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Looking Forward from the Crisis of 2007-2008

This panel session by Michael D. Bordo discusses the need for central banks to adapt their roles after the crisis of 2007-2008. It explores historical background, global financial crises, the future direction of central banks, and the importance of monetary policy and financial stability.

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Looking Forward from the Crisis of 2007-2008

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  1. Looking Forward from the Crisis of 2007-2008 Michael D.Bordo Rutgers University Panel session “Where do Central banks go from here?”Norges Bank symposium “What is a Useful Central bank?” Oslo Norway November 18,2010.

  2. Introduction • After the crisis do central banks need to change the plot? • Before answering the question some historical background may be relevant.

  3. Global financial crises • The World has had 6 global financial crises since 1880 • Research with John Landon Lane using cluster analysis on several chronologies on banking crises shows crises in 1890 1907, 1914, 1930-33, 1982, 2007-2008. • Global FCs involve many countries in 2 or more regions

  4. 2 year moving sum of Banking Crisis Frequencies

  5. Global Crises • In terms of crisis incidence the recent crisis was comparable to the Great depression • But not in terms of output loss where it is comparable to 1907 • A bellweather of a global FC is US involvement

  6. Global Financial Crises • This reflects its size and fragile banking system • Recent crisis not as bad as it could have been because CBs learned to be LLRs, automatic stabilizers, and we left the gold standard

  7. The future • Where should CBs be going? • History teaches us that CBs learned to provide a credible nominal anchor • To provide macro stability • Flexible inflation targeting useful framework

  8. The future • CBs should also serve as LLRs to the money market • Preferable to use OMO rather than DWL • If DWL used then loans only to solvent banks. No bailouts • CB to protect payments mechanism

  9. The future • CBS should not lean against the wind of asset bubbles • But if big bust threatens real economy non monetary policy tools should be used. • Strong case for separating monetary policy from financial stability policy • Canadian experience shows good mix between monetary policy and FS policy

  10. The future • Financial regulation should be based on providing incentives to private sector to take prudent actions • Capital important to financial stability.

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