the global investor summit rome 2024

The Subtle Art of Central Banking: A View From The Inside

In an unsettled global economy, central banks are being
asked to shoulder ever more responsibility. Dual mandates
are swelling into triple and even quadruple mandates,
presenting policymakers with at times competing priorities.
At its recent Global Investor Summit in Rome, Bank ofAmerica convened a panel of central bankers, financeministers and world-renowned experts, chaired by Claudio
Irigoyen, global head of Economics Research, BofA GlobalResearch, to share their insights into the lessons central
banks can learn from the past, and where they should gonext at this critical juncture.

A full plate
As Bank of America’s research team has pointed out, 2023 wasa year that defied expectations in multiple ways: recessions thatweren’t, rate cuts that never came, equity and bond markets
that over and underperformed. This unpredictability compounds
the complexities faced by policymakers as they seek a way
forward that will stand the tests of time and hindsight.
Irigoyen framed the problem in terms of the breadth ofchallenges central banks are now being asked to consider, evenas they seek to engineer a soft landing while beset by global
conflicts and their externalities, the aftermath of the COVID-19
pandemic and mixed signals from major economies.
“We’re asking central banks to deal with pricestability, climate change, inequality – is it too much?”
he asked the panelists.

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Rome, Italy

In response, they noted that many of the tools available tocentral bankers are effective only some of the time. This isbecause monetary policy is asymmetric – it can be very
effective in fighting inflation, but much less effective inbringing economies out of recession.
In addition, panelists stressed the need for cooperation between
fiscal policy and monetary policy – something Irigoyen pointed
out was less and less in evidence. The audience in Rome heard
convincing arguments that such cooperation is required tounlock the full macro-prudential toolkit necessary to see off therisk of stagflation, enabling tactics from intervention in forex
markets to more extreme solutions such as capital controls.

The Subtle Art of Central Banking: A View From The Inside
Lessons from Japan

Panelists noted that calculating the neutral rate of interest
across different markets had been made more difficult
by still ambiguous emerging forces such as the impact of
artificial intelligence on the labour market. Factors likethese are likely to impact countries differently dependingon their technological sophistication and differing
demographic pathways.

The eminent economist Simon Kuznets once quipped that there
are four types of economy: developed, undeveloped, Argentinaand Japan. That last country continues to occupy the minds ofpolicymakers given Japan’s long experience with deflation andrecent emergence from it – an experience that will be
particularly relevant to other economies facing, or soon to face,similar demographic and growth challenges.

The panel discussed the future of the global financial
system, and whether international tensions could impact
the mix of currencies in which international trade isconducted, particularly among emerging markets.

One panelist was Tsutomu Watanabe, professor of economics at
the Graduate School of Economics of the University of Tokyo,
who has closely tracked Japan’s return to inflation over theprevious two years, and its deployment of unconventionalmonetary policies in pursuit of this goal.

R-Starrateofofinterest)
R-star(neutral(neutral rateinterest)
6%
6%

The professor made the point that deflation in Japan wasintractable for decades because it had become embedded insociety, with lower prices reinforcing consumer expectations ofeven lower prices to come. He urged central banks andgovernments to do everything they can to prevent these kind ofsentiments from crystallising. And in a prediction that wasproven correct just days later, he told the panel that
“Japan’s new interest rate will be near zero.”R-star rate
R-starrate

5%
5%
4%
4%
-4.00 ppt

3%
3%
2%
2%
1%
1%

1199
6119 2961199 461199 661199 871199 071199 271199 471199 671199 881199 081199 281199 481199 681199 891199 09119 2991199 491199 692200 802200 002200 2220004
02200 602200 812200 012200 21220 401
220 601
2200 822200 022200 222200 4
260%
0%

Year
Year

Note: Gray bars indicate recessions.
Source: Holston-Laubach-Williams model, Federal Reserve Bank of New York.

Note: Gray bars indicate recessions
Source: Holston-Laubach-Williams model,
Federal Reserve Bank of New YorkA question of neutrality

0-1-1

Rates of Interest

Debate has flourished since the pandemic over whether
the neutral rate of interest has risen or fallen. In January2024 in-depth research from Bank of America’s U.S.
economists concluded that R-star had increased since thepandemic to sit at around 40 basis points in real terms,
in line with the Federal Reserve’s assumptions.

Rates of Interest

2Rates ofInterest
Rates of Interest

Real natural rates of interest in the eAnother key topic for the panel at the Global Investor Summit(percentages per annum)
Real natural rates of interest in
the euro zone
in Rome was that of neutral or natural interest rates, or R-star:
Term structure-based(range)Real natural rates of interest in the euroarea
DSGE
model
(percentagesperannum)
the real policy rate of interest that eliminates inflationary or(percentagesper annum)
Real natural rates of interest in the euro area
Median (all measures)(percentages per annum)
deflationary pressures, per Maurice Obstfeld’s definition1.
Semi-structural (range)
Termstructure-based(range)
Term structure-based (range)
DSGEmodel
model
Survey-based (median)
DSGEMedian(allmeasures)
Specifically, the expert panels considered which factors are
Semi-structural(range)
Median(all measures)
3
Survey-based (median)most important in estimating R-star, given that its level can only
Semi-structural (range)
33
Survey-based (median)2
be inferred rather than directly measured and that223
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methodologies surrounding it continue to evolve.

10-2-2-3-3-4-42008

2008

2010

2010

2012

2012

2014

2014

-1-1
2016

Year-22016

2018

2018

2020

2022

2020

2022

Year-42008-3

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0-3-2 Source: European Central Bank-4
2008

1

2010

2012

2010
2014

2012
2016
Year

2
2018

The Subtle Art of Central Banking: A View From The Inside
What the session, and indeed the wider Global Investor Summit,reinforced was that the factors and choices confronting central
banks are complex. As the global economy enters a new era oftechnological change, and more and more states grapple withthe consequences of aging and declining populations, theexperiences of once-outliers like Japan are going to become
relevant to many more policymakers around the world.
How they respond will have profound consequences for howeconomies adapt to a period of at times difficult and at othertimes promising transformation.
To learn more about Bank of America’s international
business, please get in touch with your relationshipmanager or click here.

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Natural and Neutral Real Interest Rates: Past and Future, Maurice Obstfeld
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