IMES DISCUSSION PAPER SERIESNew Dimensions and Frontiers in Central Banking
Summary of the 2022 BOJ-IMES Conference
Takuji Fueki, Yutaka Soejima, and Shunichi Yoneyama
Discussion Paper No. 2022-E-13

INSTITUTE FOR MONETARY AND ECONOMIC STUDIESBANK OF JAPAN
2-1-1 NIHONBASHI-HONGOKUCHOCHUO-KU, TOKYO 103-8660
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IMES Discussion Paper Series 2022-E-13
August 2022

New Dimensions and Frontiers in Central Banking
Summary of the 2022 BOJ-IMES Conference
Takuji Fueki∗, Yutaka Soejima**, and Shunichi Yoneyama***

I. Introduction
The Institute for Monetary and Economic Studies (IMES) of the Bank of Japan (BOJ) heldthe 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, climate change, digital currencies, and the automation of theeconomy from central bank perspectives, 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 comprised of panelists:
Pierre-Olivier Gourinchas (International Monetary Fund: IMF), James Bullard (Federal∗ Director, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: takuji.fueki@boj.or.jp)** Director-General, Institute for Monetary and Economic Studies, Bank of Japan(E-mail: yutaka.soejima@boj.or.jp)*** 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 for the thought-provoking presentations and discussions. The views expressed throughout thissummary are those of the attendants and do not necessarily reflect those of their respective institutions. Allremaining 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
25–27, 2022.
1

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 of Technology), honorary adviser to the
IMES.

II. Opening Remarks
Kuroda pointed out that the environment surrounding central banks had changed dramaticallysince the conference last year and that the themes for discussion appeared to have expanded
rapidly. He then provided an overview of the theme, focusing on the new dimensions facedby 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 thisinflation differ between countries and that the appropriate monetary policy response will also
differ. He noted a surge in geopolitical risk as another challenge and argued that central banks
were required to pay close attention not only to the further increase in commodity prices andsubsequent higher inflation but also to its long-term impact on the global economy, forinstance, that on trade and capital flows.
Next, as for frontiers that central banks should develop, he first pointed out theacceleration of structural changes in the economy, such as the digitalization and automationof 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 thatplay the primary role in addressing them, but the role of central banks may also be consideredfrom the perspective of the use of market mechanisms and initiatives. Finally, he raised thetransformation of the monetary system as the third frontier. He argued that central banks are
required to engage in designing and 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 this conference
will ensure that central banks are all fit and ready to face those challenges.

III. The Mayekawa Lecture: Institutional Innovation and Central2

For details, see Kuroda (2022).
2

Bank Independence 2.0
Rogoff began his lecture by pointing out that central bank independence is the bedrock ofmodern inflation targeting. 3 However, he argued that this independence has been challenged
in recent years due to the zero-bound on nominal interest rates. He also pointed out that theeffectiveness of monetary policy has been reduced and the political economy pressure on
central banks has increased significantly. He stated that this new pressure emerged because
fiscal policy has been responsible for much more of the burden of routine macroeconomic
stabilization after the global financial crisis.
Rogoff then indicated that, in a global low interest rate environment, innovations inpolicy measures are required to restore the efficacy of monetary policy. He claimed 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 is to prevent
arbitrage by financial institutions (e.g., insurance firms, pension funds and banks) from allinterest-bearing assets into paper currency under negative interest rates environment. He thensuggested 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 thevalue of cash depreciates at a rate calibrated to match 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 agreater challenge to central bank independence is the rise of digital 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 new era of central bank independence, andcentral banks need to innovate to deal with the political 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 in thiscycle in raising rates. Rogoff replied that central banks, including the Fed, might havehesitated 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 the zero-boundagain. 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
3

For details, see Rogoff (2022).
3

change. Rogoff agreed with the comment that having longer terms could protect central bankindependence. He also argued that narrow and well-defined mandates would lead to greater
central bank independence. He added that central banks would not have comparativeadvantage and instruments 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 digital currencies may lead to avariety of problems, such as the retention of transaction data by certain countries, stableforeign digital currencies could provide monetary stability, and a consequent improvement insocial 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, insteadof having a CBDC, central banks and governments should regulate digital currencies in orderto keep their stability. Finally, Wakatabe asked whether the environment surrounding central
banks would be heading into an inflationary period rather than a deflationary one, due togeopolitical situations and the retreat from globalization, which led central banks to prepare
for the 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 the current
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 that the cost of adelayed policy response was not very large when people understood that policy would respondin the future and long-run inflation expectations are anchored to the Fed’s target. However, hecautioned that when people form inflation expectations in a 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 volatilefluctuations 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 that4

For details, see Walsh (2022).
4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 temporaryshock, even though results from the economic literature on policy under uncertainty suggeststhat policymakers should act as if exogenous shocks are likely 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 forpolitical 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, re-establishing 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 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 fell behind 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 issystematically overestimated when forecasting future inflation. He then noted that theliterature on robust control suggested a similar 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 so monetary tightening had a large impact on public finances. He
then asked how this fiscal 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.
5

He then argued that central banks would face strong political pressures given the large impact
on public finances that monetary tightening would cause.

V. 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 irrelevant to 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 of household wealth results in deeper
decline in the real interest rates. 5 He constructed a heterogeneous-agent New Keynesian(HANK) model with aggregate uncertainty and an occasionally-binding zero lower bound(ZLB) on nominal interest rates and proposed a novel solution algorithm. He emphasized threechannels in this model that reduce the level of the interest rates and make the room formaneuver of the central bank smaller: (i) deflationary bias 6, (ii) precautionary savings due toidiosyncratic income risk, and (iii) precautionary savings due to aggregate negative shocks.
He then claimed 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 thelimits of monetary policy and thus leads to lower real interest rates. He also emphasized thatthe 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 astronger motive for precautionary savings. To evaluate the quantitative effects, he calibrated
the model to the U.S. economy and showed that changes in the trend inflation (namely thecentral bank’s inflation target) and household inequality explain an important part of the dropin 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 for showing
anticipation effects of the ZLB on inflation and real rates. He then commented that morequantitative investigation could be explored when compared to actual data, in particularregarding the frequency and the duration of the ZLB in the model. He also suggested that aninertia in the Taylor rule should be considered. He asked whether several suggested strategies
to overcome the deflationary bias in typical representative-agent New Keynesian (RANK)For details, see Fernández-Villaverde et al. (2022).
Anticipation of hitting the ZLB in the future by forward-looking households and firms puts downward
pressures on the rate of inflation, even when the policy rate is above the ZLB. This downward pressure isreferred to as deflationary bias.

5
6

6

models were applicable to HANK models as well. Fernández-Villaverde agreed with theimportance of further quantitative efforts and answered 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. FernándezVillaverde replied that the main message of the model would not be changed when other typesof 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 this model. He also inquired about the advantage of the solution
method developed in this paper. Fernández-Villaverde agreed with the first comment and to
the question he emphasized 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 theimplications from the model that a mild increase in the inflation target from 2% to 3% would
be enough to let the economy escape from the deflationary 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 a climate module. 7
In this model, the production of final goods requires two types of intermediate goods, dirty
and clean. While clean intermediate goods production firms use clean energy which does notemit CO2, dirty intermediate goods production firms use dirty energy which emits CO2 andthus 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 bank applies 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 suppressedby 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 these7

For details, see Abiry et al. (2022).
7

firms to substitute dirty energy for dirty capital in their production process, and it partially
offsets the effect of the carbon tax to reduce the dirty energy use. Based on these results, heargued that a carbon tax is a more effective tool than green QE. However, he also noted thatgreen QE can be an effective complement to carbon taxes, as it has an additional climatechange mitigation effect when the carbon tax is already in 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 generalequilibrium (DSGE) and the dynamic integrated climate-economy (DICE) frameworks, andcommented 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 underestimationof the effectiveness of green QE. Clean firms tend to face larger credit frictions than dirty
firms, because they tend to be younger, smaller and have less tangible capital. Therefore,
sufficient credit injections from the central bank to clean firms may have a greater effect. Asa second point, he proposed the assumption of the initial convexity in the production functionof 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, headded that the elasticity of substitution between clean and dirty input would be a more
important parameter 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 afinance perspective and that the development of this field was just beginning. He added thatcredit 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 specificsector 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 thenclaimed that normal QE seems preferable from the perspective of maintaining central bankneutrality 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 the revenue while the central bank
implements normal QE. Braun asked about the relative efficacy of three types of strategies,changing portfolio allocation of exchange traded funds (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 promotion of green sectors by central banks. He also asked for viewson the very limited opportunities for the Fed to intervene in financial markets. Ludwig
responded that some suggestions for subsidized credit could be obtained by extending thecurrent model. Related to the latter question, he replied that the degree of market intervention
8

by the authorities 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, andother countries to the model instead of the single global monetary authority in the current
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 bynoting that global digital money had yet to emerge, but it was technologically feasible andmight materialize in the future. He pointed out that against this background, global digitalmoney, 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 model with global digital money. Second, he showed that thiswas not an inevitable outcome, and that monetary policy autonomy could be restored byextending the model and introducing specific government policies. He argued that suchgovernment policies include limiting the amount of global digital money that serve for atransaction or banning the use of global digital money for some transactions. He also addedthat the possibility of the counterfeiting of global digital money could give rise to an incentive
constraint that 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 digitalmoney 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 theimportance of its definition. She then asked how the characteristics of the global digital money
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 caseof stablecoins as global digital money, further considerations would deepen the analyticalperspective, such as how the assets that support the value of the stablecoins could affectliquidity services for the coins and monetary policy autonomy. Ikeda replied that the supplyof global digital money was exogenous in his model and agreed that modeling the supply side
would enhance the analysis. He added that the simple modeling of the global digital money
was an initial step toward a more practical analysis and more work would be required to8

For details, see Ikeda (2022).
9

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 with the commentand 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 theunderlying 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 policy that helps restore monetary policy autonomy.
Ikeda replied that the size of a country did not affect his results and that tax payments innational 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 bearersthat vary by payment methods, would be a promising direction for future research on digitalmoney.
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 which makes the value of capital andlabor equal for firms. When the interest rate is lower than the threshold, capital is cheaper thanlabor, and thus firms boost investment in automation, 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 automationlevels 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 ofincreasing employment and inflation as described in the traditional New Keynesian model,monetary expansion could have the opposite long-run effect of decreasing them throughhigher labor productivity. Thus, he offered a new perspective that the central 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
9

For details, see Fornaro (2022).
10

the central bank cannot necessarily achieve full employment due to the zero-interest-rate
constraint. He argued that in that case the central bank faces a choice: i) to ease monetary
policy as much as possible and allow automation to progress, thereby increasing productivity
while allowing some unemployment, 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 of the resultsof the paper to the Japanese economy in the past. Specifically, he explained that the trend ofrobot 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 implied that firms had less incentive toautomate. He noted that these facts were consistent with the framework of Fornaro. He also
gave the following six comments. First, he pointed out that labor and capital may not be highly
substitutable, referring to some previous 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 other channels discussed in the literature. Third, he asked if there wereobservable sufficient statistics to estimate the breakeven interest rate where the values ofcapital and labor were 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 difficultyof monetary policy making and its communication under many counteracting channels ofmonetary 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 this point in the paper andthat 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 theframework of the paper, and proposed the introduction of uncertainty to understand thesituation in which investment in automation is not boosted with low interest rates. Fornaro
replied that a liquidity trap with no automation is properly modeled by introducing theassumption of liquidity preference instead.

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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 by therebound 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 thatin 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 ofconcern. 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, such as 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 of digital money andcrypto-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 thissituation 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 thefact 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 again thatforward guidance was helping the Fed move more quickly to keep inflation under control.
Lane discussed the current high rates of inflation, the formation of inflation
12

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 ashortage of productive capacity, would ultimately dissipate, but argued that developments ininflation expectations were an important issue, as these can to some extent be adaptive innature. 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 thepandemic. He argued that a big question was how the current surge in inflation would affectinflation expectations and whether there was a risk 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 alsomentioned a potential difference between the euro area and the U.S. regarding the impact of
the energy shock. He explained that for the euro area, energy shocks increased prices initiallybut could have the opposite effect in the medium term as the energy shock constituted a large
negative shock to the terms of trade and could reduce demand in the economy. Finally,
regarding the conduct of monetary policy at the ECB, he emphasized that there was astraightforward 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 madepossible by expanding healthcare capacity and accelerating the vaccination 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 explained that even before the pandemic, the BSP had already prepared a roadmap totransform the Philippine payments system into an efficient, inclusive, safe, and secure digital
payment ecosystem that supports the diverse needs and capabilities of individuals and firms,
and the pandemic boosted the progress. He stressed that with digitalization and financial
technology, the BSP stood ready to reform, innovate, and transform by providing an enabling
regulatory environment. He closed his remarks by stating that the wide-ranging reforms would
ultimately create tangible economic benefits to the Philippine public, as the BSP remainedcommitted to promoting price stability and a resilient, responsive, and inclusive financial
system.
13

B. Discussion among the Moderator and Panelists
Wakatabe began the discussion with recent price developments and new challenges forcentral banks. He first pointed out that prices were rising at rates not experienced in recent
years in the euro area and the U.S., and that the pace of price increases had accelerated in thePhilippines while it remained moderate in Japan. Looking at the demand side, 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 partto so-called “Great Resignation,” contributed to high inflation in the U.S. He then argued thatsoaring 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 byheightened 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 issues was
growing. He then stated that demands on central banks to address climate change risks andthe 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 that the expansion of private digitalcurrencies, including stablecoins, could pose a risk to financial 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 stillvalid. Gourinchas replied that high inflation was already here, and we were now in a highinflation environment. He also replied that the flexible inflation targeting framework was stillvalid 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 thatin 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 fragmentation of the global economy were to occur, it could lead to higher
volatility in prices and higher unit labor costs. Bullard replied that low inflation in the U.S.
seemed over, and the U.S. would have a new regime of higher nominal interest rates andhigher inflation than those seen previously. Regarding the monetary policy framework, he
explained that 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
14

background argument was that the Fed would implement the ordinary inflation targeting inhigh inflation situations. Lane recalled that the ECB’s strategy review analyzed the sourcesof low inflation before the pandemic. There had been a mixture of a series of negative shocks,
the financial crisis, the European debt crisis, and fiscal austerity. He added that the analyses
suggested that inflation pressure could materialize if the sources of low inflation either
disappear or go into reverse. He argued that inflation had certainly upside risk and thetemptation was to focus on the uncertainty factors that bring more inflation, but he added thatthe distribution of risk was not on the upside only and that downside risks to the 2% target
also continued to exist. Diokno replied that the current inflation targeting framework remained
valid and appropriate for the Philippines. 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 reconsideredgiven the recent development of new challenges and whether central bank independence
needed to be redefined. Gourinchas argued that central banks could play a role 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 mandate of supporting the general economic policies in theEuropean Union as long as 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, inline with its mandate. He also reflected on digital money and noted that the anchor of thepayment 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 stressed that 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 beappropriate to directly address other important issues such as climate change and inequality.
He noted that inflation expectations had remained relatively well anchored in the Philippines,
so the credibility of the central bank’s commitment to price stability 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 the long-run balanced growth path of the economy,so central bankers needed to be aware of this and understand how to react. He mentioned
inequality and argued that monetary policies were designed to get the very best outcome forthe whole of society, but making it more convincing would require economic models that takeinequality into account. He added that getting greater granularity regarding data and models,15

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 andasked how central banks should communicate policy intentions with the public to preserve
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 weresensitive 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 and to speed up price reviews in the current
high inflation environment. Shioji pointed out that central banks have developed various
unconventional monetary policy tools in 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 underwhich they can focus on their traditional mandates without giving up those new policy tools.
Lane replied that it was clear that all of the ECB monetary policy instruments, includingbalance 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 added that all
monetary policy instruments were looked at jointly and the underpinnings were always pricestability.

VII. Concluding Remarks
Orphanides summarized the presentations and discussions at the conference. He noted thatthe 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, structural change in theeconomy, climate change, and the digitalization of money. First of all, he argued that the
Mayekawa Lecture by Rogoff focused on challenges in central bank independence 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 andcautioned that central bank independence should not be regarded as a given, and that central
banks need to operate the policy properly to maintain 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 containthe cost of falling behind the curve. He also highlighted that given the uncertainty about the16persistence of inflationary shocks, robust monetary policy response should be much moreforceful than otherwise. 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 actually more
pronounced than otherwise, as Fernández-Villaverde presented. With respect to climatechange, he pointed out that the most important contribution of the paper by Ludwig was thatgreen QE was inferior to proper fiscal policy in dealing with climate change, and he cautionedthat central banks should not over-promise on climate change problems. On the digitalizationof 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 inflation and pointed out that a plain and simple inflation targeting framework wasquite effective in delivering price stability. On the reconsideration of the central banks’mandates, he warned 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.

17

References
Abiry, Raphael, Marien Ferdinandusse, Alexander Ludwig, and Carolin Nerlich, “Climate
Change Mitigation: How Effective is Green Quantitative Easing?,” IMES Discussion
Paper No. 2022-E-11, Institute for Monetary and Economic Studies, Bank of Japan,
2022.
Fernández-Villaverde, Jesús, Joël Marbet, Galo Nuño, and Omar Rachedi, “Inequality and theZero Lower Bound,” paper presented at the 2022 BOJ-IMES Conference on “NewDimensions and Frontiers in Central Banking” held by the Institute for Monetary andEconomic Studies, Bank of Japan, 2022.
Fornaro, Luca, “Monetary Policy in the Age of Automation,” paper presented at the 2022 BOJIMES Conference on “New Dimensions and Frontiers in Central Banking” held by theInstitute 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 andEconomic Studies, Bank of Japan, 2022.
Kuroda, Haruhiko, “Opening Remarks at the 2022 BOJ-IMES Conference Hosted by theInstitute for Monetary and Economic Studies, Bank of Japan,” Bank of Japan, 2022
(available athttps://www.boj.or.jp/en/announcements/press/koen_2022/ko220525a.htm/, accessed
June 8, 2022).
Rogoff, Kenneth S., “Institutional Innovation and Central Bank Independence 2.0,” IMES
Discussion Paper No. 2022-E-9, Institute for Monetary and Economic Studies, Bankof Japan, 2022.
Walsh, Carl E., “Inflation Surges and Monetary Policy,” IMES Discussion Paper No. 2022-E12, Institute for Monetary and Economic Studies, Bank of Japan, 2022.

18

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

Kazuo Ueda, Kyoritsu Women’s University andUniversity of Tokyo

Opening Remarks
Speaker:

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 inOpen Economies
Presenter:

Daisuke Ikeda, Bank of Japan

Discussant:Linda S. Goldberg, Federal Reserve Bank of New York

19

Friday, May 27, 2022

Chairperson:

Masaaki Kaizuka, Bank of Japan

Session 4: Monetary Policy in the Age of Automation
Presenter:
Discussant:Luca Fornaro, Centre de Recerca en
Internacional, Universitat Pompeu Fabra

Economia

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 ofTechnology

APPENDIX 2: LIST OF PARTICIPANTS
Seiji Adachi

Bank of Japan

Masayoshi Amamiya

Bank of Japan

Kosuke Aoki

University of Tokyo

Ryo Aruga

Bank of Japan

Brett Berger

Board of Governors of the Federal Reserve System

Jan Marc BerkDe Nederlandsche Bank

Martin Bodenstein

Board of Governors of the Federal Reserve System

R. Anton Braun

Federal Reserve Bank of Atlanta

James Bullard

Federal Reserve Bank of St. Louis

Carlos Canizares Martinez

Národná banka Slovenska

Lillian Cheung

Hong Kong Monetary Authority
20

Benjamin E. Diokno

Organisation for Economic Co-operation andDevelopment
Bangko Sentral ng Pilipinas

Mustafa Duman

Central Bank of the Republic of Türkiye

Marien Ferdinandusse

European Central Bank

Jesús Fernández-Villaverde

University of Pennsylvania

Luca Fornaro
Takuji Fueki

Centre de Recerca en Economia Internacional,
Universitat Pompeu Fabra
Bank of Japan

Hiroshi Fujiki

Chuo University

Ippei Fujiwara

Keio University and Australian National University

Shin-ichi Fukuda

University of Tokyo

Andrea Gerali

Banca d’Italia

Linda S. Goldberg

Federal Reserve Bank of New York

Pierre-Olivier Gourinchas

International Monetary Fund

François Haas

Banque de France

Hideo Hayakawa

Tokyo Foundation for Policy Research

Daisuke Ikeda

Bank of Japan

Nobuo Inaba

Ricoh CO., LTD.

Takatoshi Ito
Kazumasa Iwata

Columbia University and National Graduate Institutefor Policy Studies
Japan Center for Economic Research

Per Jansson

Sveriges Riksbank

Masaaki Kaizuka

Bank of Japan

Goushi Kataoka

Bank of Japan

Masahiro Kawai

Economic Research Institute for Northeast Asia

Nozlan Khadri

Bank Negara Malaysia

Marta Kightley

Narodowy Bank Polski

Juha Kilponen

Bank of Finland

Yukinobu Kitamura

Rissho University

Keiichiro Kobayashi

Keio University

Junko Koeda

Waseda University

Hirohide Kouguchi

Bank of Japan

Haruhiko Kuroda

Bank of Japan

Philip R. Lane

European Central Bank

Jonathan Lees

Reserve Bank of Australia

Luiz de Mello

21

Alexander Ludwig

Goethe University Frankfurt

Kazuo Momma

Mizuho Research & Technologies

Ichiro Muto

Bank of Japan

Hiroshi Nakaso

Daiwa Institute of Research Ltd.

Taisuke Nakata

University of Tokyo

Juha NiemeläBank of Finland

Kiyohiko G. Nishimura

National Graduate Institute for Policy Studies

Asahi Noguchi

Bank of Japan

Galo Nuño

Banco de España

Hyunseung Oh

Board of Governors of the Federal Reserve System

Athanasios Orphanides

Massachusetts Institute of Technology

Cyn-Young Park

Asian Development Bank

Yang Su Park

Bank of Korea

Toan V. Phan

Federal Reserve Bank of RichmondKenneth S. Rogoff

Harvard University

Hiroki Sakaji

University of Tokyo

Toshitaka Sekine

Hitotsubashi University

Seiichi Shimizu

Bank of Japan

Tokiko Shimizu

Bank of Japan

Mototsugu Shintani

University of Tokyo

Etsuro Shioji

Hitotsubashi University

Shigenori Shiratsuka

Keio University

Yutaka Soejima

Bank of Japan

Wataru Takahashi

Osaka University of Economics

Surach Tanboon

Bank of Thailand

Shinichi Uchida

Bank of Japan

Kazuo Ueda

Kyoritsu Women’s University and University of Tokyo

Kenji Wada

Bank of Japan

Masazumi Wakatabe

Bank of Japan

Carl E. Walsh

University of California, Santa Cruz

Kenichiro WatanabeMusashino University

Toshiaki Watanabe

Hitotsubashi University

Tsutomu Watanabe

University of Tokyo

Yasutora Watanabe

University of Tokyo
22

Martin Wolf

University of St. Gallen

Jason Wu

Board of Governors of the Federal Reserve System

Shunichi Yoneyama

Bank of Japan

Naoyuki Yoshino

Keio University

Fritz Zurbrügg

Swiss National Bank

23