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Credit in monetary and (macro-) prudential policy by Claudio Borio Comments by Stefan Gerlach University of Frankfurt.

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Presentation on theme: "Credit in monetary and (macro-) prudential policy by Claudio Borio Comments by Stefan Gerlach University of Frankfurt."— Presentation transcript:

1 Credit in monetary and (macro-) prudential policy by Claudio Borio Comments by Stefan Gerlach University of Frankfurt

2 Yet another paper on the nexus between credit, monetary policy and financial stability. –Earlier work has been widely cited and influential in policy community. Much to agree with … –In particular, credit plays a crucial role in asset price booms and busts, and in episodes of financial instability. … but also a some things to disagree with. © Stefan Gerlach 2

3 1. Information content of credit Contradiction: –Presentation emphasizes (on p. 8) that credit-to-GDP & asset price “gaps” contain information about future output, inflation and the likelihood of financial distress (p. 8). –But it also states (on p. 11) that “information content is highly non-linear and episodic” and that “linear correlations do not help.” © Stefan Gerlach 3

4 RMSFE for inflation (1-20 quarters ahead) 18 OECD countries; ; 7 models; credit, equity & property price gaps; benchmark include short rate, inflation, output gap. Using credit and asset price gaps leads to worse forecasts. Assenmacher-Wesche & Gerlach, Economic Policy, © Stefan Gerlach 4

5 Overall, information claim appears exaggerated : –C & AP gaps largely uninformative about inflation and output. –Does not improve as longer horizons are considered. Policy conclusions: 1.Imprudent to rely on indicators whose information content is “episodic” and hard to establish. 2.The notion that “extending the horizon” raises the usefulness of C & AP as indicators seems incorrect. © Stefan Gerlach 5

6 2. MaP and Monetary Policy Paper’s policy conclusions: –“Imprudent to believe that MaP policy is enough … [and CBs should]... tighten even if near-term inflation appears under control.” Reinhart and Rogoff (2009): –“A single minded focus on inflation can be justified only in an environment in which other regulators are able to ensure that leverage … does not become excessive.” (p. 291, my underlining) © Stefan Gerlach 6

7 Focus on improving other (MaP) policies: –Spectacular failure: SIVs; Northern Rock; subprime mortgage originators; … –Much more focused than monetary policy. –Many tools (but not always under CB’s control, and a clear legal mandate is needed): Reserve requirements; risk weights; loan-to-value ratios; … Responding with interest rates to credit and asset prices will amplify business cycles. © Stefan Gerlach 7

8 Several estimates in literature: –Walentin and Sellin (2010) estimate that depressing house prices by 10% would reduce real GDP by 6%. –Assenmacher-Wesche and Gerlach (2010) estimate that doing so would reduce real GDP by 4%. –“Leaning against the wind” could be costly. –Large changes in interest rates are needed. © Stefan Gerlach 8

9 Policy conclusions 1.Need to be imaginative & ambitious with MaP:s. 2.Leaning against the wind could be very costly. © Stefan Gerlach 9


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