Last week, the Sixth Annual Research Conference – The Policy Toolkit for a World in Flux – brought together representatives of central banks, financial institutions and leading economists from the United States, Canada, and Europe.
During the two days of the conference, which took place online for the second time due to the Covid-19 pandemic, about 300 participants from 33 countries discussed topics that are important for the modern world. Those included: the impact of deep inequality and climate change on the economy, the activities of central banks during the Covid-19 crisis, post-pandemic economic growth, central bank communication policies in a world of constant change, and much more.
"The epidemic has forced the authorities of different countries to cooperate. It has imposed severe restrictions on the movement of people and paralyzed the economy. Social and monetary losses have been enormous. Fortunately, cooperation has already begun to yield positive results. We are seeing that the pandemic has started to recede, but its retreat is uneven. This reflects the deep structural inequality in the world. It is expected that climate change will only deepen it and pose new long-term challenges. That includes fluctuations in harvests, floods, droughts, and the acceleration of migration flows. The common challenges we face require decisive, timely, and transparent action by governments and central banks," said NBU Governor Kyrylo Shevchenko as he opened the Annual Research Conference.
Here are the five most interesting conclusions made by the speakers of the event:
The Covid-19 crisis has forced central banks to completely reconsider their previous experience
In addition to the healthcare crisis, Covid-19 caused an economic meltdown and created preconditions for a financial crunch. Central banks had to act fast and forget everything they had done before. And they did well, said Alan Blinder, Professor of Economics and Public Affairs at Princeton University.
In his speech, Dr Blinder gave central banks a universal recipe for combating this crisis: "Act decisively, identify the problem quickly, act on a large scale, and roll back gradually." He noted that in times of shock, the coordination of fiscal and monetary policymakers becomes increasingly important, as differences between the central bank and the government create unnecessary panic even in normal conditions, let alone during a crisis.
The speaker emphasized that in order to quickly overcome the Covid-19 crisis, central banks in emerging markets must act as deeply as they can while taking into account the threat of losing their independence and the risk of a strengthening of fiscal dominance.
Thrifty government consumption is often the policy with the highest multiplier
Francesco Zanetti, Associate Professor in Economics at the University of Oxford, spoke about the role of governments and the effectiveness of fiscal policy in this crisis.
According to his study, coauthored with Mishel Ghassibe, NBU Principal Expert, the effectiveness of certain fiscal policy measures in a recession depends primarily on the nature of economic fluctuations. The reason for the general economic downturn – a drop in aggregate demand or negative shocks from aggregate supply – affects the value of the fiscal multiplier, the researchers found. Thus, an increase in government consumption during a demand-driven crisis revives economic activity significantly, while in a supply-driven crisis, the most effective policy is to ease the tax burden on businesses.
Dr Zanetti’s theoretical findings, supported by empirical evidence, place particular emphasis on the fiscal austerity policy. They suggest that the crowding out of private consumption and investment often makes frugal public consumption the policy with the highest multiplier.
Central banks can incorporate the problem of deep socioeconomic inequality into their monetary policies
In addition to discussing the role of monetary and fiscal policy in combating the Covid-19 crisis, the conference speakers also brought up other topics that pose new challenges for central banks going forward.
Specifically, policymakers should include global socioeconomic inequality in their macroeconomic models, said Mikhail Golosov, Professor of Economics at the University of Chicago, in his keynote speech. Economic shocks have a heterogeneous impact on different segments of the population, and this fallout is most noticeable in the poorest segment, he said. Therefore, the role of monetary policy may be not only to smooth out economic fluctuations, but also to safeguard the public from their uneven impact.
To do this, the speaker proposed to improve and develop macroeconomic models with heterogeneous agents that can account for global socioeconomic inequality. Given the resources and capabilities of central banks, they should lead the way in developing and applying these models, he said.
Increases in long-term corporate debt reduce the effectiveness of monetary policy
Among other challenges faced by monetary policy, the conference speakers discussed the looming growth in global corporate debt. The potential threat is not an increase in debt, but a change in its repayment structure, said Matthias Mayer, Associate Professor of Economics at the University of Mannheim, citing the results of his study.
Firms with a significant share of short-term debt that is approaching maturity are much more responsive in their investment decisions to changes in monetary policy, he said.
Over the past two decades, however, firms have tended to reduce their short-term debt ratios, which lowers the effectiveness of monetary policy, his research shows.
Climate change is a new challenge for monetary policy
The experts also touched on the topic of climate change, which is becoming increasingly popular in the media, and discussed its monetary policy implications. Climate change coverage in the media, as well as the Google Trends indicator for relevant search queries, has been growing rapidly, meaning that people are increasingly thinking about this topic.
This is confirmed by the results of a representative consumer survey that were presented during the conference by Raphael Schönle, Senior Research Economist at the Federal Reserve Bank of Cleveland. In the near future, natural disasters that cause significant economic damage will occur much more often, respondents in this poll said.
Rising expectations of adverse events increase people’s propensity to save to meet potential consumption losses in the years ahead. This increase in savings lowers the natural interest rate, which is a benchmark for monetary policy. Thus, even anticipated climate change is already affecting economic development and should be included in the pursuit of monetary policy.
Key educational activities for students within the conference
A series of educational events took place within the framework of the conference and Ukraine Economy Week. Three lectures were given by economists:
- Anti-Crisis Policy of Central Banks in Times of Uncertainty by Archil Mestvirishvili, Deputy Governor of the National Bank of Georgia
- Measuring Central Bank Communication Using Machine Learning by Sophia Kazinnik, PhD, Senior Quantitative Analyst in the Supervision, Regulation, and Credit Department of the Federal Reserve Bank of Richmond
- Domestic and International Effects of US Monetary Policy by Giovanni Ricco, PhD, Associate Professor, Warwick University.
Useful materials:
- Information about the conference, program, and speakers
- Speaker’s presentations
- Video of the first day of the conference: in Ukrainian and in English
- Video of the second day of the conference: in Ukrainian and in English.