Higher Rates Wouldn’t Tame Bubbles Even if Central Banks Tried, IMF Paper Says
By Pedro Nicolaci da Costa
.
- Federal Reserve officials shouldn’t use monetary policy to combat asset bubbles, says a new IMF working paper.
- GARY CAMERON/REUTERS
Economists at the International Monetary Fund have found a new reason for central bank officials to avoid using interest rates to dampen asset bubbles and market risk: it probably wouldn’t work.
That’s the finding of a new working paper that identifies different patterns in lending between banks and nonbanks. The gap means raising borrowing costs to curb market excesses might simply push risks into less regulated financial firms sometimes referred to as the “shadow” banking system.
“The different credit and business cycles magnify the tradeoffs of using interest rates to contain financial stability risks,” write IMF staffers Alexander Herman, Deniz Igan and Juan Solé. “From a policy perspective, our analysis is more supportive of placing greater emphasis on macroprudential measures than on using interest rates to address risks in the financial sector.”
By “macroprudential measures,” they were referring to regulatory and supervisory tools such as credit restrictions on specific industries or limits on loan-to-value ratios.
The research adds to the debate over whether central banks should consider raising interest rates to prick apparent financial asset bubbles while they are forming, to forestall the damage to the financial system that could occur if they burst on their own.
Before the financial crisis, the standard view at many central banks including the Fed was that, because asset bubbles are too hard to spot ahead of time, policy makers shouldn’t raise rates to restrain them. Instead, officials should wait until after they burst, and if necessary cut interest rates to help the economy recover afterward. This was sometimes referred to as “mopping up.”
The heavy toll of the 2008 financial crisis that followed the housing bubble, estimated at several trillion dollars in lost economic output and millions of jobs eliminated, led many policy makers to question that view. The mess was simply too great to mop up.
Many Fed officials now say interest rate increases should only be used as a second line of defense against asset bubbles because they could unnecessarily curtail economic recovery. San Francisco Fed President John Williams has argued against ever using rate increases to lessen financial stability risks, saying the cost would be far too high.
The IMF economists largely agree: “During output downturns, supervisory scrutiny should be intensified to counter the continued accumulation of financial risks.”
Regulators must do this by focusing on long-term risk trends, not simply short-run market fluctuations, the authors say.
“By adopting a short-term view and focusing on recent incremental changes in risk metrics, financial stability practitioners may miss the secular accumulation of key vulnerabilities,” they write. “The unpleasant analogy, here, is the one of the frog in the boiling pot.”
0 comments:
Publicar un comentario