advance praise for Currencies, Capital, and Central Bank Balances “It’s hard to imagine a better brief introduction to the state of the art on domestic and international monetary-policy research, framed so as to be accessible to policy makers as well as scholars Highly recommended.” —Barry Eichengreen, George C Pardee and Helen N Pardee Professor of Economics and Political Science, University of California, Berkeley “This volume, collecting insightful, innovative, and often provocative contributions from distinguished academics and high-level central bankers, is the one-stop shop for understanding the practice of modern monetary policy As central banks extract themselves from a decade of unconventional policy, they have expressed a willingness to reexamine the implementation, conduct, and communication of their policies This is the book they should consult first for ideas on how to rebuild their monetary policy frameworks.” —Carmen M Reinhart, Minos A Zombanakis Professor of the International Financial System, Harvard Kennedy School “In the wake of the global financial crisis, central banks in advanced economies embarked on unconventional monetary policies that left them with vastly swollen balance sheets At the same time, as central bank asset purchases pushed domestic investors to buy emerging-economy assets, the resulting capital inflows proved hard to manage for the receiving economies Now, as the Fed and ECB normalize their monetary policies and shrink their balance sheets, the pressures on emerging market economies are reversed How can advanced-economy central banks best return to more moderately sized balance sheets, and to what extent should they? And can emerging markets handle the repercussions entirely through conventional policy levers, or would some forms of capital flow interventions also be useful? This book is an essential guide to the issues.” —Maurice Obstfeld, University of California, Berkeley, and former chief economist, International Monetary Fund “This book takes on some of the most difficult and contentious issues surrounding central banking in the post–financial crisis world, giving candid and thoughtful perspectives from leading policy makers and academics To what extent are today’s central banks, with their massive balance sheets and expanded regulatory powers, suffering from mission creep that might ultimately undermine their independence? Should central banks exhibit artful discretion over international capital flow controls, or would the world system work better if they were bound by rules? Generally quite accessible, the self-contained individual chapters and discussions should be useful for students, researchers, and practitioners alike.” —Ken Rogoff, Thomas D Cabot Professor of Public Policy and Professor of Economics, Harvard University Currencies, Capital, and Central Bank Balances The Hoover Institution gratefully acknowledges the following individuals and foundations for their significant support of the Working Group on Economic Policy and this publication: Lynde and Harry Bradley Foundation Preston and Carolyn Butcher Stephen and Sarah Page Herrick Michael and Rosalind Keiser Koret Foundation William E Simon Foundation John A Gunn and Cynthia Fry Gunn Currencies, Capital, and Central Bank Balances EDITED BY John H Cochrane Kyle Palermo John B Taylor CONTRIBUTING AUTHORS Adrien Auclert Peter R Fisher Oleg Itskhoki Lorie K Logan Jonathan D Ostry Randal K Quarles Martin Schneider Paul Tucker Raphael Bostic Esther L George Robert S Kaplan Prachi Mishra Monika Piazzesi Raghuram Rajan George P Shultz Kevin Warsh WITH ADDITIONAL DISCUSSANTS HOOVER INSTITUTION PRESS STANFORD UNIVERSITY STANFORD, CALIFORNIA Sebastian Edwards Gita Gopinath Mickey D Levy William Nelson Charles I Plosser Thomas J Sargent John B Taylor John C Williams With its eminent scholars and world-renowned library and archives, the Hoover Institution seeks to improve the human condition by advancing ideas that promote economic opportunity and prosperity, while securing and safeguarding peace for America and all mankind The views expressed in its publications are entirely those of the authors and not necessarily reflect the views of the staff, officers, or Board of Overseers of the Hoover Institution www.hoover.org Hoover Institution Press Publication No 697 Hoover Institution at Leland Stanford Junior University, Stanford, California 94305-6003 Copyright © 2019 by the Board of Trustees of the Leland Stanford Junior University All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without written permission of the publisher and copyright holders For permission to reuse material from Currencies, Capital, and Central Bank Balances, ISBN 978-0-8179-2234-4, please access www.copyright.com or contact the Copyright Clearance Center, Inc (CCC), 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400 CCC is a not-for-profit organization that provides licenses and registration for a variety of uses Efforts have been made to locate original sources, determine the current rights holders, and, if needed, obtain reproduction permissions On verification of any such claims to rights in the articles reproduced in this book, any required corrections or clarifications will be made in subsequent printings/editions Hoover Institution Press assumes no responsibility for the persistence or accuracy of URLs for external or third-party Internet websites referred to in this publication, and does not guarantee that any content on such websites is, or will remain, accurate or appropriate First printing 2019 26 25 24 23 22 21 20 19 Manufactured in the United States of America The paper used in this publication meets the minimum requirements of the American National Standard for Information Sciences—Permanence of Paper for Printed Library Materials, ANSI/NISO Z39.48-1992 ♾ Cataloging-in-Publication Data is available from the Library of Congress ISBN-13: 978-0-8179-2234-4 (cloth) ISBN-13: 978-0-8179-2236-8 (EPUB) ISBN-13: 978-0-8179-2237-5 (Mobipocket) ISBN-13: 978-0-8179-2238-5 (PDF) Contents Preface ix PART I ONE International Rules of the Monetary Game Prachi Mishra and Raghuram Rajan discussant: Thomas J Sargent general discussion: John H Cochrane, Michael D Bordo, Sebastian Edwards, Gita Gopinath, Paul Tucker, Raghuram Rajan TWO Dollar Dominance in Trade and Finance 53 Gita Gopinath discussant: Adrien Auclert general discussion: Juliane Begenau, Michael D Bordo, Juhi Dhawan, Robert Hall, Michael Melvin, Robert Heller, Jim Dorn, John Smyth, John H Cochrane, Andrew T Levin, Paul Tucker, George P Shultz, Gita Gopinath SYMPOSIUM ON Capital Flows, the IMF’s Institutional View and Alternatives Introduction 83 83 George P Shultz THREE Managing Capital Flows: Toward a Policy Maker’s Vade Mecum Jonathan D Ostry 87 vi Contents FOUR The IMF’s Institutional View: A Critique 97 Sebastian Edwards FIVE Capital Flows, the IMF’s Institutional View, and an Alternative 105 John B Taylor general discussion: Robert Hall, John H Cochrane, George P Shultz, John B Taylor, Jonathan D Ostry PART II SIX Monetary Policy with a Layered Payment System 125 Monika Piazzesi and Martin Schneider discussant: Oleg Itskhoki general discussion: Michael D Bordo, Arvind Krishnamurthy, Robert Hall, Jeff Lacker, Martin Schneider SEVEN Liquidity Regulation and the Size of the Fed’s Balance Sheet 153 Randal K Quarles discussant: Paul Tucker general discussion: Andrew T Levin, Charlie Siguler, Donna Borak, Sebastian Edwards, William Nelson, Michael D Bordo, Randal K Quarles, Paul Tucker SYMPOSIUM ON The Future of Central Bank Balance Sheets Introduction Kevin Warsh EIGHT Normalizing the Federal Reserve’s Balance Sheet and Policy Implementation 193 193 197 Lorie K Logan NINE Get Up Off the Floor 213 William Nelson TEN The Fed’s Balance Sheet Strategy: What Now? Mickey D Levy 221 Contents ELEVEN Should the Fed ‘Stay Big’ or ‘Slim Down’? vii 239 Peter R Fisher general discussion: John H Cochrane, Andrew Levin, Kevin Warsh, Lorie K Logan, William Nelson, Mickey D Levy, Peter Fisher PART III TWELVE Anchoring Inflation Expectations in a Low R-star World 263 John C Williams general discussion: Robert Heller, John C Williams, Sebastian Edwards, Beat Siegenthaler SYMPOSIUM ON Monetary Policy and Reform in Practice THIRTEEN 279 Introduction Charles I Plosser 279 Monetary Policy and Reform in Practice 283 Esther L George FOURTEEN US Economic Conditions and Monetary Policy Considerations 291 Robert S Kaplan FIFTEEN Remarks 301 Raphael Bostic general discussion: Paul Tucker, Mickey D Levy, Michael D Bordo, William Nelson, Andrew Filardo, Charles I Plosser, Robert Kaplan, Esther L George, Raphael Bostic About the Contributors and Discussants 319 About the Hoover Institution’s Working Group on Economic Policy 333 Index 335 336 beggar-thy-neighbor effects, 3, 13, 23, 36–37 benchmark rate, 130 Bernanke, Ben, 18, 50, 91, 110, 222–23, 270 Berra, Yogi, 266 Betts, Caroline, 54 bilateral liquidity, 175 Bipartisan Budget Act of 2018, 233 BIS See Bank for International Settlements bitcoin, 64, 79 Bjørnland, Hilde C., 21 Blanchard, Olivier, 105, 110 blockchain, 78–79 Bodenstein, Martin, 18 boom-bust cycles, 87, 94 Borak, Donna, 187–88 Bordo, Michael, 41–42, 46, 74, 191, 314 Bostic, Raphael, xiv, 301–18 Boz, Emine, 57–58 Braüning, Falk, 58 Brazil, 21, 50, 90–91, 101 Bretton Woods, 3, 40, 46, 94 Buchanan, James, 172 Burns, Arthur, 84 Calvo, Guillermo, 111 capital controls, 108 in Chile, 104 effectiveness of, 93–94 in EMs, 87 of Federal Reserve, 106 IMF and, 83, 98–99 IV and, 89, 110 macroprudential policy and, 88 moral hazard and, 92 capital flow management (CFM) in Chile, 99–100, 102–3 for EMs, 87–94 evasion of, 112 for exchange rates, ix fixed investment and, 112 in Iceland, 103–4 integration of, IV and, 89–90, 97–114 macroprudential policy and, 106 MPMs and, 107–8 spillover effects from, 112 in Venezuela, 103 “Capital Flow Management Measures: Terminology” (IMF), 106–7 capital flows AEs and, 94 boom-bust cycles in, 94 CFM and, 107–8, 111 of EMs, 6, 6f, 10, 16–17, 87–94 Index exports and, 111 of FDI, 100 global financial crisis and, 94 IMF and, 83–85 imports and, 111 IV and, 105–9 monetary policy and, 6, 6t, 14 normalization and, 16 push factors on, 90–91, 107 surges in, 91–92 Capital Flows, the IMF’s Institutional View, and Alternatives, xi–xii Carter, Jimmy, 76 Cashin, Paul, 20 CCAR, 315 ceiling system, for monetary operating system, 177–78 Center for Workforce and Economic Opportunity, of Atlanta Federal Reserve, 303 central bank balance sheets in corridor system, 180 future of, 193–95, 197–211 LCR and, 175 MCC and, 173 money markets and, 181 parsimony and, 176–77 r-star and, 267–68 U.S dollars and, 59 See also Federal Reserve balance sheet central banks of AEs, 109–10 of Argentina, 118 of Brazil, 101 of Chile, 101 in corridor system, 179, 180–81 domestic mandate of, 8, 14, 15, 25–26 of EMs, 12–13 exchange rates and, 49 for financial stability, 171–72 inflation and, interest rates of, 64, 125, 126, 129–30 liquidity and, 247 as LOLR, 63–64, 170 MCC and, 173 monetary policy of, xi OMOs of, 202 overnight interbank rate of, 131 policy rate of, 130, 176 for price stability, 170 purpose of, 171–73 reserve balances of, 162 reserves of, 75, 128 spillback effects of, 14, 15 Index transparency of, 15 U.S dollar and, 63–64, 75 of Venezuela, 101 voluntary reserves averaging of, 182–84 yield curve and, 130 See also Federal Reserve Cerutti, Eugenio, 113 CFM See capital flow management Chen, Qianying, 20–21 Chile, 99–100, 101, 102–3, 104 China, 21, 295 currency in, 23, 64, 74–75, 77, 81 exchange rates of, 75 CIP See covered interest rate parity Claessens, Stijn, 113 Cochrane, John, 45–52, 78–79, 97, 118–21, 153, 170, 258–59, 263 Code of Liberalization of Capital Movements, of OECD, 109 COFER See Currency Composition of Official Foreign Exchange Reserves collateral in layered payment system, 131–32, 133, 142–43 no lending to fundamentally unsound firms and, 185, 185n13 short safe debt as, 127 U.S dollar and, 62 voluntary reserves averaging and, 183 collateral ratio, xii, 133–35, 137, 143, 148 Congress, U.S Federal Reserve and, xiii, 286 Federal Reserve balance sheet and, 233–34, 245, 286 fiscal policy of, 221, 233–34 price stability and, 272 reserves and, 217 U.S dollar and, 79 Congressional Budget Office, 232–33 Connally, John, 84 Consumer Financial Protection Bureau, 286 convenience yields, 126, 149, 150 corridor system, 179–82 epsilon in, 179, 180–81 for federal funds rate, 222 of Federal Reserve balance sheet, 204, 213–20 interest rates in, 197 monetary policy in, 204 in New Zealand, 188 reserves in, 129, 177, 202 SOMA and, 205n9 voluntary reserves averaging in, 182–83 countercyclical fiscal policy, in EMs, 121 337 countercyclical monetary policy, 226, 289–90 covered interest rate parity (CIP), 70–71, 73 credit channel, 247, 250, 251 credit easing, of Federal Reserve, 223 credit growth, 14 crypto-currencies, 64 currency in China, 23, 64, 74–75, 77, 81 devaluation of, 23, 64 dominance of, 60–64, 60f for exports, 53 fiat, 48 interest rates and, 275 for invoicing, 57 in layered payment system, 131 macroprudential policy and, 106–7 overvaluation of, 90–91, 101, 119 pricing paradigm, 54, 57–58 trade and, 53 wars, 23, 53 Currency Composition of Official Foreign Exchange Reserves (COFER), of IMF, 59 cybersecurity, 306 Dallas Federal Reserve, xiv, 291, 293–94, 295 de Blas, Beatriz, 23 debt deflation, 40 of governments, 42, 80–81, 132, 294 interest rates and, short safe, 127, 134, 135 short-term, 117, 126, 127 debt-to-GDP ratio, in U.S., 314 Dees, 20 deflation, 40, 45, 272 demand factors, on inflation, 273–74 demand-creating, 4, 5, 8, 22 demand-switching, 4–6, 8, 22 demographics, 266–67, 291 deposits of banks, 166–67 facility rate, 129 insurance, 156n2 liquidity of, 133, 135, 142 liquidity ratio and, 136 liquidity shocks and, 136 low rates of, 147 short-term, 156 spreads, 147 derivatives, 99, 108 designated financial market utilities (DFMUs), 201, 206n11 Deutsche Bundesbank, 240 338 Devereux, Michael, 54 DFMUs See designated financial market utilities Dhawan, Juhi, 74–75 direct investment FDI, 100, 108 IV and, 99 discount rate, 213, 214, 240 discretion, versus rules, 111, 311 disorderly market conditions, 87 Dodd-Frank Act, 302 Dollar Dominance in Trade and Finance (Gopinath), xi domestic mandate, of central banks, 8, 14, 15, 25–26 Dorn, Jim, 77 Dornbusch, Rudi, 98, 99 Du, Wenxin, 59 duration assets, 241–42 ECB See European Central Bank education, 293–94, 293n3, 295 Edwards, Sebastian, xi–xii, 46–47, 111, 112, 113, 188–89, 274–75 Eichengreen, Barry, 18, 60, 64 elasticity of growth, 35 emerging markets (EMs) asset price bubbles in, 10 boom-bust cycles and, 87 capital controls in, 87 capital flows of, 6, 6f, 10, 16–17, 87–94 central banks of, 12–13 CFM for, 87–94 countercyclical fiscal policy in, 121 equity of, euro in, 58 event studies for, 21–22 exchange rates in, 16 exports of, 62, 63 FAVAR and, 21 fear of floating in, 18–19 Federal Reserve and, 110 financial markets in, 21 in global financial crisis, 91 imports of, 61 interest rates in, 22 IV and, 110 leverage in, 6–7, 7f long-term interest rates of, 22 macroprudential policy for, 88 QE and, 20, 109 safe assets for, 61 self-defense measures of, 90–91 short-term interest rates of, 22 Index spillover effects to, 91 U.S dollar in, 58, 61–63 employment/unemployment, xiv, 4, 28, 38, 223, 257, 284 FOMC and, 299 inflation and, 274, 312–13, 318 price stability and, 270, 272, 283 EMs See emerging markets end user layer, for monetary policy, 131–32 Engel, Charles, 54 enhanced supplementary leverage ratio (eSLR), 154–55, 290 EONIA See euro overnight index average epsilon, in corridor system, 179, 180–81 equilibrium liquidity ratio, 137–38 equilibrium strategies, 39 equity assets and, 175 of banks, 132, 134–35, 147 of EMs, Erceg, Christopher J., 18 eSLR See enhanced supplementary leverage ratio euro, 48, 55, 58, 63, 74, 77–78 euro overnight index average (EONIA), 129 European Central Bank (ECB), 129 event studies, 21–22 excess reserves duration assets and, 241–42 federal funds rate and, 240 of Federal Reserve, 237–60 financial stability and, 238 IOER, 213, 214–15, 217, 228, 286 liquidity and, 255 long-term interest rates and, 241, 242 monetary policy and, 241 QE and, 238, 241, 247 RRP for, 249 ON RRPs and, 237 short-term interest rates and, 250 stigma and, 247–49 transmission mechanism for, 249–50 Treasury securities and, 255 zero duration, 246 exchange rates beggar-thy-neighbor effects and, 23, 36–37 Bretton Woods and, 3, 46 capital flow management for, ix central banks and, 49 CFM and, 107–8, 111 of Chile, 100 of China, 75 demand-switching and, 4–6 Index depreciation of, 3, 13, 16, 35, 36, 57–58 elasticity of growth and, 35 in EMs, 16 flexibility of, 18, 53 floating, 85 IMF and, 26–29, 101 indeterminacy of, 48 inflation and, 3–4 of Japan, 12 monetary policy and, 48–49 negative spillovers from, 12 new rules for, 9–15 QE and, 11–12 shocks and, 18, 107 spillover effects from, stabilization of, 47 SVARs and, 19–20 terms of trade and, 53 trade and, 40 UMP and, 5, 49 in U.S., 22 on U.S dollar, 40, 48 volatility of, 61, 109 exit strategy principles, of FOMC, 218–19 exorbitant privilege, of U.S dollar, 59–60, 79 exports assets of, 68, 68f capital flows and, 111 currency for, 53 of EMs, 62, 63 euro for, 55 invoicing, 111 monetary policy and, 11, 37 U.S dollar for, 57, 68–70, 68f, 71 factor augmented vector autoregression (FAVAR), 21 Fannie Mae, 183 FAST Act, 233 FAVAR See factor augmented vector autoregression FBOs See foreign banking organizations FDI See foreign direct investment FDIC, 308 fear of floating, in EMs, 18–19 federal funds rate corridor system for, 222 equilibrium liquidity ratio and, 137–38 excess reserves and, 240 of Federal Reserve, 204, 217, 223, 240 Federal Reserve balance sheet and, 167 FOMC and, 102, 209, 220, 283, 284, 295 inflation and, 313 IOER and, 217, 286 339 money market rates and, 210n17, 214–15, 215f, 216 normalization of, 286 price signals and, 248–49 reserve balances and, 214, 285–86 r-star and, 266 as safe asset, 266 of U.S., 125, 128–29, 151 Federal Open Market Committee (FOMC), ix, 153 employment and, 299 event studies and, 21 exit strategy principles of, 218–19 federal funds rate and, 102, 209, 220, 283, 284, 295 Federal Reserve balance sheet and, 197 floor system and, 210–11 forecasts of, 218, 226f global financial crisis and, 216–17 inflation and, 299 interest rates and, 118, 252–53 long-run policy of, 210n16 MBS and, 218–19 monetary policy and, xiii–xiv, 198 New York Fed and, 232 normalization and, 165 Policy Normalization Principles and Plans of, 158–59, 198, 198n1, 201–2 on reserve balances, 201–2 reserves and, 160–61 Statement of Longer-Run Goals and Strategies of, 288 Treasury securities and, 200n4 voluntary reserves averaging and, 182 Federal Reserve Addendum to the Policy Normalization Principles and Plans of, 228, 229f aggregate demand and, 258 bank deposits and, 166–67 Brazil and, 50 capital controls of, 106 Congress and, xiii, 286 corridor system of, 204, 213–20 credit channel and, 251 credit easing of, 223 discount rate and, 240 EMs and, 110 excess reserves of, 237–60 federal funds rate of, 204, 217, 223, 240 financial markets and, 166, 284 forecasting of, 224 future of, 193–95, 197–211 global financial crisis and, xiii, xiv, 206, 206f, 221, 283–84 340 Index Federal Reserve (continued) Great Recession and, 298 independence of, 302 interest rates of, 126, 186, 206, 206f, 208–9, 216 IOER and, 234 LCR and, 153–95 liabilities of, 201f, 207f, 208n13, 246 as LOLR, 181n12, 230 long-run operating framework for, 285–87 long-run size of, 158, 158n6 macroprudential policy of, xiv maintenance period of, 179, 179n11 market rate of, 117, 240 MBS and, 222–23, 228, 229–30, 230f, 231f, 232, 286 Mexico and, 102 monetary policy of, 158, 222, 230–34 New York Federal Reserve on, 198–99, 199n3 normalization of, 113, 165–66, 198–200 overnight interbank rate of, 191 portfolio investment and, 165–66, 216 QE of, 159, 225–27, 250 reducing, 160, 160n8, 198 reinvestment policy of, 226 repo market and, 218 reserve balances of, 158–61, 159f, 187 reserve requirements and, 155, 155n1 reserves of, 201f, 207f, 208n13, 213–14, 214f, 285 ON RPPs and, 285, 286 RRP and, 150–51 short-term debt and, 117 short-term interest rates of, 216, 240 SIGMA of, 16 SOMA of, 164–65, 165f, 205n9 strategic framework for, 287 stress tests of, 186 transmission mechanism of, 249–50 transparency of, 232 Treasury Department and, 200–201 Treasury securities and, 161, 217, 218f, 219, 286 U.S dollar and, 79 voluntary reserves averaging and, 184 See also specific offices Federal Reserve Act, 248, 258, 279 Federal Reserve balance sheet, 297–98 Congress and, 233–34, 245, 286 enlargement of, 230–32 financial stability and, 246–47, 288–90 fiscal policy and, 245, 297–98 floor system of, 168, 208–9, 213–20, 228 global financial crisis and, 283–84 interest rates and, 231–32 MBS on, 222 normalization of, xiv, 165–66, 200n4, 288 QE and, 193–94, 221, 238, 245, 297 reducing, 297–98 reserve balances in, xiii r-star and, 267–68, 298 Stay Big or Slim Down?, 237–60 strategy for, 221–34 Treasury Department and, 232–33 Treasury securities on, 222, 243–44, 298 Federal Reserve notes, 163–66 Feenstra, Robert C., 23 Fernald, John, 266 fiat currency, 48 Fighting for Freedom (Skidelsky), 41 Filardo, Andy, 316–17 financial markets Arrow-Debreu securities of, 53–54, 54n1 in EMs, 21 Federal Reserve and, 166, 227–28, 284 floor system and, 254 financial stability, 91, 171–72, 238 Federal Reserve balance sheet and, 246–47, 288–90 FX and, 92, 94 monetary policy and, 11, 288–90 uncertainty of, 284, 288–90 voluntary reserves averaging and, 182–84 Finch, David, 98 fiscal policy of Congress, 221, 233–34 countercyclical, in EMs, 121 Federal Reserve balance sheet and, 245, 297–98 monetary policy and, 232–34 r-star and, 267 Fisher, Peter, xiii, 257–58, 259, 297 fixed income markets, 130–31 fixed investment, CFM and, 112 Flexible System of Global Models (FSGM), 16 floor system of Federal Reserve balance sheet, 168, 208–9, 213–20, 228 financial markets and, 254 FOMC and, 210–11 interest rates in, 197 market rate in, 177 reserves in, 128, 189, 202–3 voluntary reserves averaging and, 184 FOMC See Federal Open Market Committee Forbes, Kristin J., 23, 107–8, 111 foreign banking organizations (FBOs), 219 foreign direct investment (FDI), 100, 108 Index foreign exchange market (FX), 92, 94, 100, 108 foreign exchange market intervention (FXI), 87, 90, 92 foreign repo pool, 206, 208n13 fractional-reserve banking (FRB), 172, 224 Fratzscher, Marcel, 107–8, 109, 111 FRB See fractional-reserve banking Freddie Mac, 183 free capital mobility, 102 Friedman, Milton, 38–40, 41, 43, 44, 47–48, 53, 83, 85, 158 Friedman rule, 141, 143 FSGM See Flexible System of Global Models Fujiwara, Ippel, 18 The Future of Central Bank Balance Sheets (Logan, Fisher, Levy, and Nelson), xiii FX See foreign exchange market FXI See foreign exchange market intervention G4, 19–20 G20, x, 25 GDP See gross domestic product George, Esther, xiv, 301–2, 310, 313, 315–16, 318 Ghosh, Atish, 18, 105–6, 109, 110, 120 GIMF See Global Integrated Monetary and Fiscal Model global financial crisis bank deposits since, 166 capital flows and, 94 EMs in, 91 Federal Reserve and, xiii, xiv, 221, 283–84 Federal Reserve balance sheet and, 283–84 FOMC and, 216–17 interest rates and, 206, 206f, 213, 290 IV and, 102 LCR and, 175 liquidity regulation and, 156 monetary policy and, 230–31 price signals in, 253–54 QE and, 225 reserve balances and, 201–2 reserves and, 128 Global Integrated Monetary and Fiscal Model (GIMF), 16 Global Protection Model (GPM), 16 global risk aversion, global systemically important banks (GSIBs), 288n2, 290, 315 global vector autoregression (GVAR), 20–21 global vector correction model (GVECM), 20–21, 24 globalization, 94, 294–95 341 gold exchange standard, 40, 79, 173 Goodfriend, Marvin, 275 Gopinath, Gita, xi, 48–49, 54, 57–58, 60–61, 63, 67, 73–81 government bonds SVARs and, 20 See also Treasury securities governments balance sheet of, 143–44 debt of, 42, 80–81, 132, 294 layered payment system and, 143–44 reserves of, 143 government-sponsored enterprises (GSEs), 201, 219, 222 GPM See Global Protection Model Great Depression, 3, 41, 85 Great Recession, 105, 284, 298 See also global financial crisis green monetary policy, 11–12, 11n1, 13, 24, 33–34 Greenlaw, David, 239 Greenspan, Alan, 102 Gresham’s Law, 242 gross domestic product (GDP) government debt and, 294 nominal targeting, 298, 301, 308, 309 gross domestic product (GDP), growth of, 224, 225f, 226f Dallas Federal Reserve on, 291 debt-to-GDP ratio and, 314 uncertainty of, 302 GSEs See government-sponsored enterprises GSIBs See global systemically important banks Guerrieri, Luca, 18 Guitian, Manuel, 98 Gulf Cooperation Council, 20 GVAR See global vector autoregression GVECM See global vector correction model Haberis, Alex, 17 Hall, Robert, 75–76, 117, 118, 149, 150 Hamilton, Gary G., 23 Hansen, Lars, 39 Harlow, Bryce, 84 Heckman, Jim, 100 hedging, 62–63, 98 Heller, Robert, 76–77, 272 heteroskedasticity method, 19–20 high-quality liquid assets (HQLA) of banks, 157–58, 161–62, 162f, 166 in reserve balances, 168 reserve requirements in, 190–91 as reserves, 256 Treasury securities as, 162, 162f, 166 342 Index Hofmann, Boris, 22 Hoover, Herbert, 38, 40, 41–42 House Financial Services Committee, 233 household sector interest rates and, 149 liquidity constraints on, 141 portfolio investment of, 137 short safe debt of, 134–35 stock markets and, 147 HQLA See high-quality liquid assets Iceland, CFM in, 103–4 IMF See International Monetary Fund imports assets of, 68, 68f capital flows and, 111 domestic demand-and, of EMs, 61 invoicing, 111 liabilities of, 68, 68f from Mexico, 295 of U.S., 57 U.S dollar for, 68–70, 68f, 71, 76 India, U.S dollar and, 55 inflation, 264 capital inflows and, 90–91 central banks and, CFM and, 111 current state of, 3, 284 demand factors on, 273–74 employment and, 274, 312–13, 318 exchange rates and, 3–4 federal funds rate and, 313 FOMC and, 299 Great Recession and, 284 in Iceland, 38 long-run policy on, xiv–xv public expectations of, 47 QE and, 225 r-star and, 265, 268–71 supply factors on, 273–74 targets for, 270–71 ZLB and, 273, 275 inside money, 125–26, 131 Institutional View (IV), of IMF, xi–xii, 89–90 capital controls and, 89, 110 capital flows and, 105–9 CFM and, 97–114 EMs and, 110 ISD and, 120–21 uncertainty and, 110–11 Integrated Surveillance Decision (ISD), 120–21 interbank market convenience yields on, 126 layered payment system and, 127–28, 132 reserves and, 127–28, 132 U.S federal funds rate and, 128–29 interbank rate, 127–28, 151 overnight, 131, 191 interest rate on excess reserves (IOER), 213, 214–15, 217, 228, 234, 286 interest rates in AEs, 16, 91 bank deposits and, 166–67 as benchmark rate, 130 of central banks, 64, 125, 126, 129–30 CFM and, 107–8, 111 collateral and, 133 Congressional Budget Office and, 232–33 in corridor system, 197 credit channel and, 250 debt and, in EMs, 22 of Federal Reserve, 126, 186, 206, 206f, 208–9, 216 Federal Reserve balance sheet and, 231–32 financial stability and, 11 in floor system, 197 FOMC and, 118, 252–53 global financial crisis and, 206, 206f, 213, 290 in Japan, 45 liquidity and, 133, 137 monetary policy and, 265 QE and, 11–12 reserves and, 118, 127–28, 204–5, 204n8, 210, 285 RRP and, 150–51 short-term debt and, 126 U.S dollar and, 69, 75 ZLB on, 17–18, 129, 130 See also specific types International Monetary Fund (IMF) Articles of Agreement of, 26–28, 109 capital controls and, 83, 98–99 capital flows and, 83–85 COFER of, 59 exchange rates and, 26–29, 101 FAVAR and, 21 GVAR and, 20 moral hazard and, 100–101 Principles for the Guidance of Members’ Exchange Rate Policies of, 27 spillover effects and, 16, 25 Uruguay and, 104 See also Institutional View International Rules of the Monetary Game (Rajan), xi invoicing currency for, 57 exports, 111 Index imports, 111 in U.S dollars, 62–63, 68–70, 68f, 71 IOER See interest rate on excess reserves ISD See Integrated Surveillance Decision Itskhoki, Oleg, xii IV See Institutional View Ivashina, Victoria, 58 Jackson Hole Symposium, 223 Japan, 12, 45, 48, 57 junk bonds, 77–78 Kalemli-Ozcan, Sebnem, 59 Kamil, Herman, 59 Kamin, Steven B., 16, 22 Kansas City Federal Reserve, xiv Kaplan, Robert, xiv, 301–2, 306, 309–18 Kareken, John, 47–48 Keynes, John Maynard, 41 King, Mervyn, 174, 174n6 Koenig, Evan, 298 Krishnamurthy, Arvind, 149–50 Krueger, Anne, 104 laissez-faire, 94 large-scale asset purchases (LSAPs), 223 late-day payment shock, 253–54 layered payment system assets in, 132–33, 132f bank leverage and, 133–35 bankruptcy and, 149 collateral in, 131–32, 133, 142–43 currency in, 131 governments and, 143–44 liquidity of, 131–32, 135–37 monetary policy with, 125–52, 132f LCR See liquidity coverage ratio Leiderman, Leonardo, 111 lenders of last resort (LOLR) central banks as, 63–64, 170 Federal Reserve as, 181n12, 230 as liquidity insurance, 173 voluntary reserves averaging and, 182–83 Lenel, Moritz, 128 leverage of banks, 133–35, 248, 316 in EMs, 6–7, 7f leverage ratio, 316 eSLR, 154–55, 290 GSIB and, 315 Levin, Andrew, 79, 186, 259 Levy, Mickey, xiii, 256, 312–13 liabilities, xiv, 67 of banks, 58–59, 61, 68, 68f of Federal Reserve, 246 343 foreign repo pool as, 208n13 of imports, 68, 68f short-term, MCC and, 174–75, 174n6 in U.S dollar, 68 zero duration, 242 “The Liberalization and Management of Capital Flows: An Institutional View” (IMF), 105 Lim, Eun Mie, 23 Linde, Jesper, 18 Lipinska, Anna, 17 liquidity of assets, 143 of banks, 127, 163, 168, 238 bilateral, 175 central banks and, 247 convenience yields and, 150 on demand, 80 of deposits, 133, 135, 142 excess reserves and, 255 insurance, 7, 172, 173 interest rates and, 133, 137 IOER and, 219–19 of layered payment system, 131–32, 135–37 QE and, 238 regulations, 155–58 reinsurance regime, 173 of reserves, 136, 142–43, 175 risk, 156, 156n2 of shadow banks, 248 SOMA and, 205n9 in U.S., 168 See also high-quality liquid assets liquidity constraints, 146–47 on banks, 135, 142 deposit spreads and, 147 on household sector, 141 liquidity coverage ratio (LCR), xii banks and, 216 central bank balance sheet and, 175 Federal Reserve balance sheet and, 153–95 global financial crisis and, 175 in MCC, 174–75 QE and, 191 as reserve requirement, 175 in U.S., 157 liquidity ratio, 148 of banks, 136–37, 143 equilibrium, 137–38 monetary policy tightening and, 139 in U.S., 138 liquidity shocks, 135 banks and, 146 in corridor system, 180 344 liquidity shocks (continued) deposits and, 136 preinsurance against, 175, 181, 188 Lo Duca, Marco, 109 loan-to-value ratio, 107, 108 local currency pricing paradigm, 54 Logan, Lorie, xiii, 252–53, 259–60 LOLR See lenders of last resort Lombard rates, 240 Lombard Street (Bagehot), 43 London Financial Conference, 41–42 long-term bonds, 5, 19–20 long-term interest rates, 16–17 of EMs, 22 excess reserves and, 241, 242 QE and, 238, 250 yield curve and, 242 LSAPs See large-scale asset purchases Lucas, Donald, 39 macroprudential measures (MPMs), 18, 88, 92, 107–8 macroprudential policy, 289 capital controls and, 88 CFM and, 106–7 currency and, 106 for EMs, 88 of Federal Reserve, xiv in U.S., 298–99 maintenance period of Federal Reserve, 179, 179n11 voluntary reserves averaging and, 182 Mancera, Miguel, 102 market rate of Federal Reserve, 117, 240 in floor system, 177 IOER and, 219–19 New York Federal Reserve and, 285 policy rate and, 180 ON RRP and, 209n15 Mattis, Jim, 195 maturity transformation, of banks, 155–56 MBS See mortgage-backed securities MCC See Money-Credit Constitution Medicare, 274 Melvin, Michael, 76 MENA See Middle East and North Africa Mertens, Thomas, 268 metric system, U.S and, 76 Mexico Federal Reserve and, 102 imports from, 295 voluntary reserves averaging program in, 188–89 Index Middle East and North Africa (MENA), 20 Mishra, Prachi, xi, 110, 113 Mohaddes, Kamiar, 20 Moley, Raymond, 47 monetary economics, 50 monetary operating system ceiling system for, 177–78 in long-run, 285–87 MCC and, 176–84 See also corridor system; floor system monetary policy in AEs, 8, 112–13 aggregate demand and, 80 asset price bubbles and, 14 assets and, 253 asymmetric consequences of, 15 bank layer for, 125, 131 capital flows and, 6, 6t, 14 of central banks, xi in corridor system, 180, 204 countercyclical, 226, 289–90 for employment, 28, 38 end user layer for, 131–32 excess reserves and, 241 exchange rates and, 48–49 exports and, 11, 37 of Federal Reserve, 158, 222, 230–34 in Federal Reserve Act, 279 financial stability and, 11, 288–90 financial system efficiency and, 154–55 fiscal policy and, 232–34 of FOMC, xiii–xiv, 198 global financial crisis and, 230–31 green, 11–12, 11n1, 13, 24, 33–34 interest rates and, 265 international rules for, 3–51, 6f, 7f with layered payment system, 125–52, 132f for liquidity on demand, 80 new rules for, 9–15 normalization of, 113, 291 orange, 9, 11, 13, 24, 26, 34–35 red, 9, 10, 12, 13, 24, 34 reform in practice and, 279–90 ON RPPs of, 206n11 r-star and, 269 spillover effects from, 4, 8, 9, 10, 12–13, 14, 15, 24–28 stigma and, 181, 181n12 strategic framework for, 311 stylized form of, 202–3, 203f tightening of, 138–39 transmission mechanism of, 249–50 in U.S., 22, 291–99 See also unconventional monetary policies Index Monetary Policy and Reform in Practice (Plosser), xiii–xiv Monetary Policy with a Layered Payment System (Piazzesi and Schneider), xii monetary politics, 50 money market rates, 208 epsilon and, 180 federal funds rate and, 210n17, 214–15, 215f, 216 QE and, 176 money markets central bank balance sheets and, 181 policy rate and, 179, 182 ON RRPs and, 254 money multiplier, 128 reserve rate and, 139 money shocks, 20 Money-Credit Constitution (MCC), xii, 170–73 monetary operating system and, 176–84 moral hazard capital controls and, 92 IMF and, 100–101 mortgage-backed securities (MBS), 198, 198n1 Federal Reserve and, 222–23, 228, 229–30, 230f, 231f, 232, 286 on Federal Reserve balance sheet, 222 FOMC and, 218–19 Treasury securities and, 200n4 MPMs See macroprudential measures Mundell, Bob, 98 Mundell-Fleming paradigm, 53, 54, 55, 67 NAFTA See North American Free Trade Agreement negative spillovers, 23, 33, 35, 112, 113 from exchange rates, 12 from hedging, 63 Nelson, William, xiii, 190–91, 255–56, 315 network effects, of U.S dollar, 76–77 neutral interest rate (r-star), xv central bank balance sheets and, 267–68 demographics and, 266–67 Federal Reserve balance sheet and, 298 fiscal policy and, 267 forecasts for, 296 inflation and, 265, 268–71 monetary policy and, 269 productivity growth and, 267 QE and, 269 safe assets and, 267 uncertainty of, 265–66 New Keynesian model, 128, 129–30 345 New York Federal Reserve, xiii, 170, 177, 255–56 on corridor system, 179 on Federal Reserve balance sheet, 198–99, 199n3 FOMC and, 232 foreign repo pool and, 206 market rate and, 285 New Zealand, 181 corridor system in, 188 Nixon, Richard, 84 no lending to fundamentally unsound firms, 185, 185n13 nominal GDP targeting, 298, 301, 308, 309 normalization capital flows and, 16 of federal funds rate, 286 of Federal Reserve balance sheet, xiv, 165–66, 200n4, 288 FOMC and, 165 of monetary policy, 113, 291 Policy Normalization Principles and Plans, of FOMC, 158–59, 198, 198n1, 201–2 uncertainty with, 198 North American Free Trade Agreement (NAFTA), 295 Nunn, Sam, 80 Obstfeld, Maurice, 59 OECD See Organisation for Economic Cooperation and Development OMOs See open market operations ON RRPs See overnight reverse repurchase agreements open market operations (OMOs) at Bank of England, 191 in ceiling system, 177 of central banks, 202 in corridor system, 180, 181 short-term interest rates and, 205n10 voluntary reserves averaging and, 182–83 open market sale, 127–28 monetary policy tightening and, 138–39 Operation Twist, 223, 224 orange monetary policy, 9, 11, 13, 24, 26, 34–35 Organisation for Economic Co-operation and Development (OECD) Code of Liberalization of Capital Movements of, 109 education in, 293, 293n3 IV and, 113 original sin, 58 originator countries, 101–2 346 Index Ostry, Jonathan, xi–xii, 18, 97–100, 102, 104, 105–6, 109, 110, 120–21 overheating, 21, 91–92, 316–17, 318 FXMI for, 87, 92 stress tests for, 289 overnight credit equilibrium liquidity ratio and, 137 liquidity from, 135–36 overnight interbank rate, 131, 191 overnight reverse repurchase agreements (ON RRPs), 206n11, 207, 208–9, 209n15, 222 excess reserves and, 237 Federal Reserve and, 285, 286 money markets and, 254 par value system, 85 Park, Jung Sun, 98 parsimony central bank balance sheets and, 176–77 voluntary reserves averaging and, 184 pawnbroker for all seasons, 174 Penn Central, 83–85 pension funds management, 102 Pesaran, M Hashem, 20 Phillips curve, 258, 279, 317, 318 Piazzesi, Monika, xii, 125, 128, 130–31, 135, 146 Pigouvian tax, MPMs as, 92 Plagborg-Møller, Mikkel, 57–58 Plosser, Charles, xiii–xiv, 233, 279–81, 297, 311 Policy Normalization Principles and Plans, of FOMC, 158–59, 198, 198n1, 201–2 policy rate in Argentina, 101–2 in ceiling system, 177 of central banks, 130, 176 in corridor system, 179, 180 market rate and, 180 money markets and, 179, 182 QE and, 221 voluntary reserves averaging and, 184 portfolio investment Federal Reserve and, 216 on Federal Reserve balance sheet, 165–66 Friedman rule and, 141 of households, 137 IV and, 99 Powell, Jerome “Jay,” 101–2, 220, 228 Prasad, Eswar, 77 preinsurance, against liquidity shocks, 175, 181, 188 Prescott, Ned, 39, 41–42 price signals federal funds rate and, 248–49 in global financial crisis, 253–54 for reserve balances, 244–45, 248–49 price stability central banks for, 170 Congress and, 272 employment and, 270, 272, 283 r-star and, 265 See also inflation Principles for the Guidance of Members’ Exchange Rate Policies, of IMF, 27 producer currency pricing paradigm, 54, 57–58 productivity growth demographics and, 292 regulation and, 273 r-star and, 267 in U.S., 293–94 Program for International Student Assessment, 293n3 protectionism, in Great Depression, 85 push factors in AEs, 113 on capital flows, 90–91, 107 Puy, Damien, 113 quantitative easing (QE), 5, 11–12, 223–24 for aggregate demand, 176, 239, 242–43, 250 in ceiling system, 177 employment and, 257 for EMs, 109 equilibrium liquidity ratio and, 138 excess reserves and, 238, 241, 247 of Federal Reserve, 159, 225–27, 250 of Federal Reserve balance sheet, 193–94, 221, 238, 245, 297 FRB and, 224 LCR and, 191 liquidity and, 238 long-term interest rates and, 238, 250 MBS in, 225 money market rates and, 176 policy rate and, 176, 221 r-star and, 269 stock markets and, 224 Treasury securities and, 243–44 in UK, 190 in U.S., 20, 138 in voluntary reserves averaging, 183 yield curve and, 241 ZLB and, 190 Quarles, Randal, xii–xiii, 170, 173, 177, 183–84, 186–87, 188, 191, 252, 255 Index Quarterly Journal of Economics, 47–48 quotas, CFM and, 112 Qureshi, Mahvash S., 105–6, 109, 110, 120 race to the bottom, 5–6 Raissi, Mehdi, 20 Rajan, Raghuram, xi, 38–52, 79, 91, 110, 113, 257–58 Razin, Assaf, 97 Reagan, Ronald, 76 real effective exchange rate (REER), 37 real exchange rate, 17, 38 CFM and, 111 red monetary policy, 9, 10, 12, 13, 24, 34 REER See real effective exchange rate reform in practice, monetary policy and, 279–90 Regional Economic Information Network (REIN), of Atlanta Federal Reserve, 305–6 regulation, productivity growth and, 273 REIN See Regional Economic Information Network Reinhart, Carmen M., 111, 239 reinvestment policy, of Federal Reserve, 226 repurchase (repo) market Federal Reserve and, 218 foreign repo pool, 206, 208n13 reserves and, 204 See also overnight reverse repurchase agreements; reverse repurchase agreement reserve balances bank runs and, 248 of banks, 163 of central banks, 162 federal funds rate and, 214, 285–86 of Federal Reserve, 158–61, 159f, 187 in Federal Reserve balance sheet, xiii, 187 FOMC on, 201–2 HQLA in, 168 LCR and, 157 price signals for, 244–45, 248–49 reserve currency, 75 UK pound as, 40, 57 U.S dollar as, 79 reserve demand curve, 202, 203 reserve rate, 126–27 convenience yield and, 149 equilibrium liquidity ratio and, 137–38 monetary policy tightening and, 138 money multiplier and, 139 reserve requirements for banks, 88 347 on capital controls, 108 Federal Reserve and, 155, 155n1 on FX, 108 in HQLA, 190–91 IV and, 99 LCR as, 175 See also voluntary reserves averaging program reserves of banks, 125–52, 161–62, 162f of central banks, 75, 128 collateral and, 142–43 collateral ratio and, 137 Congress and, 217 in corridor system, 129, 177, 179, 202 of Federal Reserve, 285 on Federal Reserve balance sheet, 213–14, 214f in floor system, 128, 189, 202–3 FOMC and, 160–61 global financial crisis and, 128 of government, 143 HQLA as, 256 interbank market and, 127–28, 132 interest rates and, 118, 127–28, 204–5, 204n8, 210, 285 liquidity of, 135–36, 142–43, 175 liquidity ratio and, 136 MCC and, 173 repo market and, 204 safe assets of, 201 uncertainty of, 205, 211 in U.S dollar, 63–64 See also excess reserves resolution regime, MCC and, 173 reverse repurchase agreement (RRP), 150–51, 208 for excess reserves, 249 short-term interest rates and, 249 See also overnight reverse repurchase agreements Rey, Hélenè, 22, 109 Rigobon, Roberto, 19, 23, 99–100 risk aversion global, of investors, 91 RLAP, 190 RLEN, 190 robustness, 39 Rogers, Ciaran, 128 Rogoff, Kenneth S., 239, 274 Roosevelt, Franklin D., 42–43, 47 RRP See reverse repurchase agreement r-star See neutral interest rate 348 Index rules, versus discretion, 111, 311 Russ, Katheryn, 23 Sack, Brian, 19 safe assets currency as, 60 for EMs, 61 federal funds rate as, 266 of reserves, 201 r-star and, 267 U.S dollar as, 61–62, 64 safe debt See short safe debt Sargent, Tom, xi, 46, 47–50 Schneider, Martin, xii, 125, 128, 130–31, 135, 146, 149–50 Schreger, Jesse, 59 Schuermann, Til, 20 Schwartz, Moisés, 188–89 self-defense measures, of EMs, 90–91 SEPs See summaries of economic projections shadow banks, 172 liquidity of, 248 Shambaugh, Jay C., 59 Shapiro, Adam, 274 Sherman, Brad, 233 shocks eSLR and, 154 exchange rates and, 18, 107 money, 20 spillover effects and, 19 SVARs and, 19–20 See also liquidity shocks short safe debt, 127, 134, 135 short-term debt, 117, 126, 127 short-term deposits, 156 short-term funding markets, 244–45 short-term interest rates of EMs, 22 excess reserves and, 250 of Federal Reserve, 216, 240 OMOs and, 205n10 RRP and, 249 r-star and, 265 yield curve and, 250 short-term liabilities, MCC and, 174–75, 174n6 Shultz, George, xi–xii, 80–81, 83–85, 117, 263–64 Siegenthaler, Beat, 275–76 SIGMA, 16 Siguler, Charlie, 187 Skidelsky, Robert, 41 skills gap, 293–94 Smithsonian Agreement, 84 Smyth, John, 77–78 SOMA See System Open Market Account spillback effects, of central banks, 14, 15 spillover effects assessment of, 24–28 from CFM, 112 to EMs, 91 from exchange rates, IMF and, 16 ISD and, 120–21 from monetary policy, 4, 8, 9, 10, 12–13, 14, 15, 24–28 MPMs and, 18 from QE, 11–12 shocks and, 19 with trade, 19 two-country models for, 17–19 in U.S dollars, 10, 14 See also negative spillovers stabilization fund, of Treasury Department, 102 Staiger, Robert W., 19 Statement of Longer-Run Goals and Strategies, of FOMC, 288 Stein, Jeremy C., 54, 60–61, 63, 75 Stigler, George, 38, 40, 43, 44, 83 stigma excess reserves and, 247–49 monetary policy and, 181, 181n12 stock markets household sector and, 147 QE and, 224 Straub, Roland, 107–8, 109, 111 stress tests, 315–16 for banks, 186 of Dodd-Frank Act, 302 of Federal Reserve, 186 for overheating, 289 structural vector autoregression (SVARs), 19–20, 24 Sturzenegger, Freddy, 101–2 Sudo, Nao, 18 summaries of economic projections (SEPs), 224 Summers, Larry, 102 supply factors, on inflation, 273–74 SVARs See structural vector autoregression Svensson, Lars, 12 System Open Market Account (SOMA), 164–65, 165f, 199f, 205n9 Takáts, Előd, 22 Taming the Tide of Capital Flows: A Policy Guide (Ghosh, Ostry, and Qureshi), 105–6 Index Taper Tantrum, 7, 257 tariffs, 19, 112 taxes on capital flows, 108 on FX, 108 government debt and, 42 Pigouvian, 92 Tobin, 92 U.S dollar and, 64, 75 Taylor, Alan M., 59, 83 Taylor, John, xi–xii, 11n1, 38, 49–50, 97, 102, 104, 109, 113, 117–21, 153, 170, 173, 263 Taylor Rule, 46, 130, 265 technology, skills gap and, 293–94 Teranishi, Yuki, 18 terms of trade, 54n1 exchange rates and, 53 TGA See Treasury General Account Thorsrud, Leif Anders, 21 Tobin tax, 92 trade currency and, 53 exchange rates and, 40 spillover effects with, 19 U.S dollar for, xi, 53–81, 56f See also exports; imports; terms of trade transmission mechanism, of Federal Reserve, 249–50 transparency, 186–87 of central banks, 15 of Federal Reserve, 232 Treasury Department, U.S Federal Reserve balance sheet and, 200–201, 232–33 stabilization fund of, 102 Uruguay and, 104 Treasury General Account (TGA), 164, 206n11, 208n13 Treasury securities excess reserves and, 255 Federal Reserve and, 161, 217, 218f, 219, 286 on Federal Reserve balance sheet, 167, 222, 243–44, 298 five-year term premium for, 217f FOMC and, 200n4 as HQLA, 162, 162f, 166 MBS and, 200n4 possible losses on, 245 QE and, 243–44 Trump and, 244n14 yields on, 223 trees of assets, 132, 132f short safe debt as, 135 349 Triple-B spread, 315 Trump, Donald, 244n14 Tucker, Paul, xii, 50, 79–80, 188, 191–92, 308 two-country models, for spillover effects, 17–19 UIP See uncovered interest rate parity UK See United Kingdom UMP See unconventional monetary policies uncertainty, 50 for financial stability, 284 of financial stability, 284, 288–90 of GDP growth, 302 IV and, 110–11 with normalization, 198 of reserves, 205, 211 of r-star, 265–66 unconventional monetary policies (UMP), 4, 13 asset price bubbles and, 34 exchange rates and, 5, 49 uncovered interest rate parity (UIP), 59 U.S dollar and, 67, 70–71 unemployment See employment/ unemployment United Kingdom (UK) QE in, 190 reserve currency of, 40, 57 U.S dollar and, 79–80 United States (U.S.) countercyclical monetary policy in, 289–90 debt-to-GDP ratio in, 314 demographics in, 291 education in, 293–94, 293n3 EMs and, 22 exchange rates in, 22 federal funds rate of, 125, 128–29, 151 globalization and, 294–95 government debt in, 294 imports of, 57 LCR in, 157 liquidity in, 168 liquidity ratio in, 138 macroprudential policy in, 298–99 metric system and, 76 monetary policy in, 22, 291–99 productivity growth in, 293–94 QE in, 20, 138 r-star in, 265–66 short safe bonds in, 135 skills gap in, 293–94 voluntary reserves averaging in, 183 See also Congress; Federal Reserve; Treasury Department; U.S dollar 350 Uruguay, 104 U.S See United States U.S dollar assets in, 68 central bank balance sheets and, 59 central banks and, 63–64, 75 circulation growth of, 200, 200n5 collateral and, 62 in EMs, 58, 61–63 versus euro, 63, 74 exchange rates on, 40, 48 exorbitant privilege of, 59–60, 79 for exports, 57, 68–70, 68f government debt and, 42, 80–81 hedging for, 62–63 for imports, 68–70, 68f, 71, 76 India and, 55 interest rates and, 69, 75 invoicing in, 62–63, 68–70, 68f, 71 liabilities in, 68 for loans, 58–59, 58f network effects of, 76–77 as reserve currency, 79 reserves in, 63–64 as safe assets, 61–62, 64 spillover effects in, 10, 14 taxes and, 64, 75 for trade, xi, 53–81, 60f UK and, 79–80 utils, 13 Venezuela central bank of, 101 CFM in, 103 Index Villegas-Sanchez, Carolina, 59 Volcker, Paul, 84, 85, 314 voluntary reserves averaging program, xii–xiii of central banks, 182–84 in Mexico, 188–89 Wallace, Neil, 47–48 Warsh, Kevin, xiii, 252, 255–60 Washington Consensus, 94 Weiner, Scott M., 20 Wieland, Volcker, 49–50 Williams, John, xiv–xv, 263–77, 296 World Trade Organization (WTO), 85 World War I, 40 World War II, 40 Wriston, Walt, 85 WTO See World Trade Organization Yellen, Janet, 239, 242–43 yield curve central banks and, 130 long-term interest rates and, 242 QE and, 241 short-term interest rates and, 250 zero duration assets, 241 excess reserves, 246 liabilities, 242 zero low bound (ZLB) deflation and, 272 inflation and, 273, 275 on interest rates, 17–18, 129, 130 QE and, 190 ... balance sheets and their potential role as a separate monetary policy instrument beyond the policy interest rate set by central banks A central bank balance sheet increases when the central bank. .. Michael and Rosalind Keiser Koret Foundation William E Simon Foundation John A Gunn and Cynthia Fry Gunn Currencies, Capital, and Central Bank Balances EDITED BY John H Cochrane Kyle Palermo John... assets (such as government bonds or foreign currency bonds), borrows from commercial banks, and gives out central bank reserves in return The first key policy question is whether central bank balance