There is a joke in economics that says that “The questions don’t change, only the correct answers.” This is one of the reasons why the book “Myths and Realities of Monetary Policy” It is not intended to provide a specific solution to every question we ask.
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Our objective, instead, is to share the pertinent arguments around each problem, as well as describe the processes that are carried out in the decision-making of central banks. Of course, we will not be exempt from We will make some value judgments throughout the chapters, but, as far as possible, we will try to make them explicitly.
Monetary policy issues tend to be arduous and tedious for non-economists. That is why this book attempts to land the most complex concepts in an effort to inform the non-specialized public of the background of the decisions and role of the Bank of the Republic. In other words, it is oversight or accountability to the public, an intrinsic mandate of public servants.
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We try, to the best of our abilities, to be self-critical and have the humility that we feel is lacking in the profession. On the one hand, we recognize the many challenges that the Bank still faces (such as accompanying and developing a system of immediate low-value payments in order to facilitate financial inclusion and allow efficient, secure, low-cost and real-time payment operations).
But we also emphasize the limitations of monetary policy. In this sense, it is feasible that an extremely ambitious central bank could overreach and underdeliver.
Especially because the policy instruments are few and some that seem independent end up being tied to others (like the so-called impossible trilogy).
At the other extreme, there are economists who apply the same recipe to all problems. As the saying would say“when the only tool is a hammer, it seems like all problems are tiptoes.” In the book we seek to recognize the limitations of monetary policy, without falling into monetary monotony and admitting that the theoretical and empirical matter is in constant evolution. The reader will be the judge of this proposed balance.
Finance.
EFE
“Myths and Realities of Monetary Policy” It is not intended to be a textbook, but rather to provide an initial intuition that can easily connect the interested reader to more formal literature. We address topics that raise some controversy and some myths that have been formed around them and to deal with them we have divided the book into six large blocks and three boxes:
The first consists of issues central to the Bank and its conventional monetary policy. This addresses questions such as whether the Bank should respond (and to what extent) to supply shocks (such as landslides and climate phenomena) or whether Colombia was slow to raise and lower rates in the post-pandemic era.
The second covers issues related to unconventional monetary policy and focuses on exchange rate issues (including the appropriateness of exchange rate intervention) and in the relevance of capital flows.
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The third deals with the financial system, whether the Bank affects the profits of commercial banks, the channels through which monetary policy acts, and the unintended impact of some measures such as the usury rate.
The fourth has a wide variety of topics where the negative effects of ideas that may initially “sound good.” Among them we highlight the possibility of dollarizing the economy, or for the Bank to lend to the government and the private sector. We also analyze what would happen if international reserves were used to finance expenses.
The fifth deals with new issues in central banking, where we describe the immediate payments system, how the Bank addresses climate change and inequality. We also review how the Bank has influenced the country’s public policies.
The sixth focuses on economic activity and its relationship with monetary policy.
It highlights the importance of the labor market, including the informal sector, as well as the impacts of inflation on the poorest population. We also discuss aspects of firms’ profits and their possible impact on prices (seller’s inflation).
The book closes with three boxes: one on the curious history of money on the islands of Yap, another on the impossible trilogy and another (more technical) on the neutral interest rate.
We hope that this book allows a non-specialized public to get closer to central banking issues and that it contributes to their understanding of the importance of a independent monetary policy focused on price stability and sustainable growth.
We also hope that this effort will contribute to raising awareness among economists, technocrats, academics and public servants about the importance of making more inclusive communication that allows the public to better understand the reason for public policies and their results.
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The book can be downloaded at this link: https://www.banrep.gov.co/es/publicaciones-investigaciones/libros/mitos-realidades-politica-monetaria
MAURICIO VILLAMIZAR-VILLEGAS and BIBIANA TABORDA ARANGO
Co-directors of the Bank of the Republic.
** The opinions in this text do not commit Banco de la República or its Board of Directors.
