This paper introduces a global banking system in a small open economy DSGE model and features global relative price adjustments with incomplete asset market to investigate the role of international financial imperfections. We show that credit policy could be more powerful than monetary policy to alleviate foreign financial shocks since an expansionary monetary policy and alternative policy rules are not a sufficient tool in the global financial crisis. In particular, credit policy based on international credit spread outperforms credit policy based on domestic credit spread since the former attempts to remove distortions from international financial imperfections and reduces real costs of foreign loans. Accordingly, the lower costs of external finance further boost investment and effectively stabilize the economy without substantial asset purchases.

Quantitative easing (QE) has been a favourite tool of central banks in their post-financial crisis monetary policy apparatus. Social science literature has interpreted QE as a shift away from performative governance characterising pre-crisis monetary policy. With reference to the Bank of England’s experience, I offer a reinterpretation of QE as a performative intervention in the conditions of financial markets, as an attempt to alter the state of financial markets away from dysfunctionality and towards efficiency. I claim that, following the financial crisis, the model of complete and efficient markets – a mainstay in central banking prior to the crisis – was transformed from a real-world approximation to a ‘performative object’ to be achieved. In deploying the balance sheet, central banks attempt to performatively enact complete and efficient markets. The article rejects the claim of discontinuity between pre-crisis and post-crisis monetary policy, arguing that QE is a continuation of inflation targeting though with important innovations. While pre-crisis performativity relied on central bankers’ communicative framing of market expectations, QE is performative via the ontological shaping of financial markets, driven by epistemic models. The article relies on a set of 51 interviews with central bankers and financial market participants and a corpus of documents.

We find significant evidence of model misspecification, in the form of neglected serial correlation, in the econometric model of the U.S. housing market used by Taylor (2007) in his critique of monetary policy following the 2001 recession. When we account for that serial correlation, his model fails to replicate the historical paths of housing starts and house price inflation. Further modifications allow us to capture both the housing boom and the bust. Our results suggest that the counterfactual monetary policy proposed by Taylor (2007) would not have averted the pre-financial crisis collapse in the housing market. Additional analysis implies that the burst of house price inflation during the COVID-19 pandemic was not caused by the deviations from the Taylor rule that occurred during this period.

In a series of academic publications, Edward Nelson has contended that from the 1950s until the late 1970s, UK policymakers failed to recognise the primacy of monetary policy in controlling inflation. He argues that the highwater mark of monetary policy neglect occurred in the 1970s. This thesis has been rejected by Duncan Needham who has explored several experiments with monetary policy from the late 1960s and challenged the assertion that the authorities neglected monetary policy during the 1970s. Drawing on evidence from the archives and other sources, this article documents how the UK authorities wrestled with monetary policy following the 1967 devaluation of sterling. Excessive broad money growth during the early 1970s was followed by the highest level of peacetime inflation by 1975. The article shows that despite the experiments with monetary policy, a nonmonetary view of inflation dominated the mindset of policymakers during the first half of the 1970s. In the second half of the 1970s there was a change in emphasis and monetary policy became more prominent in economic policymaking, particularly when money supply targets were introduced. Despite this, the nonmonetary view of inflation dominated the decision processes of policymakers during the 1970s.

Monetary policy in the USA affects borrowing costs for state and local governments, incentivizing municipal borrowing and spending, which in turn affects economic outcomes. Using municipal bond indices and transaction-level data, I find that responses to monetary policy are dampened relative to treasuries and heterogeneous across location and bond characteristics. In my baseline estimate, muni yields move 26 bp after a 100 bp monetary shock. To study implications for local fiscal policy, I model US localities as small open economies in a monetary union with independent fiscal agents. In a calibrated model, monetary transmission is significantly affected by municipal borrowing costs.

Is the working capital channel big, and does it vary across industries? To answer this question, I estimate a dynamic stochastic macro-finance model using firm-level data. In aggregate, I find a partial channel —about three-fourths of firms’ labor bill are borrowed. However, the strength of this channel varies across industries, reaching as low as one-half for retail firms and as high as one for agriculture and construction. This provides evidence that monetary policy could have varying effects across industries through the working capital channel.

In this commentary, I argue that Leon Wansleben’s focus on financial plumbing as a source of central banks’ epistemic and instrumental power will be met by the profession with a mixture of relief, incredulity, and worry. More importantly, I maintain that central bankers’ relationship with finance varies according to whether or not they are independent from elected government, an under researched area. All this works as a point of departure for remarks, drawing on my own memories, on central banking’s relationship with neoliberalism in monetary policy, monetary operations, and banking. Finally, I urge that Wansleben’s method be applied to anti-trust and the micro-economic regulation of utility services.

Leon Wansleben’s new book, The Rise of Central Banks: State Power in Financial Capitalism, tells an intricately complex story of the world’s most influential central banks successfully harnessing the forces of financial globalization to build their institutional power as the principal managers of their national economies. The book argues that, regardless of central banks’ rationales and rationalizations, the resulting expansion of global money markets has failed to generate the intended macroeconomic and societal benefits. Instead, as became evident in the post-2008 era, the world’s most powerful central banks are now structurally dependent on the increasingly self-referential markets for financial assets. While the book’s narrative is focused on inflation targeting and other monetary policy innovations since the 1970s, it raises much broader questions and invites further reflection on the nonlinear dynamics of power in today’s financial markets and the uncertain future of central banks.

We follow Belongia and Ireland (2021) and investigate the role that the Center for Financial Stability credit card-augmented Divisia monetary aggregates could play in monetary policy and business cycle analysis. We use Bayesian methods to estimate a structural VAR under priors that reflect Keynesian channels of monetary transmission, but produce posterior distributions for the structural parameters consistent with classical channels. We also find that valuable information is contained in the credit-augmented Divisia monetary aggregates and that they perform even better than the conventional Divisia aggregates, in terms of highlighting the role of the money supply in aggregate demand.

We provide new evidence about US monetary policy using a model that: (i) estimates time-varying monetary policy weights without relying on stylized theoretical assumptions; (ii) allows for endogenous breakdowns in the relationship between interest rates, inflation, and output; and (iii) generates a unique measure of monetary policy activism that accounts for economic instability. The joint incorporation of endogenous time-varying uncertainty about the monetary policy parameters and the stability of the relationship between interest rates, inflation, and output materially reduces the probability of determinate monetary policy. The average probability of determinacy over the period post-1982 to 1997 is below 60% (hence well below seminal estimates of determinacy probabilities that are close to unity). Post-1990, the average probability of determinacy is 75%, falling to approximately 60% when we allow for typical levels of trend inflation.

We test the neutrality of nominal interest rates taking advantage of recent advances in quantitative financial history using the Schmelzing (2022) global nominal interest rate and inflation rate series (across eight centuries), for France, Germany, Holland, Italy, Japan, Spain, the United Kingdom, and the USA. We pay attention to the integration and cointegration properties of the variables and use the bivariate autoregressive methodology proposed by King and Watson (1997). We argue that meaningful long-run neutrality tests can be performed only for three countries—Japan, Spain, and the United Kingdom—and we find no evidence consistent with the neutrality of nominal interest rates.

Using monthly data from 1978:M1 to 2019:M9, this paper provides empirical evidence concerning the role that monetary policy plays in the US housing market. We first show that shocks to short-run interest rates have significant impacts on house prices and that these effects are persistent. Our findings also provide evidence supporting the claim that too-low-for-too-long interest rates are responsible for the 2002–2006 US housing boom. We further investigate the different channels through which an easing monetary policy fuels the house price boom and find that faster sales and lower inventory levels in the housing market most amplify the policy effects. Lastly, we provide compelling evidence of the asymmetric effects of contractionary and expansionary monetary policies on house prices.

We investigate the synchronization of the Eurozone’s government bond yields at different maturities. For this purpose, we combine principal component analysis with random matrix theory. We find that synchronization depends on yield maturity. Short-term yields are not synchronized. Medium- and long-term yields, instead, were highly synchronized early after the introduction of the Euro. Synchronization then decreased significantly during the Great Recession and the European Debt Crisis, to partially recover after 2015. We interpret our empirical results using portfolio theory, and we point to divergence trades as a source of the self-sustained yield asynchronous dynamics. Our results envisage synchronization as a requirement for the smooth transmission of conventional monetary policy in the Eurozone.