Andrew G Haldane: Ambidexterity Remarks by Mr Andrew G Haldane, Executive Director, Financial Stability, Bank of England, at the American Economic Association Annual Meeting, Philadelphia, Pennsylvania, 3 January 2014. *  *  *  For most of the post-war period, central banks have executed macro-economic policy with, at most, one hand – the monetary policy hand. It is generally felt that their dexterity improved steadily over that period. This culminated in a long period of low and stable rates of inflation and a steadily growing economy between the mid-1990s and 2007 – the “Great Moderation” [Goodfriend, 2007]. Central banks had becalmed both inflation and the business cycle – and had done so single-handedly. Or so it appeared. But even while the economies of major advanced countries were an ocean of pre-crisis calm, a storm was brewing out in the credit market seas. When this storm hit in 2008, it caused a contraction in global output only rivalled by the Great Depression. Great Moderation turned abruptly to Great Recession. In response, questions began to be asked about whether monetary policy, while necessary, was sufficient to stabilise simultaneously the macroeconomy and the financial system [Bank of England, 2009]. Unlike the Great Depression, central banks’ response to the Great Recession was swift and sizable. Central bank interest rates in most advanced economies quickly fell to close to their floor, while central bank balance sheets rose to new heights.
As Chart 5 illustrates, between 1995 and 1999 interest rates fell by between 3 and 6 percentage points in Ireland, Spain and Portugal. And in Greece between 1995 and 2001, interest rates fell by a remarkable 16 percentage points. Whether by coincidence or causality, what happened next in credit markets in these countries was dramatic. The credit gaps in each of Spain, Portugal, Ireland and Greece widened significantly and continued widening through the early part of this century (Chart 6). By 2008, these credit gaps stood at over 25 percentage points in Greece and Portugal, almost 40 percentage points in Spain and over 50 percentage points in Ireland. It is unlikely that any of these countries have previously seen credit booms on this scale. It is useful again to rerun history and ask how macro-prudential policy might have looked over this period. Charts 7 and 8 give the “Minsky rule” paths for bank capital ratios in Spain and Ireland relative to their actual paths. As in the US, they show macro-prudential policyimplied capital ratios lying significantly above their actual paths, by progressively larger amounts. At their peak, Minsky rule paths for bank capital are more than twice their actual levels in Spain and three times their actual level in Ireland. Macro-prudential stringency would have counteracted the loosening of monetary policy.