Summary of Webinar:
GRI welcomed William White to lead a discussion on monetary policy and central bank approaches in 2024 and beyond.
Central banks were established to foster financial stability, but the prevailing monetary policy paradigm, which targets inflation in goods and services and prioritizes labour market conditions in assessing output gaps to gauge inflation pressures, has led to many negative outcomes. It also poses significant risks for the future. White attributed these failures to neglecting the existence of endogenous processes whereby easy money policies have generated bubbles. When these bubbles have burst, the resulting disinflation has been treated with more easy money, leading to bigger bubbles, and ever-increasing public and private debt.
White examined how, since the 1980s, central banks have overlooked signs of many major structural changes and risk developments, leading to a recurring pattern of financial crises, each triggered by unresolved issues from the previous one. These crises culminated in 2021-2023 in rising inflation, then tighter monetary policy, and growing concerns about financial stability and fiscal sustainability. Rising challenges of bubbles from the great financial crisis through the early 2020s have also led to monetary policies becoming increasingly experimental.
In White’s view, four “false beliefs” of central banks have led to unsuccessful monetary policy:
- They have overestimated the need for easy money to counter deflation, resulting in a “debt trap” of their own making;
- They have overestimated the effectiveness of easy money in boosting economic growth, leading to successive bubbles and the inevitable rise of public and private debt ratios;
- They have underestimated the unintended consequences of easy money, including exacerbated inequality, undermined democracy, jeopardized financial stability and reduced fiscal sustainability; and
- They have underestimated the challenges of exiting from easy money policies, including fears of triggering financial instability and perceptions/risks of fiscal dominance.
White presented three progressively radical options that could have improved the current policy framework, including:
- Not focusing exclusively on goods and services inflation, but instead also leaning against the wind of credit growth, and fostering increasing financial market discipline.
- Taking on a more holistic view of the economy as a complex adaptive system, anticipating potential outcomes, and considering “what if” scenarios for each alternative when defining policy options.
- Following a policy of narrow money, where money is backed by government securities or liabilities.
Given the current challenges, White supports the development of models to minimize debt excesses and address the increasing complexities of the current economic landscape.
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Former Deputy Governor, Bank of Canada