Emiliano Brancaccio

The Conventional Views of the Global Crisis: A Critical Assessment

Since the summer of 2007, the world has faced — and will continue toface at least for the next few years — what in retrospect is likely to be judged the most virulent global financial crisis ever recorded together with a recession, which seems comparable to the Great Depression of 1929 (Eichengreen and O’Rourke 2009). Among the conventional interpretations of the current crisis which can be found in the growing literature on the nature and cause of the crisis, much attention has been paid to the following two. First, it is argued that the crisis is due to the misguided under-pricing of risk: financial investors ‘played with fire’ by being overconfident about the ability of their mathematical models of measuring and managing risk. Secondly, it is argued that the cause of the crisis is the loose monetary policy of the early 2000s, what has also been labelled the ’Greenspan put’: central banks — and in particular the Fed — came to the rescue of financial markets by lowering the short-run interest rate significantly and on a consistent basis. This chapter assesses the merits and drawbacks of these two conventional causes, looking at the peculiar type of relationship between these explanations and their theoretical frame of reference, namely the New Consensus Macroeconomics (NCM) model. The structure of the chapter is as follows. Section 2 presents a brief chronology of the financial crisis, with a particular focus on the key stages of the crisis.

Monetary policy rules and directions of causality: A test for the euro area

Abstract Using a VAR model in first differences with quarterly data for the euro zone, the study aims to ascertain whether decisions on monetary policy can be interpreted in terms of a “monetary policy rule” with specific reference to the so-called nominal GDP targeting rule (Hall and Mankiw, 1994; McCallum, 1988; Woodford, 2012). The results obtained indicate a causal relation proceeding from deviation between the growth rates of nominal gross domestic product (GDP) and target GDP to variation in the three-month market interest rate. The same analyses do not, however, appear to confirm the existence of a significant inverse causal relation from variation in the market interest rate to deviation between the nominal and target GDP growth rates. Similar results were obtained on replacing the market interest rate with the European Central Bank refinancing interest rate. This confirmation of only one of the two directions of causality does not support an interpretation of monetary policy based on the nominal GDP targeting rule and gives rise to doubt in more general terms as to the applicability of the Taylor rule and all the conventional rules of monetary policy to the case in question. The results appear instead to be more in line with other possible approaches, such as those based on post Keynesian analyses of monetary theory and policy and more specifically the so-called solvency rule (Brancaccio and Fontana, 2013, 2015). These lines of research challenge the simplistic argument that the scope of monetary policy consists in the stabilization of inflation, real GDP, or nominal income around a “natural equilibrium” level. Rather, they suggest that central banks actually follow a more complex purpose, which is the political regulation of the financial system with particular reference to the relations between creditors and debtors and the related solvency of economic units.

From maestro to villain of modern monetary policy: a critical assessment of the 'Greenspan put' as the main cause of the global crisis

This paper discusses the conventional view that the main cause of the current crisis is the accommodative monetary policy followed by Greenspan’s Fed in the early 2000s. It assesses the merits and the drawbacks of this view by looking at the close relationship between the role of monetary policy in modern economies, and its theoretical frame of reference, namely the New Consensus Macroeconomics (ncm) model. The paper concludes that there is little evidence that the monetary policies in the early 2000s are the cause of the credit and house bubbles, which have then led to the financial crisis.