When Central Banks Surprise: Why It Is Important and What Policy Makers Need to Do about It

CIGI Policy Brief No. 56

January 28, 2015

The period of unprecedented macroeconomic policy in the United States and the euro zone is entering a new phase. The global financial crisis sparked an aggressive, and highly experimental, period in US monetary policy that saw the federal funds rate hit the zero lower bound, where it still remains, while the Federal Reserve’s balance sheet expanded by over US$3.5 trillion. Several other central banks have followed in the Fed’s footsteps and more are waiting in the wings, if deemed necessary. The end of these policies is now in sight. The Fed has already ceased outright asset purchases, effectively stabilizing its balance sheet. More recently, the Federal Open Markets Committee — the Fed’s monetary policy committee — has changed its forward guidance. Drawing on CIGI-sponsored research, this policy brief discusses the potential effects of unexpected US news events on global capital flows. It then identifies the countries that are most vulnerable to global financial volatility and discusses the role of the Group of Twenty in facilitating a stronger and more resilient global economy.

About the Authors

Pierre Siklos is a CIGI senior fellow who specializes in macroeconomics, with an emphasis on the study of inflation, central banks and financial markets.