## _sdn1403

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---

### Executive Summary — overview and central questions
- The global financial crisis challenged the pre-crisis monetary policy paradigm of a single overriding objective (price stability) and one instrument (a short-term policy interest rate).
- Pre-crisis: dangerous financial imbalances grew under stable output gaps and low inflation.
- Crisis aftermath: massive stimulus mitigated the downturn but could not prevent the deepest recession since the Great Depression as policy rates rapidly hit the zero lower bound (ZLB) and large swings in capital flows complicated macroeconomic management in small open economies.
- Purpose: review the debate to extract common policy conclusions and lay out unresolved issues; the paper raises more questions than it provides answers.

### Findings on monetary policy objectives
- Long-term price stability must remain a primary objective of monetary policy.
- Price stability alone is not sufficient for macro stability; additional intermediate objectives may be required:
  - Financial stability.
  - External stability.
- When feasible, additional objectives should be targeted with new or rethought instruments:
  - Macroprudential tools (LTV/DTI limits, dynamic provisioning, reserve requirements, countercyclical capital buffers).
  - Capital flow management (CFMs).
  - Foreign exchange (FX) intervention.
- If those instruments prove insufficient, interest-rate policy might need to play a role.
- Crisis highlighted limits in knowledge about transmission channels and macro relationships (e.g., effect of low policy rates on bank risk-taking; weakening of inflation–unemployment relationship), implying:
  - Reconsideration of model-based policy-response rules.
  - Interim policy approach involving “more art and less science.”
- International policy cooperation has potential benefits (especially for avoiding tail risks) but implementation and incentives remain unresolved.

### Findings on monetary policy instruments and the ZLB
- Central banks used unconventional tools (bond purchases, forward guidance) to provide stimulus as policy rates approached the ZLB and to ensure transmission amid disrupted markets.
- Assessment on making unconventional tools conventional:
  - With the exception of forward guidance, the paper concludes costs seem to exceed benefits for institutionalizing most UMP measures.
- Unresolved question: how to avoid hitting the ZLB again.

### Institutional design and governance — independence and mandates
- Central bank independence remains desirable to preserve price stability.
- Expanding central bank mandates (to include financial stability) may create political pressures that complicate independence.
  - Must protect independence of price-stability role while allowing adequate government oversight over new financial-stability responsibilities.
- Prudential policy needs a macro dimension, raising governance challenges between monetary policy and microprudential policy.
- Optimal institutional arrangements depend on country distortions but must balance:
  - Need for coordination and information sharing.
  - Safeguards to preserve credibility and independence.

### Policy implications and priority directions
- Preserve valid elements of the pre-crisis consensus: long-term price stability, clear mandates and accountability, transparency, and central bank independence.
- Rethink elements where empirical and theoretical advances warrant change.
- Priority policy directions:
  - Develop and use macroprudential tools, CFMs, and FX intervention to target intermediate objectives when possible.
  - Retain price stability as primary objective and protect central bank independence for that role.
  - Carefully assess role and potential regular use of unconventional tools; forward guidance is an exception that may be more acceptable.
  - Strengthen mechanisms for international cooperation to mitigate cross-border spillovers and tail risks, recognizing implementation challenges.
  - Design institutional arrangements enabling coordination among monetary, macroprudential, and microprudential policies while maintaining accountability and credibility.

*Source: Executive Summary, _sdn1403.*

### Monetary policy objectives — detailed findings and trade-offs
- Framework organization: discussion organized around (i) intermediate objectives and cooperation; (ii) avoiding ZLB and merits of unconventional tools; (iii) central bank independence and governance for macroprudential/microprudential/monetary policy.
- Country characteristics matter: advanced, emerging, low-income, large vs small, open vs closed economies face different challenges.

A. Financial stability as a monetary objective
- Pre-crisis “divine coincidence” (low/stable inflation implies output stability) broken by financial frictions.
- Monetary policy (policy rate) is a blunt tool for sector-specific imbalances; macroprudential tools are better targeted ex ante; financial restructuring is ex post.
- Macroprudential tools are relatively new, prone to circumvention and political constraints, and may be slow to adjust.
- Two approaches if monetary policy should protect financial stability:
  - Flexible inflation-targeting with a lengthened horizon (react to imbalances threatening long-term price stability).
  - Make financial stability an additional independent target (react to imbalances even if price stability not threatened).
- Practical challenges: multiple dimensions of financial stability, many indicators (leverage, credit growth, asset prices), bubbles hard to identify in real time.
- Model implications:
  - New Keynesian models with financial frictions imply small deviations from standard rules.
  - Nonlinear frameworks with multiple equilibria and market freezes imply larger effects.

B. Output stability weight in monetary policy
- Phillips curve appears to have flattened, especially in advanced economies.
- Implications of a flatter Phillips curve:
  - Strengthens case for flexible rather than strict inflation targeting.
  - Central banks may wait longer before reacting to inflation pressures to separate temporary from permanent movements.
  - For given reaction weights, a flatter Phillips curve implies responding more often to cost-push shocks, inducing undesirable output/unemployment fluctuations.
- Risk: changing reaction functions may unanchor expectations if flattening is conditional on credibility.
- Conclusion: until more is known, balance of risks argues against giving much greater weight to output stability.

C. External stability and exchange-rate considerations
- Capital-flow and exchange-rate volatility affect macro and financial stability, especially in small open economies with foreign-currency liabilities.
- Policy toolkit: CFMs, macroprudential policy, FX intervention; monetary policy may help when these are insufficient.
- Under imperfect asset substitutability, a mix of interest-rate policy and sterilized intervention can target inflation and exchange-rate stability (portfolio rebalancing channel); sterilized intervention less effective in deep integrated markets.
- FX intervention can operate through signaling (example: Swiss National Bank 2011 commitment to buy foreign currency and maintain floor at SF1.20 per euro via heavy nonsterilized purchases).
- Intervention should smooth temporary fluctuations rather than resist trend appreciations driven by fundamentals.
- Open questions: effectiveness of CFMs and FX interventions, complementarities/substitutability among FX interventions/CFMs/macroprudential policies, and negative multilateral side effects.

D. International monetary policy cooperation
- Reserve-currency policy changes induce global portfolio rebalancing and capital flows; spillovers matter when financial distortions present.
- Historical examples: Volcker disinflation, Latin American crises; swings in flows with U.S. liquidity and QE episodes.
- Gains from cooperation in normal times uncertain; some estimates small, others larger when global financial co-movements included.
- Empirical observation: debt-creating flows to emerging markets much higher when advanced-country interest rates and volatility were low. Sample periods identified as Low Rates, Low VIX: 1991-94, 1996, 2004-07, 2012-13:Q3.
  - Figure 3 reported values (labels correspond to gross and net inflow series under alternative financing conditions): 2.4, 0.7, 2.8, 3.3, 0.5, -0.3, 1.6, 2.0.
- Cooperation during crises yields significant gains (swap lines, coordinated fiscal stimulus, IMF resource expansion); welfare gains in tranquil times are ambiguous.
- Obstacles: asymmetries in country size, disagreement on economic situation and transmission, lack of recognition of trade-offs across objectives.
- Proposals: neutral assessor to bridge divergent national views; international monetary policy committee reporting to world leaders.
- IMF Integrated Surveillance Decision encourages countries to consider policies that engender less adverse spillovers while achieving domestic objectives.

### Monetary policy instruments — dealing with the ZLB and unconventional policy
A. Determinants of ZLB risk and strategies to reduce it
- ZLB risk increases when natural rates are lower; emerging markets less likely to face ZLB due to higher inflation and natural rates.
- Effectiveness of UMP at the ZLB:
  - UMP (bond purchases, forward guidance) lowered long-term yields with effects comparable to conventional policy in crisis periods (Annex 4); results mainly from periods of severe financial distress.
  - Concerns: calibration, exit complexity, diminishing returns; UMP may be less effective if ZLB reached without financial disruption.
- Recent literature: nonlinear models imply ZLB spells up to 10 years are not unlikely under some specifications.
- Four proposed strategies to reduce ZLB risk or increase resilience:
  1. Raising the inflation target.
     - Theoretical suggestions often put optimal inflation rarely above 3 percent, often between 1 and 2 percent; no consensus.
     - Credibility concerns: raising target once may create expectations of repeated increases (example: New Zealand change from 0-2 percent to 1-3 percent).
     - Costs: distortions in cash holdings, overinvestment in financial sector, relative-price uncertainty, tax distortions, redistribution, financial planning difficulties.
  2. Forward guidance to engineer temporarily higher expected inflation at ZLB.
     - Effective when central bank credibility is strong or supported by commitment devices (large long-term asset purchases).
     - Conditioning guidance on economic state preferred to calendar-based announcements, but may be interpreted as triggers.
  3. History-dependent rules (price-level targeting or nominal GDP targeting).
     - Keep policy accommodative until nominal GDP or price level returns to target path; implies future above-average inflation/nominal GDP growth to compensate undershoots.
     - Advantages: automatic expectation of higher inflation after undershoots; theoretically optimal with ZLB.
     - Practical problems: time-inconsistency temptation to renege, market reaction to extreme swings, political difficulty in later deflation, complications explaining nominal GDP target-path changes due to potential output revisions.
  4. Preemptive loosening (act aggressively to cut rates when deflation risks arise).
     - Increases frequency of ZLB episodes but mitigates their severity and duration.
     - Related: leaning against the wind during booms to strengthen financial system and enlarge room to cut rates later.

B. Should unconventional tools become conventional?
- Targeting long-term interest rates:
  - Arguments for: shield economy from term-premium shocks, focus on rates relevant for spending, diminish ZLB risk.
  - Costs/risks: greater short-end volatility, potential exchange-rate volatility in small open economies, welfare-relevant volatility with financial distortions, fiscal dominance risk.
  - Historical example: U.S. Fed ceilings on long-term rates 1942–1951.
  - Empirical anomalies: “Greenspan conundrum” (June 2004–June 2005: federal funds up 2 percentage points, 10-year yield down almost one percentage point); early fall 2008 FOMC cuts while long-term rates rose.
  - Conclusion: insufficient evidence to conclude benefits exceed costs.
- Managing the yield curve slope:
  - Proposals aim to reduce incentives for excessive maturity transformation; need more work comparing gains for financial stability vs macroprudential policy and welfare costs when objectives conflict.
- Broadening eligible collateral and counterparties:
  - Benefits: increase market depth/liquidity, free up HQLA to meet regulatory requirements.
  - Risks: moral hazard, reduced bank profitability/resilience, structural market changes, harder-to-price collateral, asset encumbrance undermining unsecured markets.
  - Requires enhanced central bank internal risk management.
- Credit easing (private asset purchases):
  - In crisis: helped restore intermediation and market functioning.
  - In normal times: could reduce real fluctuations by containing asset-price cycles via collateral/balance-sheet channels.
  - Concerns: inhibits price discovery, redistributive nature better suited to fiscal authorities (SME lending, guarantees), political interference and credibility risks.

### Evidence on UMP effectiveness (Annex 4)
- UMP decreased longer-term interest rates in early crisis event studies:
  - United States: mortgage-backed security yields decreased by around 150 basis points over the first LSAP 1; Treasury yields decreased by between 90 and 200 bps.
  - United Kingdom: cumulative effects on government bond yields range from 45 to 160 bps.
- Markets reacted quantitatively similarly to UMP and CMP announcements when measured by surprise components using two-year futures on the three-month local-currency LIBOR rates.
- Impact on aggregate demand less clear: reductions in term premia may have lower effects on output than decreases in risk-neutral expected future short rates.
- Diminishing returns: UMP may face diminishing returns as longer-term rates approach their own lower bound; no clear evidence so far of decreased marginal returns as balance sheets expanded.
- Undesirable features: calibration uncertainty, quantity-based strategy uncertainty, exit complications, perceived political/fiscal dominance risks.

### Institutional design — independence, mandates, and optimal arrangements
A. Risks to central bank independence
- Pre-crisis preference for instrument independence.
- Independence historically associated with lower inflation, but causality complex.
- Concerns with broader mandates:
  - Financial stability harder to measure than price stability.
  - Policy failures visible ex post, successes invisible, making defense of preemptive measures difficult.
  - Targeted tools create clearer winners/losers, complicating accountability and political economy.
- Empirical evidence (reported values in source):
  - Average inflation = 5.22 where central banks not in charge of bank supervision; average inflation = 6.81 where central banks are in charge of bank supervision.
  - Mean deviation = 1.14 (Goal-Independent Central Banks) and mean deviation = 2.62 (Instrument-Independent Central Banks) in Figure 4.
  - Among inflation targeters: average deviation = 3.16 (Central Banks not in Charge of Bank Supervision) and average deviation = 3.49 (Central Banks in Charge of Bank Supervision).
- Safeguarding independence with expanded mandates requires institutional design and accountability measures.

B. Institutional arrangements for microprudential, macroprudential, and monetary policy
- Macroprudential tools interact with monetary and microprudential policy; cross-spillovers mean policies will affect multiple mandates in practice.
- Trade-offs in options:
  - Separate authorities risk uncoordinated policy mixes dominated by individually optimal actions.
  - Consolidation (housing mandates in the central bank) may improve coordination but can jeopardize credibility and expose monetary policy to political interference.
- Practical institutional options:
  - Keep macroprudential outside central bank with strong information-sharing and interagency committees (examples: Australia’s CFR; Brazil’s CMN and BCB; committees in Chile, Mexico, Uruguay; U.S. FSOC).
  - House both mandates in the central bank with safeguards: separate decision-making structures (as in the United Kingdom and the ECB), separate reports to legislature, enhanced accountability and communication.
  - Singapore’s MAS: both monetary policy and macroprudential regulation reside in MAS with cross-agency collaboration.
- Bottom line: optimal arrangement depends on country-specific distortions and political-economy constraints; design should enhance information-sharing, credibility protections, and safeguards.

### Low-income countries and other special considerations (Annex 3)
- LIC crisis shocks: declines in terms of trade and export demand, shifts in investor risk appetite, capital flow volatility, higher country-risk premia, declines in credit, financial-sector balance-sheet strain.
- Outcomes for many LICs:
  - Not calamitous; many LICs bounced back faster than advanced economies.
  - Sound pre-crisis monetary frameworks allowed loosening policy, cushioning demand and supporting depreciation without unanchoring inflation expectations.
- Limitations revealed:
  - De jure reserve and broad-money targets do not provide clear frameworks for policy responses to shocks.
  - Example: Zambia—money-target concerns resulted in excessively tight policy during banking stress.
- Post-crisis developments:
  - Inflation increased in several countries during 2010–11 after prolonged low short-term interest rates and commodity price rises.
  - Prolonged accommodation sometimes due to optimistic broad-money/credit targets and lack of concern for interest-rate levels.
- Policy modernization trends:
  - Moves toward inflation targeting or adopting elements of modern policymaking: communication centered on inflation outlook, liquidity management, reliance on interest-rate channel, in-house forecasting/policy analysis.
- LIC-specific points:
  - ZLB less likely in LICs with higher average inflation and nominal rates.
  - In low-credibility settings, downturns may unanchor inflation, making ZLB constraint moot.
  - Sterilized FX interventions more effective in LICs given shallow markets and imperfect asset substitutability.
  - Interventions should not override inflation stabilization; lean-against-the-wind interventions preferred to exchange-rate level targeting.

### Key takeaways and open questions
- Crisis exposed limits of the pre-crisis “one target–one instrument” framework; monetary policy must be reconsidered in light of financial stability, external spillovers, and the ZLB.
- Many policy choices unresolved; further research needed on:
  - Indicators and targets for financial stability and operationalization.
  - Effectiveness, calibration, exit strategies, and welfare costs of UMP relative to CMP.
  - Complementarities and substitutability among monetary policy, macroprudential policy, CFMs, and FX intervention.
  - Institutional designs that preserve monetary-policy credibility while enabling effective macroprudential action and interagency coordination.
- Country-specific characteristics (income level, openness, financial development, size) determine appropriate mixes of objectives, instruments, and institutional arrangements.

*Source: IMF staff chapter titled "_sdn1403 - conclusions; on others, it identifies areas where theoretical and empirical advances are needed".*

### Executive Summary ......................................................................................................

### _sdn1403 - Executive Summary ......................................................................................................

### Overview and central questions
- The global financial crisis challenged the pre-crisis monetary policy paradigm that emphasized a single overriding objective (price stability) and one instrument (a short-term policy interest rate).
- Before the crisis, dangerous financial imbalances grew under stable output gaps and low inflation. After the bust, a massive stimulus mitigated the downturn but could not prevent the deepest recession since the Great Depression, as policy rates rapidly hit the zero lower bound (ZLB), and large swings in capital flows complicated macroeconomic management in small open economies.
- The paper reviews the debate to extract common policy conclusions where possible and to lay out unresolved issues. It raises more questions than it provides answers.

### Findings on monetary policy objectives
- Long-term price stability must remain a primary objective of monetary policy.
- Price stability alone is not a sufficient condition for macro stability; additional intermediate objectives may be required:
  - Financial stability.
  - External stability.
- When feasible, these additional objectives should be targeted with new or rethought instruments (macroprudential tools, capital flow management, foreign exchange intervention).
- If those instruments prove insufficient, interest-rate policy might need to play a role.
- The crisis highlighted limits in current knowledge about transmission channels (for example, the effect of low policy rates on bank risk-taking) and relationships among macro variables (for example, a weakening of the relationship between inflation and unemployment). This argues for:
  - Reconsidering model-based policy-response rules.
  - An interim policy approach involving “more art and less science” than before the crisis.
- Greater international policy cooperation has potential benefits (especially for avoiding tail risks) but how and whether such cooperation can be achieved remains open.

### Findings on monetary policy instruments
- Central banks used unconventional tools during the crisis (for example, bond purchases and forward guidance) to provide stimulus as the policy rate approached the ZLB and to ensure transmission amid disrupted markets.
- The assessment of whether unconventional tools should become conventional:
  - With the exception of forward guidance, the paper concludes that the costs seem to exceed the benefits.
- An unresolved question is how to avoid hitting the ZLB again in the future.

### Institutional design and governance
- Central bank independence remains desirable for preserving price stability.
- Expanding central bank mandates (for example, to include financial stability) may create political pressures that make independence more difficult to maintain.
  - It will be critical to protect the independence of the role of central banks in protecting price stability while allowing adequate government oversight over new responsibilities for financial stability.
- Prudential policy needs to acquire a macro dimension, raising governance challenges in relation to monetary policy and traditional microprudential policy.
- Optimal institutional arrangements will depend on the most important distortions in each country, but must balance:
  - The need for coordination and information sharing.
  - Safeguards that preserve credibility and protect independence.

### Policy implications and open issues
- Preserve elements of the pre-crisis consensus that remain valid: long-term price stability, clear mandates and associated accountability, transparency of policy actions, and central bank independence.
- Rethink elements where necessary in light of empirical and theoretical advances.
- Priority policy directions highlighted:
  - Develop and use macroprudential tools, capital flow management, and foreign exchange intervention to target intermediate objectives when possible.
  - Retain price stability as the primary objective and protect central bank independence for that role.
  - Carefully assess the role and potential regular use of unconventional monetary tools; forward guidance is an exception that may be more acceptable.
  - Strengthen mechanisms for international cooperation to mitigate cross-border spillovers and tail risks, while recognizing implementation challenges.
  - Design institutional arrangements that enable effective coordination among monetary, macroprudential, and microprudential policies while maintaining accountability and credibility.

*Source: Executive Summary, _sdn1403.*

### conclusions is not possible. Country characteristics matter, and thus the challenges are different

### _sdn1403 - conclusions is not possible. Country characteristics matter, and thus the challenges are different

### Overview and framing
- The paper organizes discussion around three main themes: (i) intermediate objectives of monetary policy and cross-country cooperation; (ii) steps to avoid hitting the ZLB and the merits of unconventional policy tools in normal times; and (iii) challenges for central bank independence and optimal governance for macroprudential, microprudential and monetary policy.
- Country characteristics matter: advanced, emerging, and low-income economies, larger and smaller economies, and more open versus more closed economies face different challenges.

### Monetary policy objectives
- Long-term price stability remains a primary objective; well-anchored inflation expectations helped avoid deflation spirals during the crisis.
- The crisis questioned whether price stability alone suffices for macro (output) stability and raised whether financial stability and external stability should enter central bank mandates.

A. Should Financial Stability Be a Goal of Monetary Policy?
- Pre-crisis consensus emphasized low and stable inflation as primary mandate (New Keynesian frameworks and the “divine coincidence”).
- Financial frictions break the divine coincidence and introduce trade-offs between stabilizing output and stabilizing inflation.
- Monetary policy (policy rate) is a blunt tool to prevent sector-specific imbalances; macroprudential tools (LTV/DTI limits, dynamic provisioning, reserve requirements, countercyclical capital buffers) are better targeted ex ante; financial restructuring is an ex post tool.
- Macroprudential tools are relatively new and untested in advanced economies and prone to circumvention and political economy problems; they may be difficult to adjust with speed in some institutional settings.
- Two approaches if monetary policy should protect financial stability:
  - Flexible inflation-targeting with a lengthened horizon: react to financial imbalances to the extent they threaten long-term price stability (e.g., keep policy rate higher in booms that threaten busts and deflation).
  - Make financial stability an additional target independent from price stability: react to imbalances even if they do not threaten price stability.
- Practical challenges: multiple dimensions of financial stability; many potential indicators (leverage, credit growth, asset prices); bubbles are hard to identify in real time; focus on more dangerous imbalances (credit-driven booms) may be sensible.
- New Keynesian models with financial frictions imply small deviations from standard rules; nonlinear frameworks with multiple equilibria and market freezes imply larger effects.

B. Should Central Banks Assign Larger Weights to Output Stability?
- Inflation remained stable amid sharp output contractions and unemployment increases; the Phillips curve appears to have flattened, especially in advanced economies.
- Implication of a structurally flatter Phillips curve:
  - Strengthens case for flexible rather than strict inflation targeting.
  - Central banks may wait longer before reacting to inflation pressures to distinguish temporary from permanent movements.
  - For given reaction-function weights, a flatter Phillips curve implies responding more often to cost-push shocks, inducing undesirable output and unemployment fluctuations.
- Risk: if flattening is conditional on policy credibility, changing reaction functions may unanchor expectations and steepen the Phillips curve.
- Conclusion: until sources of Phillips-curve flattening are better understood, balance of risks argues against giving much greater weight to output stability; further work is high priority.

C. Should Monetary Policy Be Concerned with External Stability?
- Capital-flow and exchange-rate volatility can affect macro stability via real and financial channels, especially in small open economies (resource misallocation, credit booms, foreign-currency liabilities).
- Capital flow management tools (CFMs), macroprudential policy, and foreign-exchange (FX) intervention are policy responses; monetary policy may need to help when these are insufficient.
- A monetary stance aimed at stabilizing domestic inflation will, except under unrealistic conditions, not guarantee external stability; a new external objective implies either a new instrument or accepting trade-offs.
- Under imperfect asset substitutability, a mix of interest-rate policy and sterilized intervention can target both inflation and exchange rate stability (portfolio rebalancing channel); sterilized intervention less effective in highly integrated, deep markets.
- FX intervention can also operate through a signaling channel altering expectations about fundamentals and policy stance; example: Swiss National Bank’s 2011 commitment to buy foreign currency and maintenance of exchange-rate floor (SF1.20 per euro) through heavy nonsterilized purchases.
- Intervention should smooth temporary fluctuations rather than resist trend appreciations driven by fundamentals.
- Key open questions: effectiveness of CFMs and FX interventions, complementarities and substitutability of FX interventions/CFMs/macroprudential policy, negative multilateral side effects.

D. Is There a Case for International Monetary Policy Cooperation?
- Changes in reserve-currency policy can induce global portfolio rebalancing and capital flows; spillovers matter in presence of financial distortions.
- Historical examples: Volcker disinflation and Latin American crises; swings in capital flows with changes in U.S. liquidity and quantitative easing.
- Gains from cooperation in normal times are uncertain: some estimates suggest small gains (comparable to trade liberalization); others that include global financial co-movements suggest larger gains.
- Empirical observation: debt-creating flows to emerging markets were typically much higher when advanced country interest rates and volatility were low (“easy” conditions) than when high (Figure 3; sample periods identified as Low Rates, Low VIX: 1991-94, 1996, 2004-07, 2012-13:Q3).
  - Figure 3 annotations (reported values in source): 2.4, 0.7, 2.8, 3.3, 0.5, -0.3, 1.6, 2.0 (labels correspond to gross and net inflow series under alternative financing conditions).
- Cooperation during crises yields significant gains (swap lines, coordinated fiscal stimulus, IMF resource expansion); welfare gains in normal times are ambiguous.
- Obstacles to cooperation: asymmetries in country size, disagreement on economic situation and transmission effects, and lack of recognition of trade-offs across objectives.
- Proposals: neutral assessor to bridge divergent national views; international monetary policy committee reporting to world leaders.
- IMF’s Integrated Surveillance Decision encourages countries to consider policies that engender less adverse spillovers while achieving domestic objectives.
- Enforcement and incentives remain challenging; large-country central banks lack incentives to internalize global spillovers when domestic mandates conflict.

### Monetary policy instruments
- The pre-crisis one-target-one-instrument simplicity evaporated as policy rates hit the ZLB and financial disruptions impaired transmission. Central banks expanded toolkits: long-maturity sovereign bond intervention and direct purchases of risky private assets.

A. How Should Central Banks Deal With the Risk of the Zero Lower Bound (ZLB)?
- Determinants of ZLB risk:
  - Monetary policy is stimulative when real policy rate < natural rate; lower natural rates make hitting ZLB more likely.
  - Emerging markets less likely to face ZLB due to higher inflation and natural rates; low-income countries’ challenges are structural/institutional.
  - Advanced economies with lower natural rates may face ZLB more frequently.
- Effectiveness of unconventional monetary policy (UMP) at ZLB:
  - UMP (bond purchases, forward guidance) lowered long-term yields with effects comparable to conventional policy in crisis periods (Annex 4); results mainly from periods of severe financial distress.
  - Concerns about calibration, exit complexity, diminishing returns; UMP may be less effective if ZLB is reached without major financial disruption.
- Historical underestimation of ZLB spells due to: underestimating large shocks, ignoring parameter uncertainty and tail events, and models ill-suited to generate prolonged ZLB spells.
  - Recent literature suggests ZLB spells up to 10 years are not unlikely under nonlinear models (Fernande-Villaverde and others, 2013) and other factors increase likelihood.
- Four proposed strategies to reduce ZLB risk or increase resilience:
  1. Raising the inflation target (Summers 1991; Krugman 1998; Blanchard and others, 2010).
     - Costs: distortions in cash holdings, overinvestment in financial sector, greater uncertainty about relative prices, tax distortions, redistribution, financial planning difficulties (Mishkin, 2011).
     - Theoretical suggestions often put optimal inflation rarely above 3 percent, often between 1 and 2 percent (Coibion and others, 2012; Billi 2011), but no consensus on parameters.
     - Credibility concerns: raising target once may create expectations of repeated increases (Bernanke, 2010; Woodford, 2009; Mishkin, 2011). New Zealand example: band change from 0-2 percent to 1-3 percent.
  2. Forward guidance to engineer temporarily higher expected inflation at ZLB.
     - Effective when central bank credibility is strong or commitment devices (large long-term asset purchases) support announcements.
     - Conditioning guidance on economic state preferred to calendar-based announcements; but conditioning can be interpreted as triggers.
  3. History-dependent rules (price-level targeting or nominal GDP targeting).
     - Under these frameworks policy remains accommodative until nominal GDP or the price level returns to target path; implies future above-average inflation or nominal GDP growth to compensate undershoots.
     - Advantages: automatic expectations of higher inflation/nominal GDP after undershoots; in theory optimal with ZLB.
     - Practical problems: time-inconsistency temptation to renege, market reaction to extreme dovish/hawkish swings, political difficulty in later deflation, complications in explaining nominal GDP target path changes due to potential output revisions.
  4. Preemptive loosening (act aggressively to cut rates when deflation risks arise).
     - Increases frequency of ZLB episodes but mitigates their severity and duration.
     - Related: leaning against the wind during booms to strengthen financial system and enlarge room to cut rates later.
- Conclusion: uncertainty remains on substitutability of CMP and UMP; clarification on optimal inflation level and overcoming practical concerns about path-dependent frameworks needed.

B. Should Unconventional Tools Become Conventional?
- Targeting long-term interest rates vs short-term policy rate:
  - Arguments for targeting long-term rates: shield economy from term-premium shocks, focus on rates most relevant for spending, diminish ZLB risk.
  - Costs and risks: greater short-end volatility (arbitrage equalizes overnight return and one-day return on targeted long-term bond), potential exchange-rate volatility in small open economies, welfare-relevant volatility in presence of financial distortions, fiscal dominance risk (perception of subordinating monetary policy to government financing).
  - Historical instances: U.S. Fed ceilings on long-term rates 1942–1951; targeting low end of yield curve common in recent decades.
  - Empirical anomalies: “Greenspan conundrum” (June 2004–June 2005: federal funds up 2 percentage points, 10-year yield down almost one percentage point); early fall 2008 FOMC cuts while long-term rates rose.
  - Conclusion: insufficient theoretical and empirical work to conclude benefits outweigh costs and operational hurdles.

- Managing slope of the yield curve:
  - Proposals aim to reduce incentives for excessive maturity transformation by financial institutions (overnight rate composed of interest on reserves + premium tied to short-term debt issuance costs; manage slope via long-term bond purchases).
  - Need more work on gains for financial stability relative to macroprudential policy and welfare costs when objectives conflict.

- Broadening eligible collateral and counterparties:
  - Crisis showed importance of reserve balances and central bank engagement with larger counterparty sets; broadening collateral may increase market depth/liquidity and free up high-quality liquid assets to meet regulatory requirements.
  - Risks: moral hazard (banks hold less liquid portfolios), reduced bank profitability and resilience if nonbanks gain access, unanticipated structural changes, harder-to-price collateral, asset encumbrance undermining unsecured interbank markets.
  - Central banks would need enhanced internal risk management to handle riskier asset composition.
  - More research required on welfare consequences, regulatory mitigants, and likely behavioral changes.

- Credit easing (central bank purchases of private assets):
  - In crisis, helped restore intermediation and market functioning.
  - In normal times, direct purchases could reduce real fluctuations by containing asset-price cycles through mitigating collateral and balance-sheet amplification mechanisms.
  - Concerns: inhibits price discovery, political/redistributive nature suggests fiscal authorities better placed for targeted credit programs (SME lending, guarantees, subsidies).
  - Central bank involvement risks credibility: would policy rate be adjusted to benefit supported borrowers/lenders? Increased political interference risk.

### Institutional design
- Expanded mandates imply need for broader instrument sets (macroprudential policies, CFMs, FX intervention), raising questions on matching instruments to objectives, governance, and preserving credibility in a multi-mandate framework.

A. Risks to Central Bank Independence
- Pre-crisis consensus favored instrument independence; central banks given targets but control instruments.
- Independence historically associated with lower inflation, though causality complex; inflation often trending down when legal independence introduced.
- Concerns with broader mandates:
  - Financial stability is harder to measure than price stability; no consensus on indicators or targets.
  - Policy failures (crises) are visible; successes are invisible ex post, making defense of unpopular preemptive measures difficult.
  - Targeted tools create clearer winners/losers than interest-rate policy, complicating accountability and political economy.
  - Empirical evidence: average inflation somewhat higher where central banks run bank supervision/supervisory powers (average inflation = 6.81 vs 5.22 where not in charge), though differences less pronounced among inflation targeters.
    - Reported values in source: average inflation = 5.22 (Central Banks not in Charge of Bank Supervision) and average inflation = 6.81 (Central Banks in Charge of Bank Supervision).
    - Average inflation deviation cases: mean deviation = 1.14 (Goal-Independent Central Banks) and mean deviation = 2.62 (Instrument-Independent Central banks) in Figure 4.
    - Inflation deviation among inflation targeters: average deviation = 3.16 (Central Banks not in Charge of Bank Supervision) and average deviation = 3.49 (Central Banks in Charge of Bank Supervision).
- Safeguarding independence with expanded mandates requires institutional design and accountability measures.

B. Optimal institutional arrangements for microprudential, macroprudential, and monetary policy
- Macroprudential tools interact with monetary and microprudential policy; cross-spillovers mean one policy will contribute to another’s mandate in practice.
- Trade-offs:
  - Separate authorities (central bank vs macroprudential regulator) risk uncoordinated policy mixes dominated by individually optimal actions; consolidation may improve coordination but can jeopardize credibility and expose monetary policy to political interference.
  - Analogous to monetary–fiscal interactions: joint decision-making can be optimal absent political economy considerations, but separation can be preferable taking political incentives into account.
- Practical institutional options:
  - Keep macroprudential outside central bank with strong information-sharing and interagency committees; examples: Australia’s Council of Financial Regulators; Brazil’s CMN and BCB; Chile, Mexico, Uruguay committees chaired by Minister of Finance with central bank participation; U.S. Financial Stability Oversight Council (FSOC).
  - House both mandates in central bank with safeguards: separate decision-making structures (separate policy committees as in the United Kingdom and the ECB), separate reports to legislature, enhanced accountability and communication.
  - Singapore’s MAS: both monetary policy and macroprudential regulation reside in MAS with collaboration across agencies.
- Bottom line: optimal institutional arrangement depends on country-specific distortions and political-economy constraints; design should enhance information-sharing, credibility protections, and appropriate safeguards.

### Key takeaways and open questions
- The crisis exposed limits of the pre-crisis “one target–one instrument” framework; monetary policy must be reconsidered in light of financial stability, external spillovers, and the ZLB.
- Many policy choices remain unresolved; the paper identifies tentative conclusions and emphasizes the need for further research on:
  - Indicators and targets for financial stability and their operationalization.
  - Effectiveness, calibration, exit strategies, and welfare costs of UMP relative to CMP.
  - Complementarities and substitutability among monetary policy, macroprudential policy, CFMs, and FX intervention.
  - Institutional designs that preserve monetary-policy credibility while enabling effective macroprudential action and interagency coordination.
- Country-specific characteristics (income level, openness, financial development, size) determine appropriate mixes of objectives, instruments, and institutional arrangements.

*Source: IMF staff chapter titled "_sdn1403 - conclusions is not possible. Country characteristics matter, and thus the challenges are different" (provided content).*

### conclusions; on others, it identifies areas where theoretical and empirical advances are needed

### _sdn1403 - conclusions; on others, it identifies areas where theoretical and empirical advances are needed

### Conclusions on monetary policy framework and international cooperation
- Long-term price stability remains a primary objective and central bank independence a critical ingredient to achieve it.
- Other intermediate objectives (such as financial and external stability) may have to play a greater role than in the past to guarantee macroeconomic stability.
- An expanded mandate requires either new tools or the acceptance of new trade-offs and complicates accountability and central bank independence.
- Key institutional question: how to protect the independence of monetary policy decisions (narrowly defined) if greater oversight over new central bank responsibilities (notably financial stability) proves desirable or unavoidable.
- The use of unconventional policies proved monetary policy was not powerless at the zero lower bound, but resilience of monetary policy frameworks to the risk of the zero lower bound is desirable.
- Current knowledge indicates there are no evident gains, at least for now, in turning unconventional policy tools (with the exception of forward guidance) into conventional ones.
- International monetary policy cooperation has proven highly useful during the crisis and will grow more beneficial as economies become more interconnected.
- There is little agreement on the quantitative relevance of cooperation benefits (especially in tranquil times) and on how cooperation would work in practice given political economy obstacles.

### Annex 1 — Financial distortions and monetary policy (financial frictions)
- Financial market imperfections amplify and prolong shocks; examples include:
  - Lenders unable to distinguish ex ante good from bad borrowers (Stiglitz and Weiss, 1981).
  - Contracts not fully enforceable (Hart and Moore, 1994).
  - Project outcomes not observable without cost (Townsend, 1979).
- Monetary policy can change the intensity of these frictions; effects depend on friction type and model specification.
- Examples of monetary policy interactions:
  - Lower interest rates from easing can reduce borrower moral hazard and adverse selection in limited liability models (Stiglitz and Weiss, 1981).
  - Easing can relax borrowing constraints and increase leverage through asset price effects (Kiyotaki and Moore, 1997).
  - Easing can reduce expected bankruptcy costs component in external finance cost (Carlstrom and Fuerst, 1997; Bernanke and others, 1999).

### Annex 1 — Excessive risk-taking ex ante and asset-price externalities ex post
- Financial frictions can make pecuniary externalities welfare-relevant, leading to:
  - Excessive risk-taking ex ante and volatility in asset prices and output ex post.
  - Under-insurance against future shocks via too much debt (Korinek, 2011; Lorenzoni, 2008; Mendoza, 2010; Bianchi, 2010; Adrian and Shin, 2012 for banks).
  - Excessive liquidity risk (Stein, 2012).
  - Excessive borrowing in foreign currency (Caballero and Krishnamurthy, 2003, 2004; Korinek, 2010).
- Lax monetary policy can initiate over-borrowing or encourage excessive risk-taking ex ante (Dell’Ariccia and others, 2013; Valencia, 2011; Jimenez and others, forthcoming).
- Expectations of an aggressive post-bust monetary response can also lead to excessive risk-taking (Farhi and Tirole, 2012).
- Monetary tightening may trigger defaults and asset fire-sales.

### Annex 1 — Counterparty risk, market freezes, and financial panics
- Maturity mismatches between assets and liabilities can cause self-fulfilling runs and panics.
- Creditors can behave like deposit runs in response to margin requirement changes (Diamond and Dybvig, 1983; Krishnamurthy, 2010).
- Shock propagation in financial networks can cause system-level run-like behavior when institutions are interconnected (Allen and Gale, 2000).
- Liquidity hoarding and credit crunches worsen with uncertainty about interconnections (Caballero and Krishnamurthy, 2008; Caballero and Simsek, forthcoming) or asset values (Brunnermeier and Pedersen, 2009).
- Monetary tightening can cause portfolio losses that cascade through system due to interconnections.

### Annex 2 — Possible explanations for the flattening of the Phillips curve
- Mismeasurement:
  - Standard unemployment estimates may fail to capture the cyclical component during the global financial crisis; long-term unemployment increased unusually (Kocherlakota, 2010).
  - Alternative measures of output gap, capacity utilization, and short-term unemployment point to sizable slack in most advanced economies (IMF, 2013b), making the smaller-than-expected reduction in inflation puzzling.
- Globalization:
  - Greater international competition may make producers less inclined to adjust prices to domestic demand (Loungani and others, 2001; Bean 2007).
  - Inflation could have become more sensitive to international conditions (Borio and Filardo, 2007), but this hypothesis struggles to explain inflation stability during the crisis and conflicts with open-economy New Keynesian predictions that increased openness may steepen the Phillips curve (Woodford, 2007).
- Low level of inflation:
  - Historically low inflation in advanced economies may make downward nominal rigidities more binding (Yellen, 2012).
  - Low inflation may reduce the frequency of price changes due to adjustment costs (Ball, Mankiw, and Romer, 1988; Klenow and Malin, 2010).
  - However, inflation appears little responsive to cyclical unemployment even in emerging economies where inflation levels are considerably higher.
- Credibility:
  - Greater central bank credibility over the last two decades has made inflation expectations less responsive to changes in actual inflation, reducing amplification of temporary deviations and making inflationary or deflationary spirals less likely.

### Annex 3 — Lessons from the global financial crisis for monetary policy in low-income countries (LICs)
- Crisis shocks for LICs included declines in terms of trade and export demand, and changes in investor risk appetite, leading to capital flow volatility, increases in country-risk premia, declines in credit, and deterioration of financial sector balance sheets.
- Outcomes for many LICs:
  - Overall effect was not calamitous; LIC economies bounced back faster than advanced economies.
  - Sounder and more credible pre-crisis monetary policy frameworks allowed many countries to loosen policy considerably, cushioning domestic demand and supporting required nominal and real depreciation.
  - Large nominal depreciations did not unanchor inflation expectations; inflation decreased considerably partly due to aggregate demand contraction and declines in international food and fuel prices.
- Limitations of LIC policy regimes revealed by the crisis:
  - Most de jure regimes based on reserve and broad money targets do not provide clear frameworks for policy responses to shocks.
  - Example: In Zambia, concerns with money targets resulted in excessively tight monetary policy when domestic banking systems were under stress (Baldini and others, 2012), amplifying initial crisis impact.
- Post-crisis developments:
  - Inflation increased again in several countries during 2010–11 because short-term interest rates were kept low for extended periods and due to increases in international commodity prices.
  - Prolonged policy accommodation sometimes resulted from excessively optimistic targets for broad money and credit growth and lack of concern for interest rate level, forcing abrupt policy reversals and added macroeconomic volatility. (Footnote references: Andrle and others (2013a and 2013b), and Berg and others (2013) for Kenya, Uganda, Tanzania, and Rwanda.)
- Policy modernization in LICs:
  - Central banks have sought to strengthen and clarify monetary policy formulation and implementation, enhance credibility and accountability, and make institutional changes.
  - Examples: Uganda announced intention to formally adopt inflation targeting; others aim to adopt elements of modern policymaking including communication strategies centered on the inflation outlook, improved liquidity management, greater reliance on the price (interest rate) channel, and development of in-house forecasting and policy analysis capacity.
  - The role of money targets going forward remains debated.
- Additional lessons:
  - The zero lower bound is less likely to be a concern in LICs with higher average inflation and higher nominal interest rates.
  - In countries with incipient policy credibility, a persistent downturn is more likely to unanchor inflation, making the zero lower bound constraint moot.
  - Foreign interventions remain important tools in LICs; sterilized interventions are likely more effective given shallow FX markets and imperfect substitutability between domestic and foreign assets.
  - Interventions should not override inflation stabilization objectives and policy modernization; interventions that lean against the wind are preferred to those targeting exchange rate level. (References: Ostry, Ghosh, and Chamon (2012) and Benes and others (2013).)

### Annex 4 — How close of a substitute is unconventional monetary policy (UMP) for conventional interest rate policy (CMP)?
- Key question: relative effectiveness of UMP and CMP in affecting asset prices and the real economy, whether UMP faces diminishing returns, and whether some UMP aspects make it less attractive than CMP.
- Evidence on interest rates:
  - UMP successfully decreased longer-term interest rates in early crisis event studies.
  - United States: mortgage-backed security yields decreased by around 150 basis points (bps) over the first LSAP 1; Treasury yields decreased by between 90 and 200 bps (Gagnon and others, 2011; Krishnamurthy and Vissing-Jorgensen, 2011; Hancock and Passmore, 2011; IMF, 2013c).
  - United Kingdom: cumulative effects on government bond yields range from 45 to 160 bps (Joyce and others, 2011; IMF 2013c).
  - Markets appear to have reacted quantitatively similarly to UMP and CMP announcements when measured by the surprise component using two-year futures on the three-month local currency LIBOR rates (Chen, Mancini-Griffoli and Mondino, 2014).
- Impact on aggregate demand:
  - Less clear; a relevant channel is reduction in term premia.
  - Evidence suggests drop in term premia may have lower effects on output than decreases in risk-neutral expected future short rates, which is how CMP mostly affects long-term rates (Hamilton and Kim, 2002; Kiley, 2012; Chen, Mancini-Griffoli and Saadi Sedik, 2014).
- Diminishing returns and credibility stretch:
  - UMP may face diminishing returns as longer-term rates approach their own zero lower bound, requiring central banks to stretch credibility to convince markets of sustained expansionary conditions.
  - No evidence so far that marginal returns decreased as central banks’ balance sheets expanded or the size of surprises diminished (Chen, Mancini-Griffoli, and Mondino, 2014).
- Undesirable features of UMP:
  - Calibration issues: announcing a target for long-term bond rates would expose central bank balance sheets to significant interest-rate and possibly credit risk; central banks have preferred quantity-based strategies.
  - Quantity-based strategies suffer from uncertainty about what stock of bonds must be purchased to achieve desired effects on long rates and spending.
  - Exit from UMP could be complicated (IMF, 2013c, d).
  - Real or perceived political costs include risks of fiscal dominance and controversies over selection of private assets and redistribution in credit easing.

### Annex 5 — Case studies: institutional arrangements for macroprudential and other financial policies
- Singapore — Monetary Authority of Singapore (MAS):
  - MAS has a mandate covering financial stability, supervision, and monetary policy and is the unique macroprudential authority.
  - Board-level Chairman’s Meeting (CM) has responsibilities for microprudential and macroprudential policies.
  - Management Financial Stability Committee (MFSC) is responsible for macroprudential policy and chaired by the Managing Director of MAS; Monetary and Investment Policy Meeting (MIPM) is the forum responsible for monetary policy.
  - Coordination occurs between MFSC and MIPM; MAS coordinates via an inter-agency task force with agencies such as the Urban Redevelopment Authority (URA), Housing Development Board (HDB), and Ministry of Finance (MOF) on housing-related policies.
  - MOF involvement in bank resolution is limited to cases with no viable private solution or when public resources are at risk.
- Australia — Council of Financial Regulators (CFR) coordination:
  - Reserve Bank of Australia (RBA): monetary policy, payment system oversight, lender of last resort.
  - Australian Prudential Regulation Authority (APRA): prudential supervisor, resolution authority, and administers the financial claims scheme (FCS).
  - CFR (RBA, APRA, ASIC, Treasury) is primary coordinating body for macroprudential policy and crisis management; chaired by the Governor of the RBA.
  - APRA has responsibility for the main macroprudential tools; Treasury advises government on financial stability and legislative framework.
- Brazil — diffuse arrangements:
  - Legal framework does not assign explicit macroprudential responsibility to any single agency.
  - National monetary council (CMN) and central bank of Brazil (BCB) assume de facto financial stability mandate and accountability for prudential action.
  - CMN (chaired by Minister of Finance; includes Governor of BCB and Minister of Planning, Budget, and Management) is highest council with broad powers over financial sector policies.
  - Based on CMN guidelines, BCB implements monetary policy and supervises banking; CVM regulates securities and foreign exchange markets.
  - COREMEC was designed to improve coordination but has a purely advisory role with no “comply or explain” mechanism and is not tasked with crisis management.
  - BCB is charged with identifying and analyzing banking-sector systemic risk and can execute macroprudential actions for banks and lead bank resolution.
  - Systemic risk from nonbank sources is not covered by the BCB.
- Source note within annexes: Source: IMF (2013g).

*Source: _sdn1403 - conclusions; on others, it identifies areas where theoretical and empirical advances are needed*

### REFERENCES

### REFERENCES

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### Central Bank Governance and Independence
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### Unconventional Monetary Policy and the Zero Lower Bound
- Bernanke, Ben. S., Vincent R. Reinhart, and Brian P. Sack, 2004, “Monetary Policy Alternatives at the Zero Bound: An Empirical Assessment,” Brookings Papers on Economic Activity, Vol. 2.
- Carlstrom, Charles, and Andrea Pescatori, 2009, “Conducting Monetary Policy When Interest Rates are near Zero,” Federal Reserve Bank of Cleveland, Economic Commentary.
- Chung, Hess, Jean-Philippe Laforte, David Reifschneider, and John C. Williams, 2010, “Have We Underestimated the Probability of Hitting the Zero Lower Bound?” Paper presented at the conference, Revisiting Monetary Policy in a Low Inflation Environment, Federal Reserve Bank of Boston, October, Vol. 13.
- Eggertsson, G. B., and M. Woodford, 2003, “The Zero Bound on Interest Rates and Optimal Monetary Policy,” Brookings Papers on Economic Activity, Vol. 1, pp. 139.233.
- Fernández-Villaverde, Jesús, Grey Gordon, Pablo A. Guerrón-Quintana, and Juan Rubio-Ramírez, 2013, “Nonlinear Adventures at the Zero Lower Bound,” NBER Working Paper No. 18058.
- Chen, Jiaqian, Tommaso Mancini-Griffoli, and Tomas Mondino, 2014, “Is the Zero Lower Bound a Constraint? A Study of Unconventional Monetary Policies,” IMF, mimeo.
- Chen, Jiaqian, Tommaso Mancini-Griffoli, and Tahsin Saadi Sedik, 2014, “Macroeconomic Effects of Large Scale Asset Purchase: Do Channels of Transmission Matter?” IMF Working Paper, forthcoming.
- Gagnon, Joseph, Matthew Raskin, Julie Remache, and Brian Sack, 2011, “The Financial Market Effects of the Federal Reserve’s Large-Scale Asset Purchases,” International Journal of Central Banking, Vol. 7, No. 1, pp. 3–43.
- Gagnon, Joseph, and Brian Sack, 2014, “Monetary Policy with Abundant Liquidity: A New Operating Framework for the Fed,” Policy Briefs PB14-4, Peterson Institute for International Economics.

### Financial Stability, Risk, and Crises
- Adrian, Tobias, and Hyun Shin, 2012, “Procyclical Leverage and Value-at-Risk,” Federal Reserve Bank of New York Staff Report 338.
- Allen, Franklin, and Douglas Gale, 2000, “Bubbles and Crises,” Economic Journal, Vol. 110, pp. 236-55.
- Bianchi, Javier, 2010, “Credit Externalities: Macroeconomic Effects and Policy Implications,” American Economic Review, Vol. 100, No. 2, pp. 398-402.
- Borio, Claudio, and Philip Lowe, 2002, “Asset Prices, Financial and Monetary Stability: Exploring the Nexus,” BIS Working Paper 114.
- Brunnermeier, Markus K., and Lasse Pedersen, 2009, “Market Liquidity and Funding Liquidity,” Review of Financial Studies, Vol. 22, pp. 2201-38.
- Brunnermeier, Marcus K., and Yuliy Sannikov, 2014, “A Macroeconomic Model with a Financial Sector,” American Economic Review, Vol. 104, No. 2, pp. 379-421.
- Dell’Ariccia, Giovanni, Luc Laeven, and Gustavo Suarez, 2013, “Bank Leverage and Monetary Policy’s Risk-taking Channel: Evidence from the United States,” IMF Working Paper 13/143.
- Dell’Ariccia, Giovanni, Luc Laeven, and Robert Marquez, 2014, “Real Interest Rates, Leverage, and Bank Risk-taking,” Journal of Economic Theory, Vol. 149, pp. 65–99.
- Diamond, D. and Dybvig, P. 1983. “Bank Runs, Deposit Insurance and Liquidity,” Journal of Political Economy Vol. 91, pp. 401–19.
- Caballero, Ricardo, and Arvind Krishnamurthy, 2008, “Collective Risk Management in a Flight to Quality Episode,” Journal of Finance, Vol. 63, No. 5, pp. 2195-230, October.

### International Transmission, Capital Flows, and Exchange Rates
- Clarida, Richard, Jordi Galí, and Mark Gertler, 2002, “A Simple Framework for International Policy Analysis,” Journal of Monetary Economics, Vol. 49, pp. 879-904.
- Coenen, Günter, Giovanni Lombardo, Frank Smets, and Roland Straub, 2007, “International Transmission and Monetary Policy Cooperation,” NBER Chapters, in International Dimensions of Monetary Policy, pp. 157-92.
- Corsetti, Giancarlo, and Paolo Pesenti, 2005, “International Dimensions of Optimal Monetary Policy,” Journal of Monetary Economics, Vol. 52, pp. 281-305.
- Disyatat, Piti, and Gabriele Galati, 2005, “The Effectiveness of Foreign Exchange Intervention in Emerging Market Countries,” in Foreign Exchange Market Intervention in Emerging Markets, BIS Paper No. 24, pp. 97–113.
- Farhi, Emmanuel, and Iván Werning, 2013, “Dilemma not Trilemma? Capital Controls and Exchange Rates with Volatile Capital Flows,” paper presented Jacques Polak Annual Research Conference, International Monetary Fund.
- Farhi, Emmanuel, and Jean Tirole, 2012, “Collective Moral Hazard, Maturity Mismatch and Systemic Bailouts,” American Economic Review, February, Vol. 102, No. 1.
- IMF, 2010, “The Fund’s Role Regarding Cross-border Capital Flows,” IMF Policy Papers.
- IMF, 2011a, Recent Experiences in Managing Capital Inflows—Cross-Cutting Themes and Possible Guidelines (Washington: International Monetary Fund).
- IMF, 2012a, “The Liberalization and Management of Capital Flows: An Institutional View,” IMF Policy Paper.

### Models, Theory, and Methodology
- Bernanke, Ben, Mark Gertler, and Simon Gilchrist, 1999, “The Financial Accelerator in a Quantitative Business Cycle Framework,” in John B. Taylor and Michael Woodford, eds., Handbook of Macroeconomics, Vol. 1C, pp. 1341–393.
- Calvo, Guillermo, and Enrique Mendoza, 1996, “Reflections on Mexico’s Balance of Payments Crisis: A Chronicle of Death Foretold,” Journal of International Economics, Vol. 41, pp 235-64.
- Carlstrom, Charles, and Timothy Fuerst, 1997, “Agency Costs, Net Worth, and Business Fluctuations: A Computable General Equilibrium Analysis,” American Economic Review, Vol. 87, No. 5, pp. 893–910.
- Clarida, Richard, Jordi Galí, and Mark Gertler, 2002, “A Simple Framework for International Policy Analysis,” Journal of Monetary Economics, Vol. 49, pp. 879-904.
- Curdia, Vasco, and Michael Woodford, 2009, “Credit Frictions and Optimal Monetary Policy,” Bank for International Settlements Working Paper No. 278.
- Dixit, Avinash, and Luisa Lambertini, 2003, “Interactions of Commitment and Discretion in Monetary and Fiscal Policies,” American Economic Review, Vol. 93, No. 5, pp. 1522-542.
- Gertler, Mark, and Peter Karadi, 2011, “A Model of Unconventional Monetary Policy,” Journal of Monetary Economics, Vol. 58, pp. 17-34.
- Hart, Oliver, and John Moore, 1994, “A Theory of Debt Based on the Inalienability of Human Capital,” Quarterly Journal of Economics, Vol. 109, No. 4, pp 841-79.
- Caballero, Ricardo, 2010, “Macroeconomics after the Crisis: Time to Deal with the Pretense-of-Knowledge Syndrome,” Journal of Economic Perspectives, Vol. 24, No. 4, pp. 85–102.

*References list as provided in the PDF: _sdn1403 - REFERENCES*

### Chapter 2, October (Washington: International Monetary Fund).

### _sdn1403 - Chapter 2, October (Washington: International Monetary Fund)

### Major thematic clusters in the chapter's references
- Macroprudential policy and institutional design
  - “Key Aspects of Macroprudential Policy,” IMF Policy Paper, 2013f.
  - “Brazil: Technical Note on Macroprudential Policy Framework,” Financial Sector Assessment Program. IMF Country Report 13/148, 2013g.
  - Jácome, Luis I., Erlend W. Nier, and Patrick A. Imam, 2012, “Building Blocks for Effective Macroprudential Policies in Latin America: Institutional Considerations,” IMF Working Paper 12/183.
  - Nier, Erlend, Luis Jácome, Jacek Osinski, Pamela Madrid, 2011, “Institutional Models for Macroprudential Policy,” IMF Staff Discussion Note 11/18.
  - Osinski, Jacek, Katharine Seal, and Lex Hoogduin, 2013, “Macroprudential and Microprudential Policies: Toward Cohabitation.” IMF Staff Discussion Note 13/5.
  - Korinek, Anton, 2011, “Systemic Risk-Taking: Amplification Effects, Externalities, and Regulatory Responses,” European Central Bank Working Paper No. 1345.
  - Ueda, Kenichi, and Fabián Valencia, forthcoming, “Central Bank Independence and Macroprudential Regulation,” Economic Letters.

- Monetary policy strategy, instruments, and the zero lower bound
  - Mishkin, Frederic, 2010, “Monetary Policy Flexibility, Risk Management, and Financial Disruptions,” Journal of Asian Economics Vol. 23 (June), pp. 242-46.
  - Mishkin, Frederic, 2011, “Monetary Policy Strategy: Lessons from the Crisis,” NBER Working Paper No. 16755.
  - Williams, John C., 2009, “Heeding Daedalus: Optimal Inflation and the Zero Lower Bound,” Brookings Papers on Economic Activity, 2009, Vol. 2, pp. 1-45.
  - Woodford, Michael, 2012, “Methods of Policy Accommodation at the Interest-Rate Lower Bound,” Jackson Hole Symposium, 2012.
  - Woodford, Michael, 2013, “Monetary Policy Targets After the Crisis,” conference “Rethinking Macro Policy II,” IMF, April 16-17.
  - Joyce, Michael, Ana Lasaosa, Ibrahim Stevens, and Matthew Tong, 2011, “The Financial Market Impact of Quantitative Easing in the United Kingdom,” International Journal of Central Banking, 2011, Vol. 7, N. 3, pp. 113–61.
  - Krishnamurthy, Arvind, and Vissing-Jorgensen, 2011, “The Effects of Quantitative Easing on Long-term Interest Rates,” Brookings Papers on Economic Activity, (Fall), pp. 215-256.
  - Kiley, Michael, 2012, “The Aggregate Demand Effects of Short- and Long-Term Interest Rates,” Federal Reserve Board Working Paper N. 54.
  - Kashyap, Anyl, and Jeremy Stein, 2012, “Optimal Conduct of Monetary Policy with Interest on Reserves,” American Economic Journal: Macroeconomics, Vol. 4, No. 1, pp. 266-82.
  - Reifschneider, David, and John C. Williams, 2000, “Three Lessons for Monetary Policy in a Low-Inflation Era,” Journal of Money, Credit, and Banking, 32 (4), 936.966.
  - Bernanke-related and Fed/FOMC perspective: Kocherlakota, Narayana, 2010, “Inside the FOMC,” speech; Yellen, Janet L., 2012, “Perspectives on Monetary Policy,” speech at the Boston Economic Club, June 6.

- Financial cycles, credit, leverage, and crises
  - Kiyotaki, Nobuhiro, and John Moore, 1997. “Credit Cycles,” Journal of Political Economy, Vol. 105, pp. 211-48.
  - Mendoza, Enrique, 2010, “Sudden Stops, Financial Crises, and Leverage,” American Economic Review, Vol. 100, No. 5, pp. 1941–66.
  - Sandri, Damiano and Fabián Valencia, 2013. “Financial Crises and Recapitalizations,” Journal of Money, Credit, and Banking, Vol. 45s, No. 8, pp. 59-86.
  - Jimenez, Gabriel, Steven Ongena, José Luis Peydro-Alcalde, and Jesús Saurina, forthcoming, “Hazardous Times for Monetary Policy: What do Twenty-three Million Bank Loans Say About the Effects of Monetary Policy on Credit Risk-taking?” Econometrica.
  - Valencia, Fabián, 2011, “Monetary Policy, Bank Leverage, and Financial Stability,” IMF Working Paper 11/244.
  - Valencia, Fabián, forthcoming, “Banks’ Precautionary Capital and Credit Crunches,” Macroeconomic Dynamics.
  - Lorenzoni, Guido, 2008, “Inefficient Credit Booms,” Review of Economic Studies, Vol. 75, No. 3, pp. 809-33.
  - Krishnamurthy, Arvind, 2010, “Amplification Mechanisms in Liquidity Crises.” American Economic Journal: Macroeconomics, Vol. 2, No. 3, pp. 1-30.
  - Stein, Jeremy, 2012, “Monetary Policy as Financial Stability Regulation,” Quarterly Journal of Economics, Vol. 127, No. 1, pp. 57-95.
  - Shocks and banking crises literature: Kaminsky, Graciela, and Carmen Reinhart, 1999, “The Twin Crises,” American Economic Review, Vol. 89, pp. 473-500.

- Capital flows, externalities, and policy coordination
  - Korinek, Anton, 2010, “Regulating Capital Flows to Emerging Markets: An Externality View,” University of Maryland mimeo.
  - Ostry, Jonathan D., and Atish R. Ghosh, 2013, “Obstacles to International Policy Coordination, and How to Overcome Them,” IMF Staff Discussion Note No. 13/11.
  - Ostry, Jonathan D., Atish R. Ghosh, and Marcos Chamon, 2012, “Two Targets, Two Instruments: Monetary and Exchange Rate Policies in Emerging Market Economies,” IMF Staff Discussion Note SDN/12/01.
  - Ostry, Jonathan D., A. Ghosh, K. Habermeier, M. Chamon, M. Qureshi, and D. Reinhardt, 2010, “Capital Inflows: The Role of Controls,” IMF Staff Position Note 10/04.
  - Ostry, Jonathan D., Atish R. Ghosh, Karl Habermeier, Luc Laeven, Marcos Chamon, Mahvash S. Qureshi, and Annamaria Kokenyne, 2011, “Managing Capital Inflows: What Tools to Use?” IMF Staff Discussion Notes 11/06.
  - Mondino, Nier, and Saadi Sedik, 2014, “Determinants of Capital Flows: Can the Global Financial Cycle Be Tamed?” IMF Working Paper, forthcoming.
  - Rey, Helene, 2013, “Dilemma not Trilemma: The Global Financial Cycle and Monetary Policy Independence,” presented at Jackson Hole, August 22–24, 2013.

- Inflation targeting, central bank independence, and price-setting
  - King, Mervyn, 2012, “Twenty Years of Inflation Targeting,” Stamp Memorial Lecture, October 9.
  - Roger, Scott, 2009, “Inflation Targeting at 20: Achievements and Challenges” IMF Working Paper No. 09/236.
  - Jácome, L.I., and F. Vázquez, 2008, “Is there Any Link between Central Bank Independence and Inflation? Evidence from Latin America and the Caribbean,” European Journal of Political Economy, Vol. 24, No. 4, pp. 788-801 (December).
  - Laubach, Thomas, and John Williams, 2003, “Measuring the Natural Rate of Interest,” The Review of Economics and Statistics, Vol. 85, No. 4, pp. 1063–070.
  - Loungani P., and N. Sheets, 1997, “Central Bank Independence, Inflation, and Growth in Transition Economies,” Journal of Money, Credit, and Banking, Vol. 29, No. 3, (August), pp. 381-99.
  - Summers, Lawrence, 1991. “Price Stability: How Should Long-Term Monetary Policy Be Determined?” Journal of Money, Credit and Banking, Vol. 23, No.3, pp. 625-31.
  - Woodford, Michael, 2003, Interest and Prices (Princeton, NJ: Princeton University Press).

- Term structure, bond premia, and long-term rates
  - Vayanos, Dimitri, and Jean-Luc Vila, 2009, “A Preferred-Habitat Model of the Term Structure of Interest Rates,” LSE, Paul Woolley Centre Working Paper 6.
  - Rudebusch, Glenn D., and Eric T. Swanson. 2008. “Examining the Bond Premium Puzzle with a DSGE Model,” Journal of Monetary Economics, Vol. 55, pp. S111–26.
  - Wright, Jonathan, 2011, “Term Premia and Inflation Uncertainty: Empirical Evidence from an International Panel Dataset,” American Economic Review, Vol. 101, pp. 1514-534.

### Representative citation details preserved exactly as listed (selection)
- Jácome, L.I., and F. Vázquez, 2008, “Is there Any Link between Central Bank Independence and Inflation? Evidence from Latin America and the Caribbean,” European Journal of Political Economy, Vol. 24, No. 4, pp. 788-801 (December).
- Jimenez, Gabriel, Steven Ongena, José Luis Peydro-Alcalde, and Jesús Saurina, forthcoming, “Hazardous Times for Monetary Policy: What do Twenty-three Million Bank Loans Say About the Effects of Monetary Policy on Credit Risk-taking?” Econometrica.
- Ostry, Jonathan D., Atish R. Ghosh, Karl Habermeier, Luc Laeven, Marcos Chamon, Mahvash S. Qureshi, and Annamaria Kokenyne, 2011, “Managing Capital Inflows: What Tools to Use?” IMF Staff Discussion Notes 11/06 (Washington: International Monetary Fund).

*Source: Chapter 2 reference list, _sdn1403 - Chapter 2, October (Washington: International Monetary Fund).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/sdn/2014/_sdn1403.pdf_