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.
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 translates into a sustained adjustment in inflation towards its objective, the need for monetary policy support will tend to diminish.