Central Bank Design
under a Continued Low Inflation andInterest Rate Environment
Summary of the 2019 BOJ-IMES Conferenceby Shigenori Shiratsuka, Nao Sudo,and Shingo Watanabe
I. Introduction
The Institute for Monetary and Economic Studies (IMES) of the Bank of Japan (BOJ)
held the 2019 BOJ-IMES Conference, entitled “Central Bank Design under a Continued Low Inflation and Interest Rate Environment,” on May 29–30, 2019, at the BOJ
head oﬃce in Tokyo.1 The conference attracted about one hundred participants fromacademia, central banks, and international organizations. The conference covered awide range of issue related to the implementation and the eﬀects of central bank policies under a continued low inflation and interest rate environment.
The conference began with the opening remarks delivered by Haruhiko Kuroda,
Governor of the BOJ. The Mayekawa Lecture, presented by Jean-Claude Trichet, theformer President of the European Central Bank (ECB), followed. The keynote speech
was given by Carl E. Walsh (University of California, Santa Cruz), honorary adviser
to the IMES. The paper presentation sessions discussed four papers, presented by
Giancarlo Corsetti (University of Cambridge), Markus K. Brunnermeier (Princeton
University), Enrique G. Mendoza (University of Pennsylvania), and Nao Sudo (BOJ).
The policy panel discussion, moderated by Athanasios Orphanides (Massachusetts Institute of Technology), honorary adviser to the IMES, was comprised of three panelists:
Christian Hawkesby (Reserve Bank of New Zealand: RBNZ), Klaus Masuch (ECB),
and Masazumi Wakatabe (BOJ).
Shigenori Shiratsuka: Director-General, Institute for Monetary and Economic Studies, Bank of Japan (currently,
Faculty of Economics, Keio University, E-mail: shira@econ.keio.ac.jp)
Nao Sudo: Director, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: nao.sudou@boj.or.jp)
Shingo Watanabe: Associate Director-General, Head of Economic and Financial Studies Division, Institute for
Monetary and Economic Studies, Bank of Japan (E-mail: shingo.watanabe@boj.or.jp)..........................................................................................................................................
The conference organizers would 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 forthought-provoking presentations and discussions. The views expressed throughout this summary are those of theattendants and do not necessarily reflect those of their respective institutions. All remaining errors are the authors’
responsibility.
1. See Appendix 1 for the program. See Appendix 2 for a list of participants; their aﬃliations are as of May
29–30, 2019.

MONETARY AND ECONOMIC STUDIES / NOVEMBER 2019
DO NOT REPRINT OR REPRODUCE WITHOUT PERMISSION

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II. Opening Remarks
In his opening remarks, Kuroda pointed out that both inflation and nominal interest
rates remained low after the Global Financial Crisis compared with the pre-crisis period.2 He also reviewed the current major research agenda for central banks, whichwere to be covered by this year’s conference.
First, Kuroda discussed challenges to the monetary policy framework in textbook
New Keynesian models. Specifically, he stressed the reliability of the natural rate ofinterest as a policy benchmark, as well as the stability of long-term inflation expectations. Second, regarding monetary policy instruments, he pointed out that the eﬀectiveness of unconventional monetary policy tools would possibly be state dependent.
He also added that an important question seemed to be whether such unconventional
tools would be employed as standard policy tools in normal times. Third, he discussed
the relationship between price stability and financial stability. He noted that continued
low interest rates could aﬀect financial stability by changing the risk-taking behaviorof financial institutions. He also highlighted the importance of the choice of monetaryand macroprudential policy instruments to achieve policy goals. Finally, he touchedon the spillovers to emerging and developing economies and pointed out the growing
concern over associated potential adverse eﬀects to the global economy.
Thereafter, Kuroda expressed his hope that this year’s conference would contributeto deepening our understanding of central bank design under a continued low inflationand interest rate environment.

III. The Mayekawa Lecture: The Euro Area Economic, Fiscal and
Financial Governance: Difficulties and Successes in the Past–
Present Challenges–Future Steps
Trichet began by taking up the issue that the performance of the euro since its inception in 1999 had been underestimated.3 He stressed that the euro had been successful
in terms of international credibility, domestic price stability in the euro area, and resilience in turbulent times. He added that the euro area’s per capita real income growth
had been comparable to that of the United States. He also mentioned survey resultsthat showed solid popular support among European citizens for the euro and the euroarea and argued that this explained the remarkable resilience of the euro and of the euroarea.
Turning to the issues for further promotion of macroeconomic convergence among
euro area member countries, he made six proposals for strengthening economic, fiscal, and financial governance: (i) completing the ongoing process of establishing the
Banking Union, (ii) applying the Stability and Growth Pact and the Macroeconomic
Imbalance Procedure in a rigorous manner, (iii) improving the decision making inside
the European Stability Mechanism, (iv) establishing the euro area’s Minister of Economy, (v) providing the European Parliament with the last word on conflicts between................................
2. For details, see Kuroda (2019).
3. For details, see Trichet (2019).

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Central Bank Design under a Continued Low Inflation and Interest Rate Environment

national governments and the European Union institutions, and (vi) setting up a euroarea budget to stabilize business cycles and to facilitate structural reforms in an areawide fashion.
On monetary policy, he argued that the convergence of the key elements for policy
framework proceeded in major advanced countries, as evidenced by numerical definition of price stability at a 2 percent inflation rate in the medium to long run. To achieve
price stability in Japan, he stressed that not only expansionary monetary policy but
also promotion of structural reforms and higher wage growth were indispensable. He
added that the latter two required eﬀective coordination among a broad set of public
and private bodies.
From the floor, Orphanides noted that the ECB needed to take measures to support
the economic convergence process and to give more precise definition of price stability.
Trichet disagreed with those points by arguing that the delay in convergence was due
mainly to diﬀerences in member countries’ eﬀorts to improve cost competitivenessrather than the eﬀects of euro-area monetary policy, and that all taken into account,
there were more negatives than positives in changing the definition of price stability.
In any case, he would stress the importance of the medium and long term perspectivein the concept of the ECB. Kazumasa Iwata (Japan Center for Economic Research)asked whether continued non-performing loan problems in some member countries
were attributable to the incomplete Banking Union. Trichet acknowledged that thisplayed a role and mentioned that the integration of retail banking was significantly
lower than that of the wholesale banking. Kazuo Ueda (Kyoritsu Women’s University
and University of Tokyo) asked Trichet about his view on whether Japan should use
fiscal policy more to stimulate the economy, considering that yields on Japanese longterm government bonds implied a zero risk premium. Trichet said that doing so would
be a mistake for Japanese authorities, referring to the experience of the European debt
crisis, when there was large, sudden increase in risk premia on the government bondsof certain member countries. He stressed, once again, the decisive role of the social
partners and the importance of unit labor costs to be more dynamic.

IV. Keynote Speech: Alternatives to Inflation Targeting in Low
Interest Rate Environments
In his keynote speech, Walsh discussed whether inflation targeting (IT), which was
widely adopted by central banks, was the best monetary policy framework in low inflation and interest rate environments, or whether it should be replaced by an alternative
monetary policy framework such as price-level targeting (PLT) or average inflation
targeting (AIT).4
Walsh began by pointing out that IT might be inappropriate in low interest rateenvironments, since it was developed when the challenge was to reduce high inflationand then stabilizing it at a low level. Employing standard New Keynesian models anda goal-based approach to policy design, he computed the welfare loss arising fromshocks in an economy where the central bank’s objective was to stabilize the inflation................................
4. For details, see Walsh (2019).

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rate, the average inflation rate, or the price level, in addition to the output gap. He
showed that (i) when only prices were sticky and private agents had rational expectations, PLT dominated IT and AIT by automatically guiding inflation expectations ina stabilizing fashion, (ii) in the presence of wage stickiness and productivity shocks,
PLT performed significantly worse than IT and AIT, and (iii) when inflation expectations were well anchored, IT and AIT worked better than PLT. He then noted that theseresults depended on how the weights in the central bank’s objective functions were set
and that the analysis ignored the costs of changing the policy regime. He ended his
speech by noting that basic theoretical models of monetary policy capture the “science” of monetary policy but not the “art” required to successfully implement policy,
as the analysis abstracted from such important issues as model uncertainty and policy
credibility that policymakers must deal with in practice.
From the floor, Orphanides highlighted the benefits of comparing performance ofvarious simple rules particularly under model uncertainties, and asked why the analysis
was conducted using the goal-based approach. Walsh commented that complicatedrules were diﬃcult to communicate, and in such cases the central bank would still findit necessary to communicate their objectives. Paolo Pesenti (Federal Reserve Bankof New York) pointed out that the poor performance of PLT in the model was mostly
attributable to the large output gap volatility. He then asked whether PLT could be
optimal when an alternative welfare metric, such as no weight on the output gap in theloss function, was employed. Walsh replied that the weight on the output gap in thecentral bank’s objective function was very small with the standard calibration of the
New Keynesian model, thus leading to the large output gap volatility.

V. Paper Presentation Sessions
A. Exchange Rate Misalignment, Capital Flows and Optimal Monetary Policy
Trade-oﬀs
Corsetti presented his work on the optimal policy stance when capital flows createda trade-oﬀ between domestic stabilization, inflation and the external balance, basedon the two-country New Keynesian framework.5 Corsetti stressed that the misallocation associated to financial imperfections was well synthesized by the “wealth gap,”
which combined the relative deviation of domestic demand from the eﬃcient level athome and abroad, with real exchange rate misalignment. He showed that the optimalmonetary response to capital inflows that widened the deficit can be characterized analytically as a function of the wealth gap, and that, when this gap was positive, the optimal monetary stance depended on the degree of exchange rate pass through (ERPT).
When inflows overappreciated the currency and boost demand, the optimal monetarystance was contractionary if ERPT was incomplete (local currency pricing, or LCP),
and currency movements had limited eﬀects on the global demand for the country’s
output. The central bank stabilized domestic demand, tolerating below-target inflationand overappreciation. Conversely, the optimal stance was expansionary if EPRT wascomplete (producer currency pricing, or PCP): the central bank contained misalign................................
5. For details, see Corsetti, Dedola, and Leduc (2019).

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Central Bank Design under a Continued Low Inflation and Interest Rate Environment

ment, at the cost of above target inflation and ineﬃciently high demand. Relative tostrict price stability, exchange rate volatility was therefore lower in PCP than in LCP
economies.
As the discussant, Pesenti commented that the paper made an important contribution to both the theoretical and policy debate about international spillovers of monetary policy. In particular, the theoretical contribution was substantial as it explicitly
addressed the implications of financial market imperfections. He asked if the wealthgap could be related to diﬀerences in the natural rate of interest between the countries.
He also asked how the author’s approach based on a representative agent model could
be generalized. Corsetti replied that it was possible to express the wealth gap as afunction of the natural rate of interest. He also replied that modelling heterogeneity
across households might not produce drastically diﬀerent implications from the current model, pointing out that the optimal policy in two-agent New Keynesian (TANK)
model can be envisioned as a combination of the optimal policy under complete market
and financial autarky.
From the floor, Mendoza commented that capital flows might have been driven by
structural forces rather than business cycles, considering the gradual worsening of the
net foreign position of the United States over the past two decades. Corsetti acknowledged the importance of structural changes since market integration may have indeed
enhanced the scope for consumption smoothing via cross-border borrowing and lending. But he added that these changes may also magnify the response of capital flows
to shock at business cycle frequencies. Koichi Hamada (Yale University) commented
that the paper clearly contributed to the literature by incorporating market incompleteness in various dimensions. Carlos Thomas (Banco de España) asked how the wealthgap, the key metric of financial market distortion in the model, could be measured from
actual data. Corsetti pointed out that one can calculate wealth gaps simply combining diﬀerences in the growth rates of (consumption) demand across countries and realdepreciation (weighed by risk aversion). Etsuro Shioji (Hitotsubashi University) inquired about the implications of the currency denomination of the debt in the model.
He also asked that actual price setting in international transaction involves both LCP
and PCP, as the case in Japan. Corsetti replied stressing that in this model debts were
zero in the steady state, so that valuation eﬀects were zero. While this limited the scopeof the analysis, an analytical advantage was that of a transparent analysis on how policy
rates works via conventional transmission channels. He agreed that in practice firms
may use diﬀerent invoice currencies over time depending on the export destination
markets, quoting recent microeconometric evidence.
B. The Reversal Interest Rate
Brunnermeier presented a theoretical framework for the reversal interest rate (RR) as
a determinant of the eﬀective lower bound (ELB), in the sense that a policy rate cut
below the RR reduced lending and depressed the economy.6 Employing a partial equilibrium model, he showed that the RR existed because the decrease of net interest income could exceed the capital gains from fixed income assets and the capital constraint................................
6. For details, see Brunnermeier and Koby (2019).

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could become binding. He then highlighted that the RR would creep up over time in a
prolonged low interest rate environment, since capital gains faded out as fixed income
assets matured. He also pointed out that quantitative easing should be employed after
hitting the ELB, since quantitative easing lowered the potential capital gains of banks
by reducing their bond holding and raised the RR. Incorporating the mechanism intoa general equilibrium model with New Keynesian framework, he showed that the RR
continued to exist in such a model. Finally, he noted that a fall in the natural rate of interest did not result in a one-to-one shift of the RR, so it made less leeway for monetary
policy.
As the discussant, Meredith Beechey (Sveriges Riksbank) praised the analysis,
describing it as an excellent proof of concept of the reversal rate with a model that
captured various mechanisms examined in the banking literature. She commented thatloosened financial constraints and central bank policies to ease the net worth problem could increase the scope of policy rate cuts. She then conjectured that the RR
might “creep down” since banks would take on more maturity mismatch and would
rely more on market funding, suggesting that a cross-country estimation of the RR
might be useful. She also commented that transition to cashless society might aﬀect
the RR since new technologies would erode banks’ market power. Brunnermeier
replied that the creeping down eﬀect should be implicitly incorporated in the generalequilibrium model but was not embedded explicitly in the partial equilibrium model.
He then argued that the lack of data for several variables, such depositors’ behavior in
response to changes of the policy rate, made it diﬃcult to estimate the RR for manyother countries.
From the floor, Thomas suggested that a policy rate cut might also lead to lowering the RR through a decrease in defaults on corporate debt and in banks’ provisions.
Brunnermeier replied that this might not be the case, since a negative rate could
lead to raising lending rates, as happened in Switzerland. Walsh commented that it
was important to examine the eﬀects of other shocks than a monetary policy shock.
Brunnermeier agreed and replied that this was future works. Tsutomu Watanabe(University of Tokyo) asked why the model did not contain money and argued thatincorporation of money would create a zero lower bound, thereby making the RR negative. Brunnermeier answered that the model allowed for cash in a more generalinterpretation and that the RR could be positive. Kazuhiko Ohashi (Hitotsubashi University) asked what the result of a negative shock to loan demand would be and how it
would aﬀect the economy in the model. Brunnermeier replied that bank loans wereendogenously determined in the model and any shocks could be shocks to bank loans.
C. Tight Money-Tight Credit: Coordination Failure in the Conduct of Monetaryand Financial Policies
Mendoza presented a quantitative analysis on the interaction between monetary andfinancial policies using a New Keynesian model with a financial accelerator mechanism, focusing on the policy response to risk shocks that increased borrowers’ externalfinance premium.7 In the single policy rule regime, only monetary policy was con................................
7. For details, see Carrillo, Mendoza, Nuguer, and Roldán-Peña (2019).

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Central Bank Design under a Continued Low Inflation and Interest Rate Environment

ducted, based either on a simple Taylor rule (STR) or a Taylor rule augmented witha response to credit spreads (ATR). In the dual policy rules regime (DRR), monetary
policy was conducted based on a simple Taylor rule, while financial policy was conducted based on a policy rule providing a financial subsidy to banks in response to anincrease in credit spreads. He showed that economic fluctuations in response to risk
shocks were much less severe and welfare costs were smaller in the DRR and highlighted that Tinbergen’s rule was relevant, arguing that with the ATR the monetary
policy rate rose too much when inflation increased and did not fall enough when thecredit spread widened. Finally, he examined the strategic interaction between the twopolicies in the DRR described by the optimal choice of the elasticity of response of themonetary and financial policy rules to changes in inflation and credit spreads, respectively. He showed that the cooperative equilibria yielded welfare outcomes that wereclose to the first best and that welfare was lower if monetary and financial policies were
not coordinated, but even without coordination the DRR dominated both the STR and
the ATR.
As the discussant, Kosuke Aoki (University of Tokyo) began by praising the paper
for providing a quantitative analysis of the interaction between monetary and financial
authorities with intuitive explanations and ample robustness checks. He then pointed
out that the welfare criteria used for analyzing the benefits of the DRR and the loss
function used for analyzing the coordination problem were not the same. He then suggested that the loss function should be derived from the second order approximation ofutility, so that all the results in the paper were comparable. He also pointed out that acoordination problem arose in the case of markup shocks in addition to risk shocks, because markup shocks might create an additional trade-oﬀ between stabilizing inflationand stabilizing the output gap. Mendoza replied that no coordination problem occurredwith utility-based loss functions that made common payoﬀs for both authorities, andgenerated an equivalent outcome with the cooperative equilibria.
From the floor, in line with Aoki’s comments, Thomas argued that utility-based
loss functions should be used to examine coordination problems, since such loss functions were expressed in additive form and could be assigned to each authority separately. Masuch argued that incorporating other policy measures aimed at reducing banks’ borrowing costs, such as the ECB’s Longer-Term Refinancing Operation(LTRO) and the existence of an RR as proposed by Brunnermeier and Koby (2019),
into the analysis could provide more practical implications. Ohashi asked how the results would be aﬀected if monetary policy became ineﬀective. Mendoza replied thatit might be possible to analyze the case when an economy was in a liquidity trap byusing other policy instruments such as fiscal policy to address distortions by nominal
rigidities.
D. Prolonged Low Interest Rates and Banking Stability
Sudo theoretically argued that prolonged low nominal interest rates reduced banks’profits, thereby undermining banking stability by using a dynamic stochastic generalequilibrium model with a bank run, à la Gertler and Kiyotaki (2015).8 He explained................................
8. For details, see Aoki, Munakata, and Sudo (2019).

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that the key mechanism rested on the positive relationship between nominal interest
rates and the deposit spread arising from liquidity services provided by bank deposits.
Specifically, when nominal interest rates were low, households had less demand fordeposits, so that the interest spread on deposits was compressed and banks’ profits
declined. As a result, the adverse eﬀects of a bank run on banking sector and the real
economy tended to be larger, bringing the economy closer to the state with a bank run
equilibrium. However, based on simulation exercises using the model calibrated toJapan, he suggested that low nominal interest rates did not bring the economy to thestate with a bank run equilibrium, except for the extreme cases that the TFP growthrate or the target inflation rate of the central bank stayed below zero. He also argued
that the qualitative implications remained unchanged when the model was calibrated
to Canada, the United Kingdom, and the United States.
As the discussant, Thomas commented that the paper focused on the topical issue. He then argued that banking instability might not be as implausible as the paper
claimed, for the two reasons. First, demographic changes going forward might exert
downward pressure on nominal interest rates, bringing the economy to a state with abank run even if the TFP growth rate or the target inflation rate was positive. Second, while the existence of non-bank lenders (NBLs) alleviated the concerns regarding
a bank run in the model, in practice, some NBLs were leveraged and could be vulnerable to a run. Sudo agreed with these arguments. He pointed out, however, that
demographic changes involved additional aspects other than downward pressure on interest rates, such as changes associated with age-specific diﬀerences in the elasticity
of deposit holdings, which potentially improved banking stability. He also argued thatwhile the model did not incorporate vulnerability of NBLs, the impact of leveraged
NBLs could be captured in the model by using a broad definition of banks.
From the floor, Corsetti highlighted the importance of addressing the relationshipbetween banks’ default risk and deposit rate. Sudo replied that the model indeed captured the positive relationship between the two variables, but added that the quantitative eﬀect of the default risk on the variables in the model was minor. Brunnermeier
asked how the model’s implications would change if the government conducted asset
purchase to support asset prices in the case of a run. Sudo replied that banking stability
would improve if it was expected that the government would successfully support asset
prices. Mendoza encouraged him to examine the transitional dynamics of the model.
Sudo replied that, partly for illustrative purposes, the paper exclusively focused on thesteady state and that examining the transitional dynamics would be a useful extension.
Daisuke Miyakawa (Hitotsubashi University) asked about the implications of firms’
cash holdings. Sudo replied that such firms were considered as NBLs in the model andcontributed to mitigating the fall in asset prices in the case of a run. Shioji pointed outthat the returns from the three types of assets—bonds, money, and deposits—could not
be equalized to zero when the utility gains from deposits and money were considered.
Sudo replied that the returns from bonds and deposits were strictly above zero due toutility gains. Hamada proposed to introduce deposit insurance into the model. Sudo
replied that even if deposit insurance was in place, a run could still occur if the insurance was incomplete, so that the conclusions of the paper would remain unchanged.

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Central Bank Design under a Continued Low Inflation and Interest Rate Environment

VI. The Policy Panel Discussion
In the policy panel discussion, moderated by Orphanides, three panelists, Hawkesby,
Masuch, and Wakatabe, expressed their views on central bank credibility under a lowinterest rate environment.
A. Remarks by Panelists
Hawkesby explained recent reforms of the monetary policy framework at the RBNZ.
First, he introduced that RBNZ shifted to a dual mandate with an employment objective in addition to a price stability objective. He explained that employment was one
measure of wellbeing of the public, which was the end goal of monetary policy. Second, he noted that the RBNZ adopted a formal Monetary Policy Committee (MPC),
and pointed out that diversity in its members was key for ensuring the credibility of the
RBNZ. He added that the RBNZ had published the Monetary Policy Handbook as ameans to enhance transparency in its decision-making process. Moreover, he noted that
the RBNZ needed to prepare for a situation of less room for interest rate cuts, in orderto maintain its credibility under a sustained low interest rate environment. In addition
to the possibility of introducing unconventional monetary policy tools, he explored thepossibility of fiscal and monetary policy coordination, stressing that operational independence of the central bank did not mean operational isolation.
Masuch discussed the relevance of structural factors and non-monetary policy issues for the conduct of monetary policy, with emphasis on the euro area economy. He
first pointed out that without proper support from fiscal and structural policies, monetary policy close to the ELB may require more time to achieve the price stability objective than otherwise. He then discussed importance of creating suﬃcient economic
buﬀers in normal and favorable times through (i) appropriate non-monetary policies
such as banking regulations to ensure a strong capital base in banking sector and (ii)fiscal management to create suﬃcient fiscal space. Such policies could better supportmonetary policy in a major downturn. He finally stressed that appropriate EU-wide
policies were important in addition to sound national economic policies, such as theEuropean Deposit Insurance Scheme.
Wakatabe explained Japan’s experience after the late 1990s from the viewpointof central bank credibility. He first highlighted the importance for a central bank tomatch deeds to words by referring to Blinder (2000). He briefly reviewed the BOJ’smonetary policy before and after 2013, emphasizing that the introduction of a clear
numerical definition of price stability in January 2013 and aggressive monetary easing
since April 2013 contributed to boosting the CPI inflation to the level stably above 0
percent. He next explained Japan’s experience after the late 1990s, including (i) the low
natural rate of interest, (ii) the diﬃculties in re-anchoring inflation expectations, (iii)
the interplay between financial stability and monetary policy, and (iv) revisions of theinstitutional framework such as the introduction of a formal price stability target. He
added that long-term inflation expectations still remained below the 2 percent target,
suggesting that the BOJ still needed to continue its eﬀort to achieve the target. He
concluded that central banks needed to deliver clear communication to the public, andto take decisive policy actions in order to achieve their objective.

9

B. Discussion Among Panelists
After presenting their own views, panelists commented on each other’s views.
Hawkesby made a brief review of the three presentations by showing two common
issues: one was the importance of taking action rather than just declaring objectives
and the other was the importance of cooperating with fiscal authorities if needed.
Masuch added that central banks needed to deliver a high level of transparency toreceive broad support. Wakatabe also stressed the importance of communication withthe public. Masuch asked Wakatabe regarding the costs of inflation expectations being
significantly below 2 percent. Wakatabe argued that sluggish nominal GDP growthduring the deflationary period in Japan entrenched a deflationary mindset, making
firms reluctant to invest in human and production capital.
Orphanides asked the three panelists how coordination with fiscal policy could
be operationalized. Hawkesby emphasized that the central bank needed to build agood relationship with the government to have an open dialogue over their objectives
and the current situation. Masuch explained that the fiscal authorities of euro area
member countries were supposed to have built up fiscal buﬀers during normal times
under the Maastricht Treaty. However, fiscal policy often turned out to be pro-cyclicalin retrospect. Wakatabe highlighted Abenomics as an example of a policy mix ofsound fiscal and monetary policies.
Orphanides next asked the panelists’ views about the recent move at the RBNZ
from the single mandate of price stability to a dual mandate with employment.
Hawkesby noted that if the RBNZ faced a tradeoﬀ between the two, it was likely
to put particular emphasis on inflation expectations being anchored around the target
level. Masuch commented that the introduction of a dual mandate in the euro area
may be diﬃcult inter alia because of the large diﬀerence in structural and cyclicalunemployment rates across its member countries. Wakatabe pointed out that central
banks with a dual mandate were faced with the challenge in practice: the estimationof the natural rate of unemployment became increasingly diﬃcult due to structuralchanges in the labor market.
C. General Discussion
After the exchange among the panelists, the discussion was opened to conference participants. Regarding Masuch’s question to Wakatabe on the cost of inflation expectations significantly below 2 percent, Ueda added that the greatest cost had been the lackof a safety margin on the interest rate against the ELB. He explained that, when othercentral banks cut interest rates sharply in 2008, the BOJ could not do that due to thelack of a margin, resulting in a sharp appreciation of the yen. Masuch commented thatan implicit presumption in this argument was that the eﬀectiveness of unconventionalmonetary policy tools adopted by central banks was uncertain when interest rates hit
the ELB. Beechey explained Sweden’s experience with the introduction of a negativeinterest rate policy. She stressed that communication with the public about the negativeinterest rate had been particularly diﬃcult, as the public viewed the negative interest
rate as a signal that the economy was still in crisis. Wakatabe noted that the situation
was similar in Japan, adding that its negative connotation seemed to have misguided
the public understanding of the policy.

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Central Bank Design under a Continued Low Inflation and Interest Rate Environment

Pesenti asked if engineering a transitory overshooting of the inflation rate throughmonetary policy would be desirable to maintain central bank credibility. Hawkesby
replied that the RBNZ would compare which case would be more regrettable: thecase that inflation remained below the target level or the case that it became too high.
Wakatabe added that the BOJ had introduced the overshooting commitment in 2016
in an attempt to re-anchor inflation expectation at 2 percent target. Masuch, on theother hand, argued that the ECB had not deliberately tried to overshoot (or undershoot)the inflation aim (of close, but below 2 percent).
Beechey argued that if coordination involved an open and honest exchange between
the central bank and the government, then some central bankers might feel that their
independence was threatened. Hawkesby replied that central bankers needed to become comfortable with their operational independence, to allow open discussions, andthis may come overtime as the central bank becomes more experienced operating independently. Wakatabe added that central banks might benefit from cooperation withexperts in, for example, political science to develop desirable governance structures forpolicy coordination.
Thomas raised a question as to how fiscal and monetary coordination could be
operationalized in the euro area, given that the ECB faced 19 fiscal authorities, eachwith its own national interests in mind. Masuch agreed that policy coordination wasdiﬃcult for the euro area and emphasized the need to complete the Economic andMonetary Union (EMU) and build fiscal capacity at the EMU level. He emphasizedthat open communication between authorities about their reaction functions and viewsof the economic situation was a way to achieve informal coordination.
Shioji referred to the joint statement between the BOJ and the Japanese government in January 2013 as a clear statement of policy coordination and asked if similar
examples were seen in other countries. Masuch replied that the Stability and Growth
Pact in the euro area was intended to be such a statement, although with the benefit ofhindsight it did not eﬀectively deliver counter-cyclical fiscal policy.
Hamada commented that if the number of policy instruments was equal to thenumber of policy targets, the Tinbergen rule should apply, and policy coordination
might not be necessary at all. Masuch agreed with the basic idea of the Tinbergen rule,
but argued that general equilibrium models may also need to take political economy
dynamics into account.

11References
Aoki, Kosuke, Ko Munakata, and Nao Sudo, “Prolonged Low Interest Rates and Banking Stability,”
paper presented at the 2019 BOJ-IMES Conference on “Central Bank Design under a Continued Low Inflation and Interest Rate Environment” held by the Institute for Monetary andEconomic Studies, Bank of Japan, 2019.
Blinder, Alan S., “Central-Bank Credibility: Why Do We Care? How Do We Build It?” American
Economic Review, 90(5), 2000, pp. 1421–1431.
Brunnermeier, Markus K., and Yann Koby, “The Reversal Interest Rate,” IMES Discussion Paper
No. 2019-E-6, Institute for Monetary and Economic Studies, Bank of Japan, 2019.
Carrillo, Julio A., Enrique G. Mendoza, Victoria Nuguer, and Jessica Roldán-Peña, “Tight MoneyTight Credit: Coordination Failure in the Conduct of Monetary and Financial Policies,” IMES
Discussion Paper No. 2019-E-8, Institute for Monetary and Economic Studies, Bank of Japan,
2019.
Corsetti, Giancarlo, Luca Dedola, and Sylvain Leduc, “Exchange Rate Misalignment, Capital Flows
and Optimal Monetary Policy Trade-oﬀs,” paper presented at the 2019 BOJ-IMES Conference
on “Central Bank Design under a Continued Low Inflation and Interest Rate Environment”
held by the Institute for Monetary and Economic Studies, Bank of Japan, 2019.
Gertler, Mark, and Nobuhiro Kiyotaki, “Banking, Liquidity, and Bank Runs in an Infinite Horizon
Economy,” American Economic Review, 105(7), 2015, pp. 2011–2043.
Kuroda, Haruhiko, “Opening Remarks,” Monetary and Economic Studies, 37, Institute for Monetaryand Economic Studies, Bank of Japan, 2019, pp. 17–22 (this issue).
Trichet, Jean-Claude, “The Mayekawa Lecture: The Euro Area Economic, Fiscal and Financial Governance: Diﬃculties and Successes in the Past–Present Challenges–Future Steps,” Monetaryand Economic Studies, 37, Institute for Monetary and Economic Studies, Bank of Japan, 2019,
pp. 23–40 (this issue).
Walsh, Carl E., “Alternatives to Inflation Targeting in Low Interest Rate Environments,” Monetaryand Economic Studies, 37, Institute for Monetary and Economic Studies, Bank of Japan,
2019, pp. 41–70 (this issue).

12 MONETARY AND ECONOMIC STUDIES / NOVEMBER 2019

Central Bank Design under a Continued Low Inflation and Interest Rate Environment

APPENDIX 1: PROGRAM
Wednesday, May 29, 2019
Morning
Opening Remarks
Speaker:
Mayekawa Lecture
Chairperson:
Lecturer:Haruhiko Kuroda, Bank of Japan

Kazuo Ueda, Kyoritsu Women’s University and Universityof TokyoJean-Claude Trichet, Former President of the European
Central Bank

Session 1: Exchange Rate Misalignment, Capital Flows and Optimal
Monetary Policy Trade-oﬀs
Chairperson:
Maria Almasara Cyd N. Tuano-Amador, Bangko Sentral
ng Pilipinas
Paper Presenter:
Giancarlo Corsetti, University of Cambridge
Discussant:Paolo Pesenti, Federal Reserve Bank of New York
Afternoon
Keynote Speech
Chairperson:
Speaker:

Adam Glapiński, Narodowy Bank Polski
Carl E. Walsh, University of California, Santa Cruz

Session 2: The Reversal Interest Rate
Chairperson:
Daniel G. Sullivan, Federal Reserve Bank of Chicago
Paper Presenter:
Markus K. Brunnermeier, Princeton University
Discussant:Meredith Beechey, Sveriges Riksbank
Session 3: Tight Money-Tight Credit: Coordination Failure in the Conduct ofMonetary and Financial Policies
Chairperson:
Jinho Huh, Bank of Korea
Paper Presenter:
Enrique G. Mendoza, University of Pennsylvania
Discussant:Kosuke Aoki, University of Tokyo
Thursday, May 30, 2019
Morning
Session 4: Prolonged Low Interest Rates and Banking Stability
Chairperson:
James C. MacGee, Bank of Canada
Paper Presenter:
Nao Sudo, Bank of Japan
Discussant:Carlos Thomas, Banco de España

13

Policy Panel Discussion
Moderator:
Athanasios Orphanides, Massachusetts Institute ofTechnology
Panelists:
Christian Hawkesby, Reserve Bank of New ZealandKlaus Masuch, European Central Bank
Masazumi Wakatabe, Bank of Japan

APPENDIX 2: LIST OF PARTICIPANTS
Saud M. Alsubayai
Maria Almasara Cyd N. TuanoAmador
Masayoshi Amamiya
Kosuke Aoki
Raphael Badr
Iman Badrudin
Saleem A. Bahaj
Santiago Bazdresch
Meredith Beechey
Jan Marc Berk
Markus K. Brunnermeier
Tayyar Buyukbasaran
Mark Chambers
Lillian Cheung
Andrew Colquhoun
Giancarlo Corsetti
Andrea De Michelis
Kimihiro Etoh
Hiroshi Fujiki
Shin-ichi Fukuda
Yukitoshi Funo
Adam Glapiński
Koichi Hamada
Naoko Hara
Yutaka Harada
Christian Hawkesby
Hideo Hayakawa
Kenji Hayashi
Peter Hoerdahl
Jinho Huh

Saudi Arabian Monetary Authority
Bangko Sentral ng Pilipinas
Bank of Japan
University of Tokyo
Embassy of France
Bank Negara Malaysia
Bank of England
Banco de México
Sveriges Riksbank
De Nederlandsche Bank
Princeton University
Central Bank of the Republic of Turkey
Reserve Bank of Australia
Hong Kong Monetary Authority
Monetary Authority of Singapore
University of Cambridge
Federal Reserve Board
Bank of Japan
Chuo University
University of Tokyo
Bank of Japan
Narodowy Bank Polski
Yale University
Bank of Japan
Bank of Japan
Reserve Bank of New Zealand
Fujitsu Research InstituteBank of Japan
Bank for International Settlements
Bank of Korea

14 MONETARY AND ECONOMIC STUDIES / NOVEMBER 2019

Central Bank Design under a Continued Low Inflation and Interest Rate Environment

Yuichi Ikeda
Nobuo Inaba
Takatoshi Ito
Yuto Iwasaki
Kazumasa Iwata
Jia Yandong
Goushi Kataoka
Takeshi Kato
Yukinobu Kitamura
Keiichiro Kobayashi
Hirohide Kouguchi
Haruhiko Kuroda
Harri Lahdenperä
Andrey S. Lipin
James C. MacGee
Krzysztof Mackiewicz
Eiji Maeda
Takako Masai
Klaus Masuch
Enrique G. Mendoza
Daisuke Miyakawa
Ryuzo Miyao
Firman Mochtar
Gudrun M. Moede
Kazuo Momma
Ko Munakata
Shinobu Nakagawa
Hiroshi Nakaso
Yoshinori Nakata
Makoto Nirei
Kazuhiko Ohashi
Yoji Onozawa
Athanasios Orphanides
Paolo Pesenti
Tetsuya Sakamoto
Toshitaka Sekine
Seiichi Shimizu
Etsuro Shioji
Shigenori Shiratsuka

Bank of Japan
Ricoh Company, Ltd.
Columbia University and National Graduate
Institute for Policy Studies
Bank of Japan
Japan Center for Economic Research
People’s Bank of China
Bank of Japan
Bank of Japan
Hitotsubashi University
Tokyo Foundation and Keio University
Bank of Japan
Bank of Japan
Bank of Finland
Bank of Russia
Bank of Canada
Narodowy Bank Polski
Bank of Japan
Bank of Japan
European Central Bank
University of Pennsylvania
Hitotsubashi University
University of Tokyo
Bank Indonesia
Deutsche Bundesbank
Mizuho Research InstituteBank of Japan
Bank of Japan
Daiwa Institute of Research Ltd.
Bank of Japan
University of Tokyo
Hitotsubashi University
Bank of Japan
Massachusetts Institute of Technology
Federal Reserve Bank of New YorkBank of Japan
Bank of Japan
Bank of Japan
Hitotsubashi University
Bank of Japan

15

Nicholas Sly
Tiziana Sodano
Siegfried E. Steinlein
Nao Sudo
Daniel G. Sullivan
Chikahisa Sumi
Hitoshi Suzuki
Wataru Takahashi
Kazuki Tashima
Taro Teruuchi
Carlos Thomas
Jean-Claude Trichet
Tomohiro Tsuruga
Shinichi Uchida
Kazuo Ueda
Masazumi Wakatabe
Carl E. Walsh
Wang Xin
Kenichiro Watanabe
Shingo Watanabe
Toshiaki Watanabe
Tsutomu Watanabe
Bin Wei
Warapong Wongwachara
Mark Wynne
Hirohide Yamaguchi
Nobuyasu Yoshioka

Federal Reserve Bank of Kansas City
Banca d’Italia
International Monetary FundBank of Japan
Federal Reserve Bank of Chicago
International Monetary FundBank of Japan
Osaka University of Economics
Ministry of FinanceBank of Japan
Banco de España
Bank of Japan
Bank of Japan
Kyoritsu Women’s University and Universityof Tokyo
Bank of Japan
University of California, Santa Cruz
People’s Bank of China
Musashino University
Bank of Japan
Hitotsubashi University
University of Tokyo
Federal Reserve Bank of Atlanta
Bank of Thailand
Federal Reserve Bank of Dallas
Nikko Research Center
Bank of Japan

16 MONETARY AND ECONOMIC STUDIES / NOVEMBER 2019