Central Banking Seminar - Federal Reserve Bank of New York

Discussion Groups 2007

Central Banking in Episodes of Financial Volatility

Central banks are responding to recent financial market turbulence with various policy measures, depending on the proximity of the dislocations, their assessment of risks, and their instruments. As central banks apply the tools of monetary policy, they must assess their relative effectiveness in the short term and over the longer run.

Policymakers are called upon to balance multiple objectives, among them the implications for economic activity and price stability, moral hazard, and public expectations. Recent central bank statements assessing the environment and explaining their decisions offer valuable insights into the tradeoffs they face as they work to stabilize financial markets.

Advance preparation
Current central bank speeches and statements will serve as a point of departure for the group discussions. To prepare for the discussions, participants should browse this information to identify key aspects of the financial dislocations and the policy decisions taken to date. Several examples are noted here. Additional statements are likely to be released between now and October 15.

Testimony by Chairman Ben S. Bernanke, Board of Governors of the Federal Reserve System offsite

Press conference with President Jean-Claude Trichet and Vice President Lucas Papademos, European Central Bank offsite

Tripartite statement by HM Treasury, Bank of England and Financial Services Authority offsite

Remarks by Governor David Dodge, Bank of Canada offsite

Monthly Report of Recent Economic and Financial Developments, Bank of Japan offsite

Address by Governor Glenn Stevens, Reserve Bank of Australia offsite

Participants may also find it useful to review the interaction between financial crises and aggregate economic activity. Two accessible treatments are:

The Economics of Money, Banking, and Financial Markets
Frederic S. Mishkin, Seventh Edition, 2004, Addison Wesley, New York, chapter 8, An Economic Analysis of Financial Structure, pp. 169-199.

Money, Banking, and Financial Markets
Stephen G. Cecchetti, 2006, McGraw-Hill Irwin, New York, chapter 14, Regulating the Financial System, pp. 349-374.