The Paradox of Risk: Leaving the Monetary Policy Comfort Zone (Policy Analyses in International Economics)

For decades, economic policymakers have worshipped at the altar of combating inflation, reducing public deficits, and discouraging risky behavior by investors. That mindset made them hesitate when the global financial crisis erupted in 200708. In the face of the worst economic disaster in 75 years, they often worried excessively about the risks and possible losses from their actions, rather than moving forcefully to support financial institutions, governments and people. ngel Ubides provocative thesis in The Paradox of Risk is that central banks fear of inflation and risk taking has hampered their efforts to revive global prosperity. In their confusion, he argues, policymakers made the recovery weaker. He calls on world leaders to abandon old shibboleths and learn the lessons from the financial crisis and its sluggish aftermath. Ubide mobilizes a wealth of research on the experience from the last decade, urging policymakers to leave their "comfort zone," embrace risk taking, and take bolder action to brighten the worlds economic prospects. Introduction The Paradox of Risk Of Boring Central Bankers, "NICE" Economies, and the Power of Narratives Just Blame the Central Banks Roadmap of the Book The Future Is Not What It Used to Be The Intellectual and Political Background to the Crisis It All Started in the 1970s: The Anti-Inflation Consensus Deflation and Zero Interest Rates? That's Such a Japanese Thing The European Obsession with Competitiveness and Reforms The Diabolical Politics of Rescue Programs Lean versus Clean-or How the Deep Origin of the Crisis Lies in a Bathtub Bayesian Inference Meets Politicians in a Rush-and Austerity Is Born Markets and the Crisis: In Search of Analogues I Wouldn't Start from Here The Great Experiment in Monetary Policy: Central Bank Actions since 2007 Conventional versus Unconventional Monetary Policy How to Do Monetary Policy? Goals, Tools, Strategies, and Communication Policy Goals: Is Clarifying Price Stability Enough? Policy Tools Policy Strategies: Forward Guidance to Sell Insurance on the Economic Outlook Policy Communication: Opening the Doors of the Temple Do or Do Not. There Is No Try Has Monetary Policy Worked? Yes, No, Maybe Did Monetary Policy Decisions Affect Financial Conditions in the Expected Way? Did Policies Ease to the Extent Recommended by Simple Benchmark Rules? Did Policies Achieve Their Objectives in Terms of Inflation and Growth? Has Monetary Policy Had Any Negative Side Effects? Monetary Policy Worked-But It Can Do Better Have We Learned Anything? Crafting a Monetary Policy for All Seasons Goals: A Program of Opportunistic Reflation Tools: Be Ready to Use All the Tools at All Times Strategies: Adopt Cyclically Adjusted Forward Guidance Communication: Stop Calling It Unconventional Institutional Design: Financial Stability as Part of Central Banking, Not Monetary Policy A Game Plan for the Future Conclusion: The Future Is Not What It Used to Be The Brexit Easing The Resetting of Abenomics The Trump Surprise Fiscal Policy in the Lead It's All about Risk Management. In the decades before the global financial crisis struck in 2007, economic policymakers kept to the primary goal of containing inflation and public deficits. Today, after years of sluggish economic recovery, the time has come for that prevailing consensus to give way to a new strategy of monetary stimulus to spur economic growth and encourage risk-taking by investors. In this book, Angel Ubide surveys the actions taken by central banks after the crisis and draws lessons from the unpredictable interaction of markets, countries, and financial institutions. He concludes that fear of another crippling crisis has caused central banks to become dangerously risk-averse and overly complacent about dampened economic growth. He advances the provocative thesis that monetary policymakers, accustomed to a "boring" role in managing economies, must now leave their "comfort zone" and embrace risk as a necessary requirement for growth The Paradox Of Risk Contends That Central Banks' Fear Of Inflation And Risk Taking Has Hampered Their Efforts To Revive Global Prosperity. Ángel Ubide Mobilizes A Wealth Of Research On The Experience From The Last Decade, Urging Policymakers To Leave Their Comfort Zone, Embrace Risk Taking, And Take Bolder Action To Brighten Economic Prospects. Cover 1 Copyright 5 Contents 6 Preface 12 PIIE's Board of Directors (as of September 2017) 15 Acknowledgments 16 Abbreviations 20 Chapter 1 22 Chapter 2 40 Chapter 3 62 Chapter 4 112 Chapter 5 208 Chapter 6 246 Appendices 258 Appendix A 260 Appendix B 278 Appendix C 288 References 292 Index 306 PIIE's Other Publications 320 Back cover 343