17. 01. 2018 papanel : “ new challenges for central banks ” * * russia and the world : values and virtues / gaidar forum luis m. linde governor * on 17 january 2018, governor luis m. linde participated in the 2018 gaidar forum panel entitled “ new challenges for central banks ”. the panel was structured around a debate format moderated by ksenia yudaeva, first deputy governor of the central bank of the russian federation, with the participation of jacob aharon frenkel, chairman of jpmorgan chase international and former governor of the bank of israel, and petr aven, chairman of the board of directors, abh holdings s. a. this note includes the thoughts on central banking that were the focus of governor linde ’ s speech. i. taking a step back : three main developments have defined the global economy in the 21st century. globalisation. the period between 1990 and the early 2000´s was characterised by an intense process of globalisation, with rapid growth of trade and financial relations among countries. for instance, between 2000 and 2007 the growth of world imports averaged 7. 4 % per year, about twice as much as global gdp growth. global banking also expanded markedly, in terms both of cross - border activities and local entry into banking sectors overseas. the crisis entailed a dramatic and severe reversal of this trend. trade plunged by more than 10 % in 2009, an extraordinary collapse by historical standards. since 2012, trade has gradually recovered at a slower pace than pre - crisis levels, with imports growing around 3 % annually. financial markets experienced a sudden stop in the fall of 2008. the decline in global banking activity has been particularly pronounced in cross - border positions vis - a - vis advanced economies, which declined by 20 % between 2008 and 2017, whereas cross - border lending to emerging market economies increased by 44 % during the same period ( primarily driven by very strong lending to china ). global financial crisis. during the years of expansion of the so - called great moderation, from the mid - 80s until the crisis, the global economy was progressively accumulating high levels of debt and leverage, assisted by easy financing conditions and the underpricing of risk. this led to increased vulnerability of the global economy and to the accumulation of bubbles, mainly in the financial and real estate sectors in advanced economies. what took us all by surprise was the intense depth and global nature of the crisis that exploded in 2008.

policy framework addressing systemic risk enhanced international coordination. the global nature of the crisis required a global response and new international institutions to coordinate the regulation of the financial sector. at the global level we saw the creation of the financial stability board and the intensification of the work at the basel committee ( bcbs ). in the case of the european union, we have taken an important step towards financial integration, most notably with the activation of the banking union, currently comprising two elements : the single supervisory mechanism and the single resolution mechanism. there is a third necessary pillar, the european deposit insurance scheme, which is still under political negotiations. iii. four broad challenges for central banks ahead : 1. are we under a “ new normal ” macroeconomic environment for the macroeconomy and what does it mean for monetary policy? new normal? debate about whether or not we are facing a new structural reality of secular stagnation that defines a “ new normal ” for the macroeconomy, characterised by low growth, low inflation and low real and nominal interest rates. most estimates suggest that the natural interest rate ( i. e. the real interest rate consistent with inflation stability and output at its natural level ) is now at historically low, possibly negative, levels. some possible explanatory factors are of a transitory nature ( such as the still - ongoing deleveraging processes ), while others are more structural ( i. e. low productivity growth and demographic factors ). we have to deepen our analysis further in order to have a full grasp of this “ new normal ” reality. implications for monetary policy : new conventional? the question that arises is whether the “ new normal ” should lead to a “ new conventional ” for monetary policy. indeed, inflation and real interest rates are likely to persist at a low level in the future, and therefore nominal interest rates will also be lower and hence closer to their effective lower bound, limiting their effectiveness as a monetary policy instrument, which will possibly lead to balance sheet management as a permanent policy. there are still no conclusive debates about balance sheet management, including on its marginal effectiveness, the optimal size of the balance sheet and the repercussions it could involve in terms of financial stability. again, in this area, we need further analysis. 4 / 6 once the conditions for it are met, the exit strategy from the accommodative policies will require gradualism and predictability. as the recovery gathers speed, and as long as this