(AP Microstock)
(AP Microstock)

How the world’s central banks exit crisis mode will have as much – or even greater – impact on global economic stability as their various entry strategies have had since 2008. That was the takeaway message from the 2013 CIGI-sponsored session at the Canadian Economics Association’s (CEA) annual conference, being held at HEC Montreal.

Domenico Lombardi, director of CIGI’s Global Economy program, chaired the following panel of leading experts in this area: Steven Ambler, Université du Québec à Montréal; Pierre Siklos, CIGI and Wilfrid Laurier University; Christopher Ragan, McGill University; and, Pierre Duguay, former deputy governor of the Bank of Canada.

Ambler focused on the challenges that low world interest rates present for central banking. He said that, in the extraordinary environment that has existed since the onset of the global financial crisis of 2008, determining what is a “natural” rate of interesting is a much more difficult proposition. Ambler suggested that at least part of the difficulty in this was due to current models not taking certain population and demographic shifts into account. He cited the example of the increased costs of increased longevity being understood, while the risks of this were not well appreciated. Ambler also pointed to the pace of transition in countries such as Egypt and Iran occurring at a much faster rate than predicted as another complicating factor for interest rate modelling.

Duguay said that since the crisis, the balance sheets of central banks had become, in effect, another policy instrument. To demonstrate the “phenomenal expansion” of balance sheets since the crisis, he compared the pre- and post-crisis leverage rates, capital and assets of the U.S. Federal Reserve and the Bank of England, while noting the differences in how the two responded to the crisis. Duguay also illustrated the differences and overlaps in central banks use of quantitative easing versus credit easing. He concluded that remit of central banks is to: i) provide liquidity; ii) minimize distortions; and, iii) mitigate moral hazard.

Siklos discussed the “problems and perils” of forward guidance, noting that it is a good idea in principle. But in practice, Siklos said forward guidance can be “potentially problematic,” citing the example of the Bank of Canada’s reversal on its 2009 decision to issue policy rate commitments. The lesson, he said, is that communicating monetary policy is much more difficult in times of crisis.

Ragan opened his segment looking to dispel what he views at two prevalent myths in the current dialogue on global monetary policy: i) the notion that quantitative easing is somehow unconventional action for a central bank, and ii) that the printing of money will lead to  “hyper-inflation.” Ragan said that key questions remain on how central banks sell assets – acquired in response to the crisis – in an environment of rising interest rates, and on the sequence of actions that central banks take to exit the crisis. “Should (central banks) sell assets, return their balance sheets to normal and then raise the policy rates?” Ragan asked rhetorically, before suggesting that their exit strategy might not be as simple as essentially enacting their entry strategy in reverse.

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