1. Comments on Global Monetary Policy
Andrew K Rose
Berkeley-Haas
ABFER, CEPR and NBER
Canberra, Aug 2018

2. My Task: Address Second Two Questions
“What tectonic shift may occur in monetary policy regimes globally and why?”
No such change is likely
Possible (and unlikely) shift is collapse in EMU for purely internal reasons
Even less plausible: widespread banking crisis due to negative nominal interest rates
“Would a shift in monetary policy regime in a major developing economy necessitate changes to policy in other economies?”
Irrelevant since no such shift is likely
But even then, hard to see a move away from evolving status quo
And now, a little elaboration …
Global Monetary Policy: Rose

3. Inflation Targeting Rocks!
IT is the only monetary regime to have never experienced a crash/regime shift
Widespread: all large currencies (US$, €, ₤, ¥) float, all essentially with inflation targeting
Almost all other smaller rich countries (Australia, Canada, NZ, Sweden, Switzerland …)
Large and growing number of emerging markets (Brazil, Chile, Korea, Mexico, Peru, S Africa, Thailand) means it can spread further
Unusual: contrasts favorably with fixed exchange rates, other regimes
Fixes only persistent for Denmark, HK, some small/poor states
Many crashes in Asia Latin America, Africa, Europe …
Global Monetary Policy: Rose

4. Growing Durability of Exchange Rate Regimes
Global Monetary Policy: Rose

5. IT Durability, continued
Inflation Targeting is also
Tested: no country abandoned IT through/after Global Financial Crisis of (though many hit hard)
IT countries have also experienced/are experiencing unconventional monetary policy with: a) forward guidance; b) quantitative easing; c) negative nominal interest rates
Comprehensible: domestic goals aligned with monetary objectives
Singular: no plausible alternative exists
So it’s hard to imagine a tectonic shift in monetary policy regimes globally
Hence hard to think of regime-change consequences for other countries
Global Monetary Policy: Rose

6. One Possible Exception: EMU Collapse
Seems unlikely now
Greece has already been through the wringer (and 3 programs)
Cyprus, Ireland, Portugal, Slovenia have all been tested
But a serious banking crisis in Italy is possible (Spain less so)
Italy much larger than other countries
Populist Italian government united by skepticism of Euro
Continuing issues with productivity growth, demographic decline, unemployment …
But EMU leaders have managed to avoid such issues historically
Exception is Brexit … but UK not part of EMU, little direct effect visible thus far
EMU collapse (even Italexit) would surely result in global financial crisis
Even then, hard to see how this would lead to tectonic shift in monetary regimes
Global Monetary Policy: Rose

7. Even Less Likely: Wide Banking Crisis
Nominal interest rates have been (slightly) negative in Denmark, EMU, Japan, Sweden, Switzerland … for years
Banks complaining about effects on profitability, hence lending
Thus far, little overall effect on net bank income
Curious, since deposit rates seem sticky at 0
Why?
Global Monetary Policy: Rose

8. Global Monetary Policy: Rose
Shameless Self-Promotion: Effect of Negative Nominal Interest Rate Dummy in Bank Panel
Regressand
(/Total Assets):
All
[30,792]
Large
[4,001]
Small
[26,791]
High-Deposit
[24,957]
Low-Deposit
[5,756]
Net
Income
.031
(.021)
.059
(.037)
.025
(.026)
.013
(.022)
.124*
(.056)
Net Interest
-.054**
(.016)
.010
(.031)
-.055**
(.018)
-.029
(.015)
-.244**
(.053)
Net Non-Interest Income
.052**
(.011)
.030
.047**
(.013)
.008
.323**
(.045)
Global Monetary Policy: Rose

9. Global Monetary Policy: Rose
Perhaps a Future Issue
Reduction in net interest income offset by
Gains in net non-interest income
But this may not be sustainable
Fees can rise permanently
But gains from stock/bond market rallies (associated with move to negative rates) intrinsically transitory
Ongoing work with Lopez and Spiegel
Still, hard to imagine this resulting in regime shift
Global Monetary Policy: Rose

10. A Potential Long Run Issue
Suppose inward-looking right-wing populists continue to govern
Could we end up with a world characterized by
Rising Capital Mobility, and
Shrinking Openness to Trade in Goods and Services?
Seems far-fetched … but not something that has been much modelled
Global Monetary Policy: Rose

11. Not to be confused with Serenity!
Crises occur even absent shifts in monetary policy regime
World seems vulnerable now:
Lots of leverage (not just China)
Fiscal space is limited in both stock/flow terms for larger economies
Monetary space is very limited for most large economies (except US)
Some high asset prices
Longer run
Disappointing productivity growth for larger economies
Even longer
Demographic decline for most large economies (except US)
Global Monetary Policy: Rose

12. American-Specific Fears
Monetary tightening has often lead to recessions historically
Low real interest rates and inflation targets implies limited room for relaxation
Fiscal loosening implies little room for fiscal support
Especially given longer-term concerns
Limited executive ability, especially compared with past
Especially limited concern for/interest in RoW
Special role for US$ as reserve/invoice/debt currency (exorbitant privilege)
Continuing, even growing as demand for safe assets rises
$ appreciation is disproportionately costly for firms with dollar liabilities, their (bank/bond) creditors, and their countries
Tightening US monetary/loosening fiscal policy a recipe for $ appreciation
Hence also increase in US current account deficit … with volatile President obsessed with trade deficits …
Global Monetary Policy: Rose