how we do transaction may be subject to a massive overhaul in the next 10 years do you agree with this or should we continue with our models that have nice little banks and the central bank provides them with reserves and then the banks all checking deposit is that or should be is there need of changing directions here I think that's a very good question we are close to the end of the workshop Ricardo you volunteer no let me comment I agree with Harold and it goes back to the fighting the fears of yesterday I think we are now very much focused on banks we're very much focused on financial crisis I alerted to let's think about inflation Chris added or started by saying let's worry about fiscal crisis leading to hyperinflations because that happens very often instead of just looking backwards me and Chris are looking further back than the last 10 years and you're saying look forward as well for what the next crisis or the next thing would be let me make three very small observations on how I think digital as you said innovation changes some of the arguments that I've made so far in this panel or not the first one is I think that with people stop using cash central banks stop having seniors revenue central bank as a revenue producing institution produces revenue because it prints pieces of paper that people are willing to hold at a sub market rate that is its only source of revenue that is what allows it to keep its independence going back to my separation that's what allows it to live with a somewhat vague fiscal backing in some regards at times as far as independence is respected if seniors go to zero we really have to think in some of the questions of fiscal backing central banks have to be re-questioned that's the way I think number two in a world of digital currencies ultimately a world with central bank digital currency or some form of it emerges either directly or indirectly through the financial system as banks deposit your deposit at the central bank and that is a world in which I think we have to rethink again both our theories of the bank runs as well as our theories of what's the world of the discount window or the swap lines in my discussion because we do have that if people can move very quickly from the banking sector if people can move very quickly from inside to outside money or from the banking sector into the central banking sector then I think the scope for runs for understanding financial stability can be very different in so far and the scope for the central bank to in some ways be a lender of last resort in that world also has I think to be rethought a little bit and so I think that's especially exciting for that topic and then finally I mean as we saw yesterday we're very much focused on banks I don't think banks are going to go away and supply shocks like Egon was measuring I think they're still going to be there but the transmission of shocks to the banking sector is likely going to change and therefore measuring these will become important and so in some ways my reaction also to some of the papers on yesterday like with Carlos paper or Egon's and others was in some ways they were a little far for macro the way I would like it to be monetary policy shocks but on the other hand they're really telling me what are the supply shocks in the conventional banking sector because I think those are the ones that are really going to change I think that in 10 years the paper Egon presented yesterday or that Jose Luis presented may indeed be obsolete in so far as I saw the shocks but at least they're teaching me how to measure those shocks in a way that in 10 years I'll measure them I think they won't be there anymore but I'll then have to develop new strategies on that if you want it in one line I think the transmission of monetary policy lending and mortgage rates will get a change quite dramatically but on that since I can't send Carlos or Egon or Jose Luis or Atif to go and study the one 10 years from now I'm happy that they're studying the ones right now so I understand those supply shocks and hopefully that will give us some guidance on that for me I mean basically that's a good question but the key question is to what extent central banks can keep some monopolistic position in the financial markets and that means that you're basically a producer of safe asset and to what extent will that be the case in the future so that's because if you have that even relatively small you have an enormous power and in a market which will be of course much lesser bank intermediated because the banks will lose that special function in terms of being highly leveraged and high liquidity risk in the system because that would tend to disappear because of regulation because societies can live without that sort of very dangerous sort of balance sheet now you have the shadow banks taking over some of these positions and that's what I said before if you think it may be narrower than we think what you say but in the next crisis the central banks play still a key role as a producer of a safe asset which is accepted everywhere that changes then it's another game of course it's a totally different game but as long as you have this monopolistic sort of special position in the system then I mean there are many tools of intervention but how long will that be in good times it may disappear and in bad times you know there is a rush too and you said it I mean Ricardo it's an inside-out set you say we flood the market with liquidity no we flood the market with central bank liquidity money supply is very weak as we know so that's the game because private and public and you see in crisis time this rush you know for because people still think this is a safe asset then you link it to the other position you know what is the fiscal behind the central bank and these promises you make and that's the other thing to what extent can you produce base money if you aggregate the central bank with the fiscal authority and what's the value of your seniority I mean you know this discussion of seniority once you exceed that limit then it becomes quite quite a delicate story people are rational but yeah I have one comment on it's true that in our current institutional framework is important to keeping the peace on independence central banks are essentially self-financing they don't have to regularly go to the finance minister and ask for a budget but it's not in principle true that independence of monetary policy depends on seniority and so one thing we might have to reconsider if currencies were old yet smaller is rethinking some of these institutional arrangements to try to guarantee independence of monetary policy rethinking in an environment where it's understood that seniority flows will not necessarily all be positive from the bank's bank to the treasury very last question in the back Mr Christoffer Simms Mr Simms you read an article called gaps in the institutional structure of the European area the question is if you please could elaborate on the connection between sovereign money and the ability of fiscal authorities of European countries on fiscal monetary interaction you wrote I urge everybody to read this article which came out in Bank of France publication a couple of years ago you can probably find it on the internet and actually it's related to what I said about the Euro in my talk I didn't expand on it very much but it's clear that I have argued that the European the Eurozone needs a central fiscal institution with some democratic legitimacy and one of the things that's concerned me is nothing explicit has been done about that there's a lot of resistance to it but implicitly the worrisome thing is that the ECB itself may be becoming the Eurozone common fiscal decision maker if you ask suppose the ECB has to make the decision as to whether to allow the Italian banking system to collapse or instead to preserve low interest rates on Italian debt in order to keep that from happening that's making a decision about wealth transfers between countries and the Eurozone and no matter how the decision comes out if it's being made in a way that people don't see as politically legitimate it could be a problem for the institution I think it's time to conclude this it's almost four o'clock and so I wanted, I mean we wanted to thank you for coming this was a great conference thank you for the organizing committee the staff here of the ECB and next year next year as tradition now we will have another conference and maybe we checked a little bit what we said now one year later and so nothing else no you don't have the title for the next conference yet it's always the same so thank you very much that was really great thank you