New Dimensions and Frontiers inCentral Banking
Summary of the 2022 BOJ-IMES Conference
by Takuji Fueki, Yutaka Soejima, and Shunichi Yoneyama
I. Introduction
The Institute for Monetary and Economic Studies (IMES) of the Bank of Japan (BOJ)
held the 2022 BOJ-IMES Conference, entitled “New Dimensions and Frontiers in Central Banking,” on May 25–27, 2022.1 This was the 27th conference since its start in
1983, and was held online as last year. It covered a wide range of issues on new dimensions faced by central banks and frontiers that they are developing.
The conference began with the opening remarks delivered by Haruhiko Kuroda,
Governor of the BOJ. The Mayekawa Lecture, presented by Kenneth S. Rogoﬀ(Harvard University) on central bank independence and the challenges, followed.
The keynote speech on inflation surges and monetary policy was given by Carl E.
Walsh (University of California, Santa Cruz), honorary adviser to the IMES. The
paper presentation sessions discussed four papers on economic inequality, climatechange, digital currencies, and the automation of the economy from central bankperspectives, presented by Jesús Fernández-Villaverde (University of Pennsylvania),
Alexander Ludwig (Goethe University Frankfurt), Daisuke Ikeda (BOJ), and Luca
Fornaro (Centre de Recerca en Economia Internacional and Universitat Pompeu
Fabra), respectively. The policy panel discussion on challenges facing central banks,
moderated by Masazumi Wakatabe, Deputy Governor of the BOJ, was comprisedof panelists: Pierre-Olivier Gourinchas (International Monetary Fund: IMF), James
Bullard (Federal Reserve Bank of St. Louis), Philip R. Lane (European Central Bank:
ECB), and Benjamin E. Diokno (Bangko Sentral ng Pilipinas: BSP). The concluding remarks were delivered by Athanasios Orphanides (Massachusetts Institute ofTechnology), honorary adviser to the IMES.

Takuji Fueki: Formerly Director, Institute for Monetary and Economic Studies, Bank of Japan
Yutaka Soejima: Director-General, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: yutaka.
soejima@boj.or.jp)
Shunichi Yoneyama: Director, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: shunichi.
yoneyama@boj.or.jp)..........................................................................................................................................
The conference organizers wish to express their sincere gratitude to the two IMES honorary advisers, Athanasios
Orphanides and Carl E. Walsh, the IMES chief councillor Kazuo Ueda, and all other conference participants forthe thought-provoking presentations and discussions. The views expressed throughout this summary are those of
the attendants and do not necessarily reflect those of their respective institutions. All remaining errors are theauthors’ responsibility.
1. See Appendix 1 for the program. See Appendix 2 for a list of participants; their aﬃliations are as of May
25–27, 2022.

MONETARY AND ECONOMIC STUDIES / NOVEMBER 2022
DO NOT REPRINT OR REPRODUCE WITHOUT PERMISSION

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II. Opening Remarks
Kuroda pointed out that the environment surrounding central banks had changed dramatically since the conference last year and that the themes for discussion appeared tohave expanded rapidly. He then provided an overview of the theme, focusing on the
new dimensions faced by central banks and the frontiers they are developing.2
First, Kuroda pointed out a global surge in inflation as one of the two challenges
currently facing central banks. He argued that the supply and demand factors behind
this inflation diﬀer between countries and that the appropriate monetary policy response will also diﬀer. He noted a surge in geopolitical risk as another challenge andargued that central banks were required to pay close attention not only to the further
increase in commodity prices and subsequent higher inflation but also to its long-term
impact on the global economy, for instance, that on trade and capital flows.
Next, as for frontiers that central banks should develop, he first pointed out the acceleration of structural changes in the economy, such as the digitalization and automation of society and the economy. He also noted the increase in income inequality. He
argued that central banks should pay close attention to the changing economic structure
and its potential impact on prices and the real economy. He then raised climate change
issues as the second frontier. He argued that in principle it is the governments’ industrial and fiscal policies that play the primary role in addressing them, but the role ofcentral banks may also be considered from the perspective of the use of market mechanisms and initiatives. Finally, he raised the transformation of the monetary system
as the third frontier. He argued that central banks are required to engage in designingand building the new monetary system globally while examining the possible eﬀects
of future changes to money on monetary policy and financial stability.
Kuroda stressed that in a rapidly changing world filled with uncertainty central
banks need to be nimble, agile, and smart to adapt to changing environment. He concluded his remarks by saying he was looking forward to the new insights gained in thisconference will ensure that central banks are all fit and ready to face those challenges.

III. The Mayekawa Lecture: Institutional Innovation and Central
Bank Independence 2.0
Rogoﬀ began his lecture by pointing out that central bank independence is the bedrockof modern inflation targeting.3 However, he argued that this independence has beenchallenged in recent years due to the zero-bound on nominal interest rates. He also
pointed out that the eﬀectiveness of monetary policy has been reduced and the political
economy pressure on central banks has increased significantly. He stated that this newpressure emerged because fiscal policy has been responsible for much more of theburden of routine macroeconomic stabilization after the global financial crisis.
Rogoﬀ then indicated that, in a global low interest rate environment, innovationsin policy measures are required to restore the eﬃcacy of monetary policy. He claimed................................
2. For details, see Kuroda (2022).
3. For details, see Rogoﬀ (2022).

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New Dimensions and Frontiers in Central Banking

that it would be the most eﬀective to make legal and institutional changes which invoke
deep negative interest rate policy. He argued that a central issue in this innovation isto prevent arbitrage by financial institutions (e.g., insurance firms, pension funds andbanks) from all interest-bearing assets into paper currency under negative interest rates
environment. He then suggested two possible approaches to this challenge: (i) phasing out paper currency, and (ii) setting an exchange rate between cash and electronic
currency and controlling it so that the value of cash depreciates at a rate calibrated tomatch the path of negative interest rates.
As for other factors which challenge central bank independence, Rogoﬀ first raised
the recent retreat from globalization. He stated that globalization had increased priceflexibility and reduced monopoly power, which had made it easier for central banks
to control inflation. Meanwhile, he argued that contemporary trends in deglobalization
would make it more diﬃcult for central banks to achieve low inflation in the future.
Next, he stressed that a greater challenge to central bank independence is the rise ofdigital and crypto currencies, which threatened the eﬀectiveness of central bank policy
instruments. He concluded his lecture by saying that the world has arrived at a newera of central bank independence, and central banks need to innovate to deal with thepolitical and technical changes.
From the floor, Kazuo Ueda (Kyoritsu Women’s University and University ofTokyo) asked whether the Federal Reserve (Fed) had acted a bit later than desirable inthis cycle in raising rates. Rogoﬀ replied that central banks, including the Fed, might
have hesitated to raise interest rates because they did not have adequate tools for pushing the economy if raising interest rates caused a recession and the interest rates hit thezero-bound again. He noted that it was important for central banks to have some toolkits that made them not afraid to raise interest rates. Orphanides asked how the governance of central banks should be improved, commenting that longer non-renewable
terms for board members could protect central bank independence. He also inquired
about how the mandates of central banks should be specified to protect their independence, given pressures on them to deal with climate change. Rogoﬀ agreed with thecomment that having longer terms could protect central bank independence. He also
argued that narrow and well-defined mandates would lead to greater central bank independence. He added that central banks would not have comparative advantage andinstruments to deal with climate change, although they should fully support environmental policies. Etsuro Shioji (Hitotsubashi University) inquired about the welfare
impact of adopting foreign digital currencies within a county. Rogoﬀ answered that
we should distinguish the welfare impact in advanced countries from that in developing countries. He then argued that, while the domestic circulation of foreign digitalcurrencies may lead to a variety of problems, such as the retention of transaction databy certain countries, stable foreign digital currencies could provide monetary stability, and a consequent improvement in social welfare, in emerging markets. R. Anton
Braun (Federal Reserve Bank of Atlanta) asked how central banks should be involved
in digital currencies. Rogoﬀ replied that, instead of having a CBDC, central banks
and governments should regulate digital currencies in order to keep their stability. Finally, Wakatabe asked whether the environment surrounding central banks would beheading into an inflationary period rather than a deflationary one, due to geopolitical3

situations and the retreat from globalization, which led central banks to prepare forthe higher inflation period from now, although central banks could ultimately control
inflation rate. Rogoﬀ agreed with the comment, pointing out that it might not be easy
to rein in inflation due to the reversal of globalization.

IV. Keynote Speech: Inflation Surges and Monetary Policy
Walsh stated that major central banks have fallen behind the curve in response to thecurrent inflation surges and seemed to be ignoring the lessons learned from the Great
Inflation of the 1960s and 1970s.4
Walsh showed that the policy rate projections by the Federal Open Market Committee (FOMC) are too low compared with the policy rate calculated based on the Taylor rule using the FOMC’s own economic projections, and he pointed out the Fed’s slow
policy response to recent high inflation. Next, using model simulations, he showed thatthe cost of a delayed policy response was not very large when people understood thatpolicy would respond in the future and long-run inflation expectations are anchored to
the Fed’s target. However, he cautioned that when people form inflation expectations ina backward-looking manner, persistently high inflation could lead to long-run inflation
expectations becoming unanchored, forcing the Fed to take a more aggressive policy
response that might then lead to more volatile fluctuations of the economy.
Next, Walsh reviewed two of the main explanations of the Great Inflation in the
1960s and 1970s and discussed their implications for current inflation surges. He
stated that the first explanation was the underestimation of the persistence of exogenous
shocks. He argued that central banks have once again dismissed the current inflation
surge as a temporary shock, even though results from the economic literature on policy
under uncertainty suggests that policymakers should act as if exogenous shocks arelikely to be persistent. He mentioned political pressure as the second explanation. He
argued that the Fed’s recent change in policy framework with the goal of broad-based
and inclusive maximum employment and flexible average inflation targeting (AIT) reduced transparency and accountability, creating room for political pressure on central
bank independence.
Walsh argued that the delayed policy responses might matter little thanks to thepower of forward guidance, as the Fed had been consistently signaling interest rate
hikes since December 2021, and the 2% inflation target may still maintain some credibility. However, he concluded that, if inflation does not return to target quickly, reestablishing a low-inflation environment might require a costly recession.
From the floor, Toshitaka Sekine (Hitotsubashi University) asked whether it wascorrect to understand that the introduction of the AIT framework by the Fed was one
reason why the Fed fell behind the curve. Walsh agreed with him that the AIT could
have contributed to the delay in policy responses and pointed out that under the current
circumstances, if the “2% average” is to be achieved over the next few years in accordance with the concept of AIT, then a very large deflation would need to be achieved
after the end of the current high inflation. However, he argued that the Fed is unlikely................................
4. For details, see Walsh (2022).

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New Dimensions and Frontiers in Central Banking

to have that intention and pointed out that AIT was originally introduced with low inflation in mind, rather than the current situation where actual inflation is much higher
than the target. He also referred to the implications for policy communication, pointing
out that inflation targets should be clear and straightforward, but under AIT, especially
if it is asymmetric, it becomes unclear what level of inflation the Fed would aim for in
the future, and this lack of clarity risks confusion.
Orphanides argued, from a diﬀerent perspective, that preemptive monetary policy
rules that reacted to fluctuations in future inflation better described the monetary policy in the Great Moderation than a simple Taylor rule. He also argued that the Fed fellbehind the curve because they abandoned such a preemptive element after the policy
framework change in 2020. Walsh pointed out that a preemptive policy rule requires
a forecast of future inflation and that, in the face of uncertainty, policy outcomes are
improved if the inertia of exogenous shocks is systematically overestimated when forecasting future inflation. He then noted that the literature on robust control suggested asimilar idea. Kosuke Aoki (University of Tokyo) pointed out that the current government debt level was extremely high, compared to that in the 1960s and 1970s, and somonetary tightening had a large impact on public finances. He then asked how thisfiscal situation would aﬀect the ability of central banks to fight against inflation surges.
Walsh commented that fiscal policy had been playing an increasingly important role
following the financial crisis and the recession associated with the COVID-19. He thenargued that central banks would face strong political pressures given the large impact
on public finances that monetary tightening would cause.

V. Paper Presentation Sessions
A. Inequality and the Zero Lower Bound
Fernández-Villaverde presented his study that showed that the level of real interest rates depended on central bank’s inflation target which appears to be irrelevantto the rates. The study sheds light on new theoretical findings that low target tends
to depress the real interest rates and lead to deflation, and that larger inequality ofhousehold wealth results in deeper decline in the real interest rates.5 He constructed aheterogeneous-agent New Keynesian (HANK) model with aggregate uncertainty andan occasionally-binding zero lower bound (ZLB) on nominal interest rates and proposed a novel solution algorithm. He emphasized three channels in this model that
reduce the level of the interest rates and make the room for maneuver of the central
bank smaller: (i) deflationary bias,6 (ii) precautionary savings due to idiosyncratic income risk, and (iii) precautionary savings due to aggregate negative shocks. He thenclaimed the non-neutrality of the inflation target on the level of real rates. He argued
that, with a lower inflation target, households anticipate that the ZLB will bind more
often, which stimulates their precautionary savings to insure against larger recession
risks due to the limits of monetary policy and thus leads to lower real interest rates.
................................
5. For details, see Fernández-Villaverde et al. (2022).
6. Anticipation of hitting the ZLB in the future by forward-looking households and firms puts downward pressureson the rate of inflation, even when the policy rate is above the ZLB. This downward pressure is referred to as
deflationary bias.

5

He also emphasized that the eﬀect of changes in the inflation target on the level of real
rates would be much larger in economies with greater wealth inequality. This is because
wealth-poor households have a stronger motive for precautionary savings. To evaluate
the quantitative eﬀects, he calibrated the model to the U.S. economy and showed thatchanges in the trend inflation (namely the central bank’s inflation target) and household
inequality explain an important part of the drop in real rates over recent decades.
As the discussant, Taisuke Nakata (University of Tokyo) began by praising thepaper for the methodological contribution, pointing out a novel solution algorithm
to solve HANK models with the ZLB and aggregate uncertainty. He also praised forshowing anticipation eﬀects of the ZLB on inflation and real rates. He then commented
that more quantitative investigation could be explored when compared to actual data,in particular regarding the frequency and the duration of the ZLB in the model. He alsosuggested that an inertia in the Taylor rule should be considered. He asked whether
several suggested strategies to overcome the deflationary bias in typical representativeagent New Keynesian (RANK) models were applicable to HANK models as well.
Fernández-Villaverde agreed with the importance of further quantitative eﬀorts andanswered to his question that he could explore the persistence of the monetary policies
and monetary policy strategies in HANK models. He also stated that it was still an
issue to study the existence of equilibrium in models where the ZLB binds with a very
high probability.
From the floor, Shioji asked how the results would be changed when demographic
changes and assets other than government bonds are incorporated into the model.
Fernández-Villaverde replied that the main message of the model would not bechanged when other types of assets were introduced. On the other hand, he pointed
out that it was an interesting extension to incorporate the overlapping generations
into this model. Ludwig commented that poor households would become poorer
because firm profits were distributed to households according to their income in thismodel. He also inquired about the advantage of the solution method developed in thispaper. Fernández-Villaverde agreed with the first comment and to the question heemphasized that the solution method developed in this paper was attractive because
it required less domain knowledge to design a good algorithm. Ippei Fujiwara(Keio University and Australian National University) asked whether it was possible
to discuss the deflationary steady state in this model. Fernández-Villaverde replied
that, the model economy could be in a deflationary steady state in the long run. He
also argued as one of the implications from the model that a mild increase in the
inflation target from 2% to 3% would be enough to let the economy escape from thedeflationary spiral.
B. Climate Change Mitigation: How Eﬀective is Green Quantitative Easing?
Ludwig presented an analysis on the eﬀectiveness of green quantitative easing (QE)
using an Integrated Assessment Model, which consists of an economic module and aclimate module.7 In this model, the production of final goods requires two types ofintermediate goods, dirty and clean. While clean intermediate goods production firms................................
7. For details, see Abiry et al. (2022).

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New Dimensions and Frontiers in Central Banking

use clean energy which does not emit CO2 , dirty intermediate goods production firms
use dirty energy which emits CO2 and thus has a negative impact on the economy
through increasing temperatures. Under this model settings, he analyzed the following
three simulation scenarios: (1) the government levies a carbon tax, (2) the central bankapplies green QE, that is, the central bank shifts its asset holdings away from dirty
firms’ capital to that of clean firms, and (3) a carbon tax and green QE are applied simultaneously. He noted that in case (1), temperature increase is suppressed by 0.17◦ C.
On the other hand, in case (2), temperature increase is suppressed by only 0.04◦ C. In
case (3), he showed that the two green policies are complements, yet the policy eﬀectiveness is less than the sum of the eﬀects of the two policies in isolation. He explainedthat this occurs because green QE increases capital costs facing dirty firms, inducing
these firms to substitute dirty energy for dirty capital in their production process, andit partially oﬀsets the eﬀect of the carbon tax to reduce the dirty energy use. Basedon these results, he argued that a carbon tax is a more eﬀective tool than green QE.
However, he also noted that green QE can be an eﬀective complement to carbon taxes,
as it has an additional climate change mitigation eﬀect when the carbon tax is alreadyin place.
As the discussant, Toan V. Phan (Federal Reserve Bank of Richmond) commended
the paper for its careful analysis based on the combination of the dynamic stochastic general equilibrium (DSGE) and the dynamic integrated climate-economy (DICE)
frameworks, and commented on two additional points that are relevant to the eﬀectiveness of green QE. First, he pointed out that the lack of financial frictions in the model
could lead to an underestimation of the eﬀectiveness of green QE. Clean firms tend to
face larger credit frictions than dirty firms, because they tend to be younger, smaller andhave less tangible capital. Therefore, suﬃcient credit injections from the central bankto clean firms may have a greater eﬀect. As a second point, he proposed the assumptionof the initial convexity in the production function of the clean sector, or “clean poverty
trap.” Under this realistic assumption, capital injections from the central bank would
have a greater eﬀect by helping the clean sector escape the clean poverty trap. This also
implies that green QE may only need to be in place temporarily, until the clean sector
achieves suﬃcient scale to escape the initial clean poverty trap. Finally, he added thatthe elasticity of substitution between clean and dirty input would be a more importantparameter if financial frictions and the clean poverty trap are accounted for. Ludwig
agreed with him and replied that the paper aimed to be an important first step to incorporate a finance perspective and that the development of this field was just beginning.
He added that credit frictions are certainly important at least in the short run.
From the floor, Orphanides argued that central banks have two very diﬀerent approaches to asset purchases. One is green QE, which is eﬀectively a subsidy to a specific sector of the economy over others, and the other is normal QE, which eﬀectively
empowers the government to decide the use of proceeds from the sale of government
bonds. He then claimed that normal QE seems preferable from the perspective of maintaining central bank neutrality with respect to sectoral distribution eﬀects and avoiding
central bank politicization. Ludwig agreed with him and replied that it would be much
more eﬃcient if the government taxes carbon and subsidizes the clean sector with therevenue while the central bank implements normal QE. Braun asked about the relative7

eﬃcacy of three types of strategies, changing portfolio allocation of exchange tradedfunds (ETFs) in the case of the Bank of Japan, subsidized credit to financial intermediaries, and improving energy eﬃciency of payment system, in terms of the promotionof green sectors by central banks. He also asked for views on the very limited opportunities for the Fed to intervene in financial markets. Ludwig responded that somesuggestions for subsidized credit could be obtained by extending the current model.
Related to the latter question, he replied that the degree of market intervention by theauthorities varies from country to country, and that one way to address this point would
be to add the European Union (EU), which is relatively active in market intervention,and other countries to the model instead of the single global monetary authority in thecurrent model.
C. Digital Money as a Medium of Exchange and Monetary Policy in Open
Economies
Ikeda considered global digital money, i.e. digital money that is widely used for transaction across borders, and its possible impact on monetary policy in open economies.8
He started by noting that global digital money had yet to emerge, but it was technologically feasible and might materialize in the future. He pointed out that against thisbackground, global digital money, including global stablecoins, had gained increasing
attention among policymakers. He used an open economy search model with multiple
currencies and derived two results. First, he showed that monetary policy autonomy,
i.e. central banks’ capacity to set monetary policy, would be lost in the standard modelwith global digital money. Second, he showed that this was not an inevitable outcome,and that monetary policy autonomy could be restored by extending the model and introducing specific government policies. He argued that such government policies include
limiting the amount of global digital money that serve for a transaction or banning theuse of global digital money for some transactions. He also added that the possibilityof the counterfeiting of global digital money could give rise to an incentive constraintthat plays a similar role to government policy that can help restore monetary policy
autonomy. In conclusion, he argued that the design, policy, and regulations of global
digital money were crucial for preserving monetary policy autonomy.
As the discussant, Linda S. Goldberg (Federal Reserve Bank of New York) commented that the paper provided a thoughtful analysis on conditions for monetary policy
autonomy in the economy with global digital money. She also commented that detailed
modeling of the global digital money would enrich the analysis and emphasized the importance of its definition. She then asked how the characteristics of the global digitalmoney considered in the paper are defined, and by whom and with what goals the supply of global digital money was determined in the model. As an example, she pointed
out that in the case of stablecoins as global digital money, further considerations would
deepen the analytical perspective, such as how the assets that support the value of thestablecoins could aﬀect liquidity services for the coins and monetary policy autonomy.
Ikeda replied that the supply of global digital money was exogenous in his model andagreed that modeling the supply side would enhance the analysis. He added that the................................
8. For details, see Ikeda (2022).

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New Dimensions and Frontiers in Central Banking

simple modeling of the global digital money was an initial step toward a more practicalanalysis and more work would be required to deepen the understanding of the possible
impact of global digital money on monetary policy.
From the floor, Sekine pointed out that although the paper focused on the mediumof-exchange role of money, the unit-of-account role was also important and, in practice, it might not be separated from the medium-of-exchange role. Ikeda agreed withthe comment and replied that a joint consideration of the two roles of money would
be a challenge for his future research. Shioji asked if the provider of the global digital currency might have an incentive to peg its value to that of the currency of a large
country, when we change the underlying assumption of the model and introduce asymmetry in size between the two economies. He also asked if the requirement to pay
taxes exclusively in national currency could play a similar role to government policythat helps restore monetary policy autonomy. Ikeda replied that the size of a country
did not aﬀect his results and that tax payments in national currency were similar in
spirit to the government policy in the model. Soejima commented that in addition to
Goldberg’s points incorporating the market microstructure of the retail payment system
into the model, including payment fees and payment cost bearers that vary by payment
methods, would be a promising direction for future research on digital money.
D. Monetary Policy in the Age of Automation
Fornaro presented a new framework in which monetary policy aﬀects the progress of
automation in the production of goods and services.9 He explained that this framework
was based on a standard task model with nominal wage rigidities and a long-run IS
curve, which described the impact of monetary policy on employment and the investment for automation. Specifically, there exists a threshold for the interest rate whichmakes the value of capital and labor equal for firms. When the interest rate is lower
than the threshold, capital is cheaper than labor, and thus firms boost investment inautomation, which results in a high-automation economy. Conversely, when the interest rate is higher than the threshold, capital is more expensive than labor. Thus, firms
do not substitute labor with capital, and automation remains low. Then, he showed
there could be multiple steady state equilibria with diﬀerent automation levels depending on the level of the interest rate. Then, Fornaro argued that monetary expansions
had the eﬀect of increasing labor productivity by inducing firms to use more automation technology due to the lower price of capital. Therefore, in addition to the eﬀect
of increasing employment and inflation as described in the traditional New Keynesian model, monetary expansion could have the opposite long-run eﬀect of decreasing
them through higher labor productivity. Thus, he oﬀered a new perspective that thecentral bank therefore could face a tradeoﬀ between automation and employment in
the long run. For example, he explained the case, such as the secular stagnation, in
which demand is permanently low and the central bank cannot necessarily achieve full
employment due to the zero-interest-rate constraint. He argued that in that case thecentral bank faces a choice: i) to ease monetary policy as much as possible and allow
automation to progress, thereby increasing productivity while allowing some unem................................
9. For details, see Fornaro (2022).

9

ployment, or ii) to keep interest rates high and hinder automation aiming at maximum
employment by constraining productivity growth and wage increases.
As the discussant, Fujiwara commended the paper by Fornaro for oﬀering a simple but innovative model with many implications. He then explained the relevance ofthe results of the paper to the Japanese economy in the past. Specifically, he explainedthat the trend of robot stock in Japan reached its peak in the late 1990s and decreased
thereafter and that real wages began to decrease right around that time, which impliedthat firms had less incentive to automate. He noted that these facts were consistent
with the framework of Fornaro. He also gave the following six comments. First, hepointed out that labor and capital may not be highly substitutable, referring to someprevious studies. Second, he asked if this automation channel has the first order importance in the eﬀect of interest rates on total factor productivity, compared to the otherchannels discussed in the literature. Third, he asked if there were observable suﬃcient
statistics to estimate the breakeven interest rate where the values of capital and laborwere equal. Fourth, he pointed out the importance of some empirical testing to show
the existence of the automation channel of monetary policy transmission. Fifth, he proposed to weaken the assumption in the impulse response functions that agents knew theterminate steady state since there could be multiple ones. Finally, he underscored the
diﬃculty of monetary policy making and its communication under many counteracting
channels of monetary policy. Fornaro agreed on the importance of empirical testing
and commented that his model could serve as a framework to motivate empirical research on this topic.
From the floor, Aoki asked whether there were multiple equilibria in the case where
the productivity of capital and labor varied by task. Fornaro replied that he also discussed such a case in the paper and there still existed multiple equilibria. Masaaki
Kaizuka (BOJ), the chairperson, asked about the eﬀect of fiscal policy as a measure
to stimulate labor displaced by automation. Fornaro replied that he also discussed thispoint in the paper and that fiscal policy can support automation and a high level of
employment. Andrea Gerali (Banca d’Italia) pointed out that automation in Japan had
not been boosted despite massive monetary policy stimulus in the last 10 to 20 years,
which was not consistent with the framework of the paper, and proposed the introduction of uncertainty to understand the situation in which investment in automation is notboosted with low interest rates. Fornaro replied that a liquidity trap with no automation
is properly modeled by introducing the assumption of liquidity preference instead.

VI. Policy Panel Discussion
In the policy panel discussion, moderated by Wakatabe, four panelists, Gourinchas,
Bullard, Lane, and Diokno, discussed the new dimensions and frontiers facing central
banks.
A. Remarks by Panelists
Gourinchas discussed policy challenges for central banks in advanced economies andemerging markets. He first mentioned that the current world economy was marked

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New Dimensions and Frontiers in Central Banking

by the rebound from the COVID-19 pandemic and the war in Ukraine, and that the
conjunction of the two had led to a significant downward revision for growth and a
sharp upward revision for inflation in the IMF forecast for the world in 2022 and 2023.
Regarding advanced economies, he pointed to combating inflation as a major policy
challenge. He explained that in most economies except for Japan, inflation had exceeded target levels and nominal wages had risen as labor markets had tightened. He
added that some measures of long-run inflation expectations had exceeded target levels
in several economies, which was certainly a source of concern. Regarding emerging
markets, he pointed to managing financial spillovers as a major challenge facing central banks. He mentioned that a historical pattern of adverse financial conditions, suchas a repricing of risk and capital outflows, that was associated with interest rate hikes
in advanced economies had yet to be seen in emerging markets as a whole. But heargued that a source of concern was an increase in the number of countries with debt
problems. Finally, he concluded that from a medium- to long-term perspective, central
banks should address frontier challenges such as climate change and the new forms ofdigital money and crypto-assets.
Bullard discussed the recent surge in U.S. inflation, credibility, and forward guidance. He firstly noted that the current U.S. inflation was comparable to levels seen 1974
and 1983. He argued that there was a risk that inflation expectations could become unmoored, and this situation was straining the Fed’s credibility with respect to its inflation
target. However, he added that modern central banks had maintained higher credibility
than in the past, much of it stemming from an explicit commitment to inflation targeting, and they also made more use of forward guidance. As an illustration that forward
guidance had taken eﬀect, he pointed to the fact that medium- to long-term market
interest rates had moved above their pre-pandemic benchmarks, while the policy rate
had not. He stressed that U.S. inflation was far above target, so market rates would
have to move well above the benchmarks this year before converging back to lower
levels in subsequent years. To provide an idea of the policy rate increases required
to bring inflation under control, he mentioned a minimal Taylor-type rule calculationand its recommended policy rate of 3.63%. He closed his remarks by stressing againthat forward guidance was helping the Fed move more quickly to keep inflation undercontrol.
Lane discussed the current high rates of inflation, the formation of inflation expectations, and the conduct of monetary policy. He focused on a central scenario discussed
by many experts that inflation would return to around 2% after a prolonged period of
inflation above the target. He added that supply shocks, such as an increase in energy
prices and a shortage of productive capacity, would ultimately dissipate, but argued thatdevelopments in inflation expectations were an important issue, as these can to someextent be adaptive in nature. He explained that inflation expectations had been updated
upon changes in the actual inflation data, as for example these had been revised downward in the years before the pandemic. He argued that a big question was how thecurrent surge in inflation would aﬀect inflation expectations and whether there was arisk of inflation expectations settling down above the target. He added that he therefore
would keep a close eye on the formation of inflation expectations and would focus on
the dynamics of prices and wages. He also mentioned a potential diﬀerence between

11the euro area and the U.S. regarding the impact of the energy shock. He explained thatfor the euro area, energy shocks increased prices initially but could have the opposite
eﬀect in the medium term as the energy shock constituted a large negative shock to theterms of trade and could reduce demand in the economy. Finally, regarding the conduct of monetary policy at the ECB, he emphasized that there was a straightforward
and robust roadmap until the summer, as made clear by President Lagarde. Beyond
the summer the ECB monetary policy would remain data-dependent to make sure that
inflation stabilizes at 2%.
Diokno discussed the post-pandemic recovery in the Philippines, as well as how
the BSP had adapted to the ever-changing environment. He stated that the Philippine
economy had been recovering strongly from the pandemic-driven recession as mobility
restrictions had eased and borders had opened to foreign tourists. He added that the recovery had been made possible by expanding healthcare capacity and accelerating thevaccination program. He also noted that the inflation rate was expected to rise to 4.6%
in 2022, due to higher oil prices, but it was expected to return to within the target range
at 3.9% in 2023. He added that under the economic circumstances, the BSP raised the
key policy interest rate to 2.25%. Next, he pointed out that the pandemic was an effective catalyst for the financial sector to evolve and innovate, and he mentioned the
BSP’s eﬀorts on the digitization of the payment system as an example. He explainedthat even before the pandemic, the BSP had already prepared a roadmap to transformthe Philippine payments system into an eﬃcient, inclusive, safe, and secure digital
payment ecosystem that supports the diverse needs and capabilities of individuals andfirms, and the pandemic boosted the progress. He stressed that with digitalization andfinancial technology, the BSP stood ready to reform, innovate, and transform by providing an enabling regulatory environment. He closed his remarks by stating that thewide-ranging reforms would ultimately create tangible economic benefits to the Philippine public, as the BSP remained committed to promoting price stability and a resilient,
responsive, and inclusive financial system.
B. Discussion among the Moderator and Panelists
Wakatabe began the discussion with recent price developments and new challenges
for central banks. He first pointed out that prices were rising at rates not experienced inrecent years in the euro area and the U.S., and that the pace of price increases had accelerated in the Philippines while it remained moderate in Japan. Looking at the demandside, he stated that real GDP had recovered to pre-pandemic levels in those economies
except for Japan. He explained that pent-up demand for consumer spending had been
limited in Japan. Looking at the supply side, he noted that a slow recovery in the labor force participation rate, due in part to so-called “Great Resignation,” contributed
to high inflation in the U.S. He then argued that soaring energy prices were driven
not only by the global economic recovery but also by the curbing of fossil fuel-related
capital investment with a view toward de-carbonization, and by heightened geopolitical risks. He noted that recent price developments seemed to suggest that inflation
had become more persistent. Next, he turned to new challenges for central banks, focusing on climate change and the digitalization of money. He pointed out that risks
related to climate change were increasing and that public interest in climate change

12 MONETARY AND ECONOMIC STUDIES / NOVEMBER 2022

New Dimensions and Frontiers in Central Banking

issues was growing. He then stated that demands on central banks to address climatechange risks and the movement toward de-carbonization are increasing. He also mentioned that many central banks were engaged in some form of CBDC work and moving
on to more advanced stages, such as developing a CBDC. Finally, he pointed out thatthe expansion of private digital currencies, including stablecoins, could pose a risk tofinancial stability and investor protection.
Wakatabe asked two sets of questions to the panelists. First, he asked whether thefear of low inflation or deflation was over, and we would see the return of high inflation. And relatedly, he asked whether the current inflation targeting monetary policy
framework was still valid. Gourinchas replied that high inflation was already here, andwe were now in a high inflation environment. He also replied that the flexible inflation
targeting framework was still valid in addressing the current inflation. He added that
inflation would come down as long as central banks do their job and keep inflation expectations well anchored. He mentioned that in the medium to long term, the forces that
had led to a low neutral interest rate, such as lower productivity, ageing populations,and demand for safe assets, might reassert themselves. He added that if fragmentationof the global economy were to occur, it could lead to higher volatility in prices andhigher unit labor costs. Bullard replied that low inflation in the U.S. seemed over, andthe U.S. would have a new regime of higher nominal interest rates and higher inflation
than those seen previously. Regarding the monetary policy framework, he explainedthat the Fed’s review of monetary policy strategy ratified in 2020 had been designed
for low inflation and low nominal interest rate situations. He added that the implicit
background argument was that the Fed would implement the ordinary inflation targeting in high inflation situations. Lane recalled that the ECB’s strategy review analyzed
the sources of low inflation before the pandemic. There had been a mixture of a seriesof negative shocks, the financial crisis, the European debt crisis, and fiscal austerity.
He added that the analyses suggested that inflation pressure could materialize if thesources of low inflation either disappear or go into reverse. He argued that inflation had
certainly upside risk and the temptation was to focus on the uncertainty factors thatbring more inflation, but he added that the distribution of risk was not on the upside
only and that downside risks to the 2% target also continued to exist. Diokno repliedthat the current inflation targeting framework remained valid and appropriate for thePhilippines. He added that the introduction of the inflation targeting framework by the
BSP had succeeded to lower headline inflation and controlled average inflation within
its target.
Next, Wakatabe asked whether the mandates of central banks should be reconsidered given the recent development of new challenges and whether central bank independence needed to be redefined. Gourinchas argued that central banks could play arole in addressing climate change, but they could not be the core of any climate transition. He added that serious climate transition rested on carbon pricing, investment
in renewable technologies, subsidies, and measures to address distributional issues
that might arise during climate transition. He emphasized that central bank independence was really critical for anchoring inflation expectations and a loss of independence
would be a tremendous blow to macroeconomic stability. Lane stressed that price stability was the ECB’s primary mandate, and that the ECB essentially had a secondary

13

mandate of supporting the general economic policies in the European Union as longas this did not conflict with the primary mandate. He added that the ECB had worked
on reshaping the operational framework to support the green transition, in line with its
mandate. He also reflected on digital money and noted that the anchor of the payment
system was the central bank, and it made a lot of sense for central banks to consider
the potential of CBDC as an anchor of a digital monetary system. Diokno stressedthat central banks should remain focused on price stability. He pointed out that traditional monetary instruments were best suited to deal with demand-side management
and might not be appropriate to directly address other important issues such as climatechange and inequality. He noted that inflation expectations had remained relatively wellanchored in the Philippines, so the credibility of the central bank’s commitment to pricestability would be maintained, even in the face of rising inflation. Bullard commented
that climate change or any other very long transition in the economy would aﬀect thelong-run balanced growth path of the economy, so central bankers needed to be awareof this and understand how to react. He mentioned inequality and argued that monetary policies were designed to get the very best outcome for the whole of society, but
making it more convincing would require economic models that take inequality into
account. He added that getting greater granularity regarding data and models, to understand who was aﬀected and how by monetary policy, would be an interesting research
theme.
C. General Discussion
Wakatabe opened the floor for questions. Walsh noted that monetary policy based its
eﬀectiveness on the credibility of central banks and the ability to use forward guidance
and asked how central banks should communicate policy intentions with the public topreserve credibility when there was a gap between households’ and financial markets’
expectations about inflation and monetary policy. Bullard replied that he focused on
financial markets’ expectations, such as treasury inflation-protected securities (TIPS),
because they were sensitive to day-to-day information. He noted that the people being
asked in surveys might not be well informed. He pointed out the importance of firms’
pricing and noted that firms appeared to set prices in a state-dependent manner andto speed up price reviews in the current high inflation environment. Shioji pointed
out that central banks have developed various unconventional monetary policy toolsin pursuit of macroeconomic stability, but, as a result, are now subject to potential
political pressures to intervene in resource allocation at the microeconomic level. He
asked if we could devise a new institutional arrangement under which they can focus
on their traditional mandates without giving up those new policy tools. Lane repliedthat it was clear that all of the ECB monetary policy instruments, including balance
sheet policies, were subordinated to the price stability mandate and that the ECB had
demonstrated that such policies were set to stabilize inflation at the target. He addedthat all monetary policy instruments were looked at jointly and the underpinnings werealways price stability.

14 MONETARY AND ECONOMIC STUDIES / NOVEMBER 2022

New Dimensions and Frontiers in Central Banking

VII. Concluding Remarks
Orphanides summarized the presentations and discussions at the conference. He notedthat the conference covered a broad range of issues facing central banks today, as in
the Opening Remarks, such as the surge in inflation and geopolitical risks, structuralchange in the economy, climate change, and the digitalization of money. First of all,he argued that the Mayekawa Lecture by Rogoﬀ focused on challenges in central bankindependence in recent years, saying that there appeared to be a rise in political economy influence on monetary policy, drawing on recent experience in the United States.
He agreed with the point and cautioned that central bank independence should not
be regarded as a given, and that central banks need to operate the policy properly tomaintain it over time. Next, he noted that the keynote speech by Walsh focused on
the recent surges in inflation and monetary policy response, and underscored the importance of maintaining central bank credibility to contain the cost of falling behindthe curve. He also highlighted that given the uncertainty about the persistence of inflationary shocks, robust monetary policy response should be much more forceful thanotherwise. Regarding the four paper presentations, he stated that the challenges facing
central banks were thoughtfully discussed. He commented that the recent increase in
scrutiny about the eﬀects of monetary policy on inequality might reflect the fact that
more central banks have faced the ZLB, where the eﬀects on inequality are actuallymore pronounced than otherwise, as Fernández-Villaverde presented. With respect toclimate change, he pointed out that the most important contribution of the paper by
Ludwig was that green QE was inferior to proper fiscal policy in dealing with climatechange, and he cautioned that central banks should not over-promise on climate change
problems. On the digitalization of the economy, he argued that it was necessary to restrict the use of global digital currency in some way, in order to preserve monetary
policy autonomy, as presented by Ikeda. The study by Fornaro, which revealed the link
between automation and monetary policy, was a new finding that suggests that the ZLB
made it harder for monetary policy alone to ensure full employment. He then suggested
that close cooperation between fiscal and monetary policy should be beneficial to an
economy when faced with the ZLB. As for the policy panel discussion, he touched
upon the issues on the validity of monetary policy frameworks against current inflationand pointed out that a plain and simple inflation targeting framework was quite eﬀective
in delivering price stability. On the reconsideration of the central banks’ mandates, hewarned that if central banks’ priorities were not clear, their mandates might inevitably
continue to be reconsidered and, as a result, their independence could be threatened.
He concluded his remarks by highlighting the importance of central banks continuing
to focus on maintaining price stability and being as clear and transparent as possible
and symmetric about maintaining the inflation objective without any bias.

15

References
Abiry, Raphael, Marien Ferdinandusse, Alexander Ludwig, and Carolin Nerlich, “Climate Change
Mitigation: How Eﬀective is Green Quantitative Easing?” IMES Discussion Paper No. 2022E-11, Institute for Monetary and Economic Studies, Bank of Japan, 2022.
Fernández-Villaverde, Jesús, Joël Marbet, Galo Nuño, and Omar Rachedi, “Inequality and the Zero
Lower Bound,” paper presented at the 2022 BOJ-IMES Conference on “New Dimensions andFrontiers in Central Banking” held by the Institute for Monetary and Economic Studies, Bankof Japan, 2022.
Fornaro, Luca, “Monetary Policy in the Age of Automation,” paper presented at the 2022 BOJ-IMES
Conference on “New Dimensions and Frontiers in Central Banking” held by the Institute for
Monetary and Economic Studies, Bank of Japan, 2022.
Ikeda, Daisuke, “Digital Money as a Medium of Exchange and Monetary Policy in Open Economies,”
IMES Discussion Paper No. 2022-E-10, Institute for Monetary and Economic Studies, Bankof Japan, 2022.
Kuroda, Haruhiko, “Opening Remarks,” Monetary and Economic Studies, 40, Institute for Monetaryand Economic Studies, Bank of Japan, 2022, pp. 21–24 (this issue).
Rogoﬀ, Kenneth S., “Institutional Innovation and Central Bank Independence 2.0,” Monetary andEconomic Studies, 40, Institute for Monetary and Economic Studies, Bank of Japan, 2022,
pp. 25–38 (this issue).
Walsh, Carl E., “Inflation Surges and Monetary Policy,” Monetary and Economic Studies, 40, Institutefor Monetary and Economic Studies, Bank of Japan, 2022, pp. 39–66 (this issue).

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New Dimensions and Frontiers in Central Banking

APPENDIX 1: PROGRAM
Wednesday, May 25, 2022
Chairperson:

Opening Remarks
Speaker:

Kazuo Ueda, Kyoritsu Women’s University and University ofTokyo

Haruhiko Kuroda, Bank of Japan

Mayekawa Lecture: Institutional Innovation and Central Bank Independence 2.0
Lecturer:
Kenneth S. Rogoﬀ, Harvard University
Keynote Speech: Inflation Surges and Monetary Policy
Speaker:
Carl E. Walsh, University of California, Santa Cruz
Thursday, May 26, 2022
Chairperson:

Yutaka Soejima, Bank of Japan

Session 1: Inequality and the Zero Lower Bound
Presenter:
Jesús Fernández-Villaverde, University of Pennsylvania
Discussant:Taisuke Nakata, University of Tokyo
Session 2: Climate Change Mitigation: How Eﬀective is Green Quantitative Easing?
Presenter:
Alexander Ludwig, Goethe University Frankfurt
Discussant:Toan V. Phan, Federal Reserve Bank of RichmondSession 3: Digital Money as a Medium of Exchange and Monetary Policy in Open
Economies
Presenter:
Daisuke Ikeda, Bank of Japan
Discussant:Linda S. Goldberg, Federal Reserve Bank of New York17

Friday, May 27, 2022
Chairperson:

Masaaki Kaizuka, Bank of Japan

Session 4: Monetary Policy in the Age of Automation
Presenter:
Luca Fornaro, Centre de Recerca en Economia Internacional,
Universitat Pompeu Fabra
Discussant:Ippei Fujiwara, Keio University and Australian National University
Policy Panel Discussion
Moderator:
Masazumi Wakatabe, Bank of Japan
Panelists:
Pierre-Olivier Gourinchas, International Monetary FundJames Bullard, Federal Reserve Bank of St. Louis
Philip R. Lane, European Central Bank
Benjamin E. Diokno, Bangko Sentral ng Pilipinas
Concluding Remarks
Speaker:Athanasios Orphanides, Massachusetts Institute of Technology

APPENDIX 2: LIST OF PARTICIPANTS
Seiji Adachi
Masayoshi Amamiya
Kosuke Aoki
Ryo Aruga
Brett Berger
Jan Marc Berk
Martin Bodenstein
R. Anton BraunJames Bullard
Carlos Canizares Martinez
Lillian Cheung
Luiz de Mello
Benjamin E. Diokno
Mustafa DumanMarien Ferdinandusse
Jesús Fernández-Villaverde
Luca Fornaro

Bank of Japan
Bank of Japan
University of Tokyo
Bank of Japan
Board of Governors of the Federal Reserve System
De Nederlandsche Bank
Board of Governors of the Federal Reserve System
Federal Reserve Bank of Atlanta
Federal Reserve Bank of St. Louis
Národná banka Slovenska
Hong Kong Monetary Authority
Organisation for Economic Co-operation and Development
Bangko Sentral ng Pilipinas
Central Bank of the Republic of Türkiye
European Central Bank
University of Pennsylvania
Centre de Recerca en Economia Internacional, Universitat Pompeu Fabra

18 MONETARY AND ECONOMIC STUDIES / NOVEMBER 2022

New Dimensions and Frontiers in Central Banking

Takuji Fueki
Hiroshi Fujiki
Ippei Fujiwara
Shin-ichi Fukuda
Andrea Gerali
Linda S. Goldberg
Pierre-Olivier Gourinchas
François Haas
Hideo Hayakawa
Daisuke Ikeda
Nobuo Inaba
Takatoshi Ito
Kazumasa Iwata
Per Jansson
Masaaki Kaizuka
Goushi Kataoka
Masahiro Kawai
Nozlan Khadri
Marta Kightley
Juha Kilponen
Yukinobu Kitamura
Keiichiro Kobayashi
Junko Koeda
Hirohide Kouguchi
Haruhiko Kuroda
Philip R. Lane
Jonathan Lees
Alexander Ludwig
Kazuo Momma
Ichiro Muto
Hiroshi Nakaso
Taisuke Nakata
Juha Niemelä
Kiyohiko G. Nishimura
Asahi Noguchi
Galo Nuño
Hyunseung Oh
Athanasios Orphanides
Cyn-Young Park

Bank of Japan
Chuo University
Keio University and Australian National University
University of Tokyo
Banca d’Italia
Federal Reserve Bank of New YorkInternational Monetary Fund
Banque de FranceTokyo Foundation for Policy Research
Bank of Japan
Ricoh CO., LTD.
Columbia University and National Graduate Institutefor Policy Studies
Japan Center for Economic Research
Sveriges Riksbank
Bank of Japan
Bank of Japan
Economic Research Institute for Northeast Asia
Bank Negara Malaysia
Narodowy Bank Polski
Bank of Finland
Rissho University
Keio University
Waseda University
Bank of Japan
Bank of Japan
European Central Bank
Reserve Bank of Australia
Goethe University Frankfurt
Mizuho Research & Technologies
Bank of Japan
Daiwa Institute of Research Ltd.
University of Tokyo
Bank of Finland
National Graduate Institute for Policy Studies
Bank of Japan
Banco de España
Board of Governors of the Federal Reserve System
Massachusetts Institute of Technology
Asian Development Bank

19

Yang Su Park
Toan V. Phan
Kenneth S. Rogoﬀ
Hiroki Sakaji
Toshitaka Sekine
Seiichi Shimizu
Tokiko Shimizu
Mototsugu Shintani
Etsuro Shioji
Shigenori Shiratsuka
Yutaka Soejima
Wataru Takahashi
Surach Tanboon
Shinichi Uchida
Kazuo Ueda
Kenji Wada
Masazumi Wakatabe
Carl E. Walsh
Kenichiro Watanabe
Toshiaki Watanabe
Tsutomu Watanabe
Yasutora Watanabe
Martin Wolf
Jason Wu
Shunichi Yoneyama
Naoyuki Yoshino
Fritz Zurbrügg

Bank of Korea
Federal Reserve Bank of Richmond
Harvard University
University of Tokyo
Hitotsubashi University
Bank of Japan
Bank of Japan
University of Tokyo
Hitotsubashi University
Keio University
Bank of Japan
Osaka University of Economics
Bank of Thailand
Bank of Japan
Kyoritsu Women’s University and University of
Tokyo
Bank of Japan
Bank of Japan
University of California, Santa Cruz
Musashino University
Hitotsubashi University
University of Tokyo
University of Tokyo
University of St. Gallen
Board of Governors of the Federal Reserve System
Bank of Japan
Keio University
Swiss National Bank

20 MONETARY AND ECONOMIC STUDIES / NOVEMBER 2022