Nyberg: Monetary policy and financial crises - some reflections
On Wednesday, Deputy Governor Lars Nyberg held his final speech as member of the Riksbank’s Executive Board at Danske Bank. Mr Nyberg, who has been a member of the Executive Board since its start in 1999, observed that it had been thirteen eventful years. Recent years in particular have been dramatic, with a global financial crisis and ensuing sovereign debt crisis.
In his speech Mr Nyberg focused on some areas that he believes will characterise the discussions on central banks and their activities over the coming years. One of the topics he covered is what role central banks and their rate-setting should play in maintaining financial stability. Mr Nyberg thought that a central bank must probably be prepared to use the policy rate to subdue a rapid expansion in credit that threatens to lead to a crisis, but that it was probably fairly rarely that this would be necessary. Other means, which are currently being discussed around the world, can be used in most cases. For the great majority of the time the central bank will thus be able to conduct its monetary policy in a normal way.
The flexible inflation-targeting policy conducted in many parts of the world has been the right path to take, said Mr Nyberg, although the financial crisis has highlighted some weaknesses. For example, there are reasons to try to gain a better grasp of the interaction between financial markets and the macro economy, and for loans and indebtedness to play a larger role than before in our models and thinking. Mr Nyberg said that he was hopeful about the prospects of gradually incorporating these aspects into practical inflation targeting.
He also emphasised the importance of having a plan ready in advance for how a crisis should be managed once it occurs. However, he noted that this is in practice rarely the case. As an example of inadequate plans for crisis management, Mr Nyberg pointed to the sovereign debt crisis in the euro area. Some work also remains to be done with regard to managing cross-border banks in distress, observed Mr Nyberg.
A general problem with regard to cross-border agreements is that we in Europe want to attain continued financial integration and increased financial stability, but at the same time we want to retain each country’s national sovereignty. However, Mr Nyberg said it is difficult to attain all three goals at the same time. If, for instance, we want to combine financial integration with continued national sovereignty regarding supervision and crisis management, it will be difficult to attain financial stability – the crisis we are currently undergoing gives good examples of this. With regard to the management of cross-border banks, however, international discussions are under way and this is hopeful, said Mr Nyberg.
He noted that at present the international debate is unusually intensive and there are many tricky questions to be resolved – not least in crisis management and supervision of the financial markets. The job is still an interesting one, but there is a time for everything, and we all know that it is best to stop while you are still having fun, Lars Nyberg concluded.
Read the whole speech in the PDF file below.
