"To put one’s house in order" has been a very practical monetary policy philosophy in the past and has been shared by many central banks in advanced economies. However, with economic and financial globalization progressing, spillover effects of monetary policy measures as well as the global impact of specific exchange rate arrangements are becoming more important. No country is any longer immune to global forces. Against this background, Masaaki Shirakawa, Professor of International Economics at Aoyama-Gakuin University and former Governor of the Bank of Japan, shared his views on coordination, cooperation and communication among central banks and supervisors at a SAFE Policy Center Lecture on 18 November. The talk was moderated by Reinhard H. Schmidt, Goethe University and SAFE Policy Center.
Stronger need for globally coordinated monetary policy
According to Shirakawa, increasing globalization inevitably calls for global cooperation and coordination among central banks in three different areas: monetary policy, banking operations provided by central banks, and financial supervision and regulation. Today, most advanced economies conduct autonomous monetary policy to insulate their own economy from foreign influences. However, for a central bank already operating close to the zero lower bound, the interest differential to other countries is determined passively by global economic conditions and, for that matter, by foreign monetary policies, Shirakawa explained. This difficulty is even compounded if the country’s currency serves as a safe-haven, he added. After the global financial crisis, Japan and Switzerland were faced with such a situation. Japan’s interest rate had already been close to zero for quite a long time so that the country did not have much room to lower its interest rate further, when the U.S. and the euro area started to decrease their interest rates in order to improve domestic stability.
In general, the objective of monetary easing is to shift future demand to the present, Shirakawa explained. However, this mechanism can be effective only temporarily. Another goal of lowering interest rates is to depreciate the exchange rate and, thus, to boost exports. But, according to Shirakawa, this mechanism only works in case of regionally limited shocks. If many countries implement Quantitative Easing (QE) aggressively for an extended period of time, this policy will not have a discernible effect on global growth. In order to internalize these externalities, cooperation and coordination of central banks becomes necessary, Shirakawa said. Otherwise a global easing bias occurs.
Global infrastructure for banking operations alleviated crisis
Similarly, if central banks in advanced economies conduct monetary policy on the basis of the core consumer price index (CPI), which excludes food and energy, they also take the risk of facing a global easing bias. The reason is that commodity prices are affected by underlying demand/supply balances as well as global monetary conditions and central banks are not internalizing the inflationary impact of their own policy.
With regard to banking operation, Shirakawa noted that global cooperation among central banks in payment and settlement is underappreciated. After the financial crisis, it had turned out that the financial sector has many shortcomings. However, the infrastructure that supports payment, clearing and settlement was not among them, he said. In his view, market infrastructure that continued to function smoothly helped to alleviate the crisis.
Countries have to give up autonomous financial regulation
Regarding financial supervision and regulation, the world is facing a new financial trilemma, Shirakawa said. According to him, it is not possible that each country autonomously determines financial regulation, that financial markets are increasingly integrated and that stability of the global financial system is achieved, all at the same time.
The global financial crisis and the preceding bubble have shown that serious financial stability problems arise when externalities in finance are neglected, Shirakawa explained. Against this background, many countries gave up autonomous determination of regulation, even though they still “write” the rules domestically, he stated. This cooperation (and coordination) currently takes place within various entities, such as the Basel Committee on Banking Supervision, the Financial Stability Board or the Group of Twenty. In Shirakawa’s view, the current state of global cooperation and coordination with regard to supervision and regulation is not ideal but he also acknowledged the steady progress that has been made in this field.