monetary policy essay 2023

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The Annual Monetary Policy Competition

The monetary policy essay prize 2023-4..

By the Institute of Economic Affairs, the Institute of International Monetary Research, and the Vinson Centre

What causes high inflation, and is the Bank of England responsible for the current inflation episode? If so, how would you make it more accountable?

The Submission and Style Requirements

Entries should be no longer than 2,500 words long. Entries should include a bibliography and Harvard style referencing. References will count towards the word total, but the bibliography will not. The text should be double spaced, on A4 pages, in Arial size 12 font.

How to Enter

This year, the Monetary Policy Essay Prize will be divided into two separate competitions, the first for sixth formers , the second for  undergraduates .

The competitions are  free  to enter, and open to both  UK and non-UK  residents. However, all entrants  must  be able to attend the semi-finals and final in person in order to compete.

All entries should be submitted and in the inbox by  23.59.59  on  Friday 26th January 2024 . They should be submitted  in PDF form  to  [email protected]

• Entrant name and contact details should be clear in the subject of the email but not on the essay attachment itself (it is important you  do not  include your name or contact details within the attachment).
• In the email text, please include whether you are applying for the sixth form or undergraduate competition, as well as your institution name.

The entries will be reviewed by a panel of judges, and the top entries will be invited to semi-finals at the Vinson Centre at the University of Buckingham in February 2024. The top participants from the semi-finals will then be invited to the final at the Institute of Economic Affairs in London in March 2024.

For Sixth Form competition, £1,000 will be awarded to first prize, and £500 each to two runners up.

For the Undergraduate competition, £2,000 will be awarded to first prize, and £1,000 each to two runners up.

The entries will be judged on the criteria of knowledge and understanding of the economic issues raised by the challenge, use of resources, the quality and clarity of the argument and analysis presented, and the degree of originality and insight displayed. They will not be judged on the basis of adherence to a particular perspective regardless of quality or the other considerations set out.

The purpose of the Institute of International Monetary Research is to demonstrate and bring to public attention the strong relationship between the quantity of money on the one hand, and the levels of national income and expenditure on the other. The Institute – which is associated with the University of Buckingham in England – was set up in 2014, in the aftermath of the Great Financial Crisis (a.k.a., “the Great Recession”) of 2007 – 2009. It is an educational charity.

The IEA is the UK’s original free-market think-tank, founded in 1955. Our mission is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems. As part of this, the IEA runs an extensive student outreach programme including internships, summer schools, seminars and competitions. The IEA is an educational charity (No CC 235 351) and independent research institute limited by guarantee. Ideas and policies produced by the Institute are freely available from our website. The Institute is entirely independent of any political party or group, and is entirely funded by voluntary donations from individuals, companies and foundations.

About the Vinson Centre

The Vinson Centre for the public understanding of economics and entrepreneurship is a space for research and knowledge exchange at the University of Buckingham where individuals and teams come together to pursue exciting projects in novel ways.

2023 Winners

On 22nd March 2023 we ran the final for the fifth year of our Monetary Policy Essay Prize in conjunction with the Institute of International Monetary Research and the Vinson Centre. The competition was won by Rory Middlemiss of Abingdon School. Guari Khanna and David Zhan Zou came in as the two runners up.

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Policy has tightened a lot. how tight is it.

February 5, 2024

On May 6, 2022, I first  published an essay  explaining why I focus on long-term real rates to evaluate the overall stance of monetary policy, which includes effects from both the setting of the federal funds rate and changes to the Federal Reserve’s balance sheet. Please see that essay for a discussion of why long-term real rates drive economic activity rather than short rates or nominal rates.

On June 17, 2022 , and September 26, 2023 , I published updates to reflect actions by the Federal Open Market Committee (FOMC) to tighten policy in order to bring inflation back to our target. This essay is an update to those earlier commentaries to assess where we are in our inflation fight and highlight some important questions policymakers face.

Since my last update in September, two significant economic developments have occurred simultaneously: Inflation has fallen rapidly—more rapidly than most forecasters expected—and economic growth has proven remarkably resilient, even stepping up in the latter half of 2023.

The FOMC targets 12-month headline inflation of 2 percent. The fact that core inflation is making rapid progress returning to our target—as demonstrated by six-month core inflation coming in lower than 12-month, three-month coming in lower than six-month, and both now at or below target—suggests that we are making significant progress in our inflation fight (see Figure 1).

At the same time that inflation has made rapid progress toward our goal, real GDP growth has continued to show remarkable strength, as shown in Figure 2.

The labor market, the other half of our dual mandate, has also remained strong with the unemployment rate remaining at a historically low 3.7 percent.

How do we reconcile such strong real economic activity with falling inflation? Typically, if tight monetary policy were the primary driver of falling inflation, we would have seen falling inflation coupled with weak economic growth and a weakening labor market, perhaps including a material increase in unemployment. But that is not what we have experienced in recent quarters.

Instead of monetary policy doing the heavy lifting to bring inflation down, it appears that supply-side increases are boosting output and bringing supply and demand into balance, thus reducing inflation. I previously described  that high inflation was being driven by “surge pricing” dynamics, where demand was hitting the vertical part of the supply curve. By most measures, supply chains that had been disrupted during the pandemic have healed and there has been a strong boost to labor supply, increasing the economy’s potential output and bringing inflation down.

If supply-side factors appear to be contributing meaningfully to disinflation, what role has monetary policy played and how is it affecting the economy now? Monetary policy has played an enormously important role in keeping long-run inflation expectations anchored. It is hard to overstate how important that is for ultimately achieving the soft landing we are all aiming for. But to assess what impact policy is having on inflation going forward, we must first try to determine how tight monetary policy actually is.

Recent public commentary suggests that the real federal funds rate has tightened dramatically over the past several months because inflation has fallen rapidly while the nominal federal funds rate has remained unchanged. While I understand the math of this argument, I believe it overstates changes in the stance of monetary policy.

In prior essays I wrote that the single best proxy for the overall stance of monetary policy is the long-term real rate, specifically the 10-year Treasury inflation-protected securities (TIPS) yield. Focusing on a long-term rate incorporates the expected path of both the federal funds rate and balance sheet, not just the current level of the federal funds rate. Moreover, it adjusts the expected path of policy by expected future inflation—the relevant comparison—rather than by recently realized inflation.

While 12-month inflation has fallen 285 basis points (bps) over the past year—implying that the real federal funds rate has climbed 360 bps—Figure 3 shows that policy as indicated by 10-year TIPS has only increased about 60 bps on net. Now, one reason the 10-year TIPS yield has not moved up much while inflation has fallen is that the expected path of nominal rates has also fallen. If markets instead expected no change in the federal funds rate this year, then, all else equal, real rates would have moved up further.

The concept of a neutral stance of monetary policy is critical to assessing where policy is now and what pressure it is having on the economy. While we cannot directly observe neutral, economists have models to estimate it, which are imperfect even under normal economic circumstances. Our various workhorse models for the economy have struggled to explain and forecast the pandemic and post-pandemic periods given the extraordinary changes and disruptions the economy has experienced. So I also look to measures of economic activity for signals to try to evaluate the stance of policy.

To assess if monetary policy is tight, I start by looking at what are traditionally the more interest-rate-sensitive sectors of the economy for signs of weakness. Start with housing: While home sales are down relative to the pre-pandemic period, overall residential investment was flat in real terms in 2023. Construction employment has not fallen during our tightening cycle and instead continues to climb to all-time highs. While home price growth has slowed, prices have not fallen and are quite high by historical measures, contributing to record household wealth. Even the stock prices of homebuilders are near all-time highs.

Private nonresidential investment was up 4.1 percent in 2023, and consumption of durable goods was up 6.1 percent. And with the backdrop of low unemployment noted above, consumers continue to surprise with robust spending.

These data lead me to question how much downward pressure monetary policy is currently placing on demand.

But the data are not unambiguously positive, and there are some signs of economic weakness that I take seriously, such as auto loan and credit card delinquencies increasing from very low levels and continued weakness in the office sector of commercial real estate.

This constellation of data suggests to me that the current stance of monetary policy, which, again, includes the current level and expected paths of the federal funds rate and balance sheet, may not be as tight as we would have assumed given the low neutral rate environment that existed before the pandemic. It is possible, at least during the post-pandemic recovery period, that the policy stance that represents neutral has increased. The implication of this is that, I believe, it gives the FOMC time to assess upcoming economic data before starting to lower the federal funds rate, with less risk that too-tight policy is going to derail the economic recovery.

Related Content

The Interaction between Inflation and Financial Stability

Policy Has Tightened a Lot. Is It Enough? (A Second Update)

Policy Has Tightened a Lot. How Tight Is It? (An Update)

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Is Monetary Policy Sufficiently Restrictive?

Since mid-2021, inflation has been running well above the 2% target set by the Federal Open Market Committee (FOMC). The FOMC’s 2% target is based on the headline personal consumption expenditures (PCE) price index. In an effort to put downward pressure on inflation, in March 2022 the FOMC began a series of increases to the federal funds rate (i.e., the policy rate), with the aim of making monetary policy “sufficiently restrictive” to return inflation to 2% over time, as noted in several of the committee’s post-meeting statements since November.

The current range for the federal funds rate stands at 5%-5.25% following the increase at the May FOMC meeting. How can we know if the policy rate is at a level that could be considered sufficiently restrictive? In a recent presentation, I used monetary policy rules to examine this question. See my presentation at Stanford University’s Hoover Institution on May 12, 2023, “ The Monetary-Fiscal Policy Mix and Central Bank Strategy .” For an earlier analysis, see my presentation in Louisville, Ky., on Nov. 17, 2022, “ Getting into the Zone .”

Monetary Policy Rules as a Guidepost

Monetary policy rules provide explicit recommendations for the level of the policy rate given macroeconomic conditions, which then serve as a guidepost for where policy should be. One of the most famous monetary policy rules is the “Taylor rule,” which was developed by John Taylor of Stanford University and has been widely accepted in monetary policy discussions over the last 30 years. See John Taylor’s December 1993 Carnegie-Rochester Conference Series on Public Policy paper, “Discretion versus Policy Rules in Practice” (PDF) . Versions of his rule (“Taylor-type rules”) have been tested in commonly used macroeconomic models and have been argued to characterize close-to-optimal monetary policy.

A Taylor-type rule requires:

• A value for the short-term real rate of interest that would prevail if economic output was at potential and the inflation rate was at target
• A measure of the size of the current inflation gap (i.e., deviation of inflation from target)
• A measure of how strongly the policymaker should react to the inflation gap
• A value for the size of the output gap (i.e., deviation of output from potential output)

In my presentation, I ignored the output gap for recent periods . The FOMC has stated that “policy decisions must be informed by assessments of the shortfalls of employment from its maximum level.” See the FOMC’s “Statement on Longer-Run Goals and Monetary Policy Strategy” (PDF) , adopted effective Jan. 24, 2012, and reaffirmed effective Jan. 31, 2023. Since unemployment is not currently above its longer-run natural rate, it isn’t necessary to factor in an output gap term.

An Assessment of a Sufficiently Restrictive Zone

My approach was to look at a Taylor-type monetary policy rule with generous assumptions, the goal being to provide a minimum recommended level of the policy rate given current macroeconomic conditions. The generous assumptions are ones that tend to recommend a lower policy rate. I also looked at a Taylor-type rule with less generous assumptions, the goal being to offer an upper bound for the recommended policy rate. The area between the lower and upper bounds can be considered the “sufficiently restrictive zone.”

The table below shows the assumptions I used for these two versions of the Taylor-type rule. More details can be found in my May 12 presentation .

So, can the current policy rate be considered sufficiently restrictive?

The figure* below shows a zone of realistic values for a sufficiently restrictive level of the policy rate from 2019 through the present. The zone’s lower bound is represented by the Taylor-type rule with generous assumptions, while its upper bound is represented by the Taylor-type rule with less generous assumptions. As seen in the figure, the zone can move in reaction to incoming data; for instance, it started to move up in 2021 as inflation began exceeding 2%.

According to this analysis, monetary policy was about right shortly before the COVID-19 pandemic, as the actual policy rate was within the zone. During the pandemic, the policy rate recommended by the Taylor-type rules went to zero along with the actual policy rate. However, the policy rate was below the zone in 2022, suggesting that monetary policy was behind the curve at that point. But since the FOMC has raised the policy rate aggressively during 2022 and into 2023, monetary policy is now at the low end of what is arguably sufficiently restrictive given current macroeconomic conditions.

Actual Policy Rate and Policy Rate Recommendations from Taylor-Type Rules

SOURCES: Bureau of Economic Analysis, Bureau of Labor Statistics, Federal Reserve Bank of Dallas, Federal Reserve Bank of New York,  FOMC’s Summary of Economic Projections and author’s calculations.

NOTES: The gray-shaded area represents the sufficiently restrictive zone for monetary policy; the values for the lower and upper bounds are through April 2023. Data for the actual policy rate are through May 2023, with the May value being the average of daily values up to May 25.

Monetary Policy in Better Position Today

Monetary policy is in much better shape today with the policy rate at a more appropriate level than it was a year ago, according to this analysis. But where within the sufficiently restrictive zone should the policy rate be? And are there other factors to consider (e.g., financial stability)? Such assessments could be reflected in judgments by the FOMC going forward.

While both headline and core PCE inflation have declined from their peaks in 2022, they remain too high. An encouraging sign that inflation will decline to 2% comes from market-based inflation expectations, which had moved higher in the last two years but have now returned to levels consistent with the 2% inflation target. The prospects for continued disinflation are good but not guaranteed, and continued vigilance is required.

*Editor’s Note: The figure in this article was updated on June 16, 2023, to correct data for the first six months of 2019.

• The FOMC’s 2% target is based on the headline personal consumption expenditures (PCE) price index.
• See my presentation at Stanford University’s Hoover Institution on May 12, 2023, “ The Monetary-Fiscal Policy Mix and Central Bank Strategy .” For an earlier analysis, see my presentation in Louisville, Ky., on Nov. 17, 2022, “ Getting into the Zone .”
• See John Taylor’s December 1993 Carnegie-Rochester Conference Series on Public Policy paper, “Discretion versus Policy Rules in Practice” (PDF) .
• See the FOMC’s “Statement on Longer-Run Goals and Monetary Policy Strategy” (PDF) , adopted effective Jan. 24, 2012, and reaffirmed effective Jan. 31, 2023.

James Bullard served as president and CEO of the Federal Reserve Bank of St. Louis from April 1, 2008, to July 13, 2023. In this capacity, he oversaw the activities of the Eighth Federal Reserve District and was a participant on the Federal Open Market Committee. More about Bullard .

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Financial Stability: Frontier Risks, a New Normal, and Policy Challenges

• Joseph G. Haubrich

Papers, presentations, and videos of the conference can be found at  2022 Financial Stability Conference: Frontier Risks, a New Normal, and Policy Challenges .

The recent failures of Silvergate Bank, Silicon Valley Bank, and Signature Bank exposed both the rapidly evolving threats to financial stability stemming from changing fiscal, monetary, and regulatory policies and the challenges stemming from an increasingly interconnected set of markets and institutions. At the same time, other risks, perhaps operating on a longer timeframe, have not gone away. Cybersecurity disruptions have introduced a growing set of vulnerabilities to the increasingly automated and interconnected financial system. Further, the financial stability consequences of climate risks and associated policy responses are still not well understood, though they have drawn increasing attention. The tenth annual financial stability conference held on November 17–18, 2022—titled Financial Stability: Frontier Risks, a New Normal, and Policy Challenges and organized by the Federal Reserve Bank of Cleveland and the Office of Financial Research—explored challenges stemming from both short- and long-term risks to financial stability. Although the 2022 conference took place months before the recent bank failures mentioned above, it addressed issues that have since become quite topical.

The conference featured both academic papers and panels on macroprudential and monetary policy, financial institutions, and financial markets, with academic sessions that each comprised two paper presentations and a discussion along with a “lightning round” of three brief paper presentations. Loretta J. Mester, president of the Federal Reserve Bank of Cleveland, and James Martin, deputy director of operations performing the duties of the director at the US Treasury Office of Financial Research, presented opening remarks. 1 ,   2 The regulatory keynote was provided by Tobias Adrian, director of the Monetary and Capital Markets Department at the International Monetary Fund. 3 This Economic Commentary summarizes the academic papers and keynote talks delivered at the conference.

Macroprudential and Monetary Policy

The person on the street usually thinks of central banks such as the Federal Reserve in terms of setting monetary policy to affect inflation and unemployment, but often they also regulate and supervise banks. 4 The two roles are linked, however, as interest rates can affect bank risk, and banking regulations can affect how banks pass through interest rates to businesses and households. The two papers in this session addressed the question of whether monetary policy should be used for macroprudential purposes and how the macroprudential environment frames the monetary policy debate.

In “Bank Runs, Fragility, and Credit Easing,” Manuel Amador and Javier Bianchi present a theoretical model of self-fulfilling bank runs that also depend on conditions in the overall economy. A bank run occurs when investors lose confidence, triggering large deposit withdrawals and leading the bank to default on its obligations. They characterize how macroeconomic aggregates such as GDP or asset prices affect the vulnerability of individual banks and also how the number of banks facing a run affects those macroeconomic aggregates in turn. Bank runs may lead to all banks’ defaulting or only a few, depending on the leverage in the banking system and the reaction of asset prices. Credit easing, during which the central bank buys assets, turns out to be good or bad depending on whether a financial crisis is driven by fundamentals or by self-fulfilling runs. In a run triggered by fundamentals, credit easing leads to more banks’ defaulting, while a self-fulfilling run can be stabilized by credit easing.

In a financial crisis, the behavior of market participants and policymakers often depends on their experience and the collective memories and shared narratives relating to past crises. Dasol Kim, William Goetzmann, and Robert Shiller investigate this in their paper “Crash Narratives.” For collective memories about major stock market crashes, investors may rely on associated narratives, or “crash narratives,” to inform current beliefs and choices, and these narratives are often transmitted by the financial press. Recent advances in computational linguistics allow the authors to carefully analyze the language in newspaper articles that appear following major crashes. The authors provide evidence that crash narratives propagate broadly once they appear in news articles and that significantly explain predictive variation in market volatility. Survey data can help to distinguish between the effects of narrativity and fundamental conditions. Significantly, they also find that in times of high market stress and uncertainty, when investor attention is higher (measured by internet search volume), the financial press is more likely to tell stories, that is, to employ narratives, as opposed to just reporting prices, volumes, and other facts. 5

Financial Institutions

Bank failures and banking panics are perennial financial stability issues. These may be caused by traditional problems such as banks’ taking excessive interest rate risk (Silicon Valley Bank is a recent example). However, the modern world has created a new set of risks, or, at a minimum, new variants of old risks. The papers in this session address the issue of cyberattacks and the disappearance of the London interbank offered rate (LIBOR), an interest rate used to set rates on trillions of dollars of loans and derivatives.

In “Cyberattacks and Financial Stability: Evidence from a Natural Experiment,” Antonis Kotidis and Stacey Schreft study the effects of a multiday cyberattack on a technology service provider (TSP). This attack impaired the ability of banks that used the TSP to send payments over Fedwire even though the Federal Reserve extended the time they had to submit payments and even though the banks were not directly attacked. This impairment (first-round effect) reduced payments to other banks (second-round effect), leaving them at risk of having too few reserves to send their own payments (a potential third-round effect). These innocent-bystander banks responded differently depending on their size and reserve holdings. Those with sufficient reserves drew down their reserves. For those without sufficient reserves, smaller banks borrowed from the discount window, while larger banks borrowed in the federal funds market. These significant adjustments to operations and funding prevented the second-round effect from spilling over into a third-round effect and broader financial instability. This highlights the importance of bank contingency planning, liquidity buffers, and the Federal Reserve in supporting the financial system’s recovery from a cyberattack.

In “Bank Funding Risk, Reference Rates, and Credit Supply” Harry Cooperman and his coauthors Darrell Duffie, Stephan Luck, Zachry Wang, and David Yang examine a conundrum facing banks in difficult times: Corporate borrowers want to draw down their credit lines and obtain funding, but the bank’s cost of funding is high, making it difficult or expensive to provide the credit. Precommitted revolving credit lines tend to be drawn down heavily when bank funding markets are stressed, presenting an important risk to banks. Until recently, banks have mitigated this funding risk by linking the interest paid on lines to risk-sensitive reference rates such as the London interbank offered rate (LIBOR). Such links, however, dampen the banks’ incentives to provide credit lines because of the debt-overhang cost to bank shareholders associated with funding stressed-market drawdowns. The good news is that the associated adverse effect on credit supply is attenuated if (1) drawdowns are expected to be deposited at the same bank, a situation which occurred at the largest banks during the COVID-19 shock of March 2020, and (2) revolving credit is linked to credit-sensitive reference rates that reduce borrower incentives to draw more heavily on their lines during stressed markets. The paper then estimates that replacing LIBOR with risk-free alternative reference rates such as the secured overnight financing rate (SOFR) will affect the supply of revolving credit. The new risk-free rates may transfer risk to bank shareholders, leading to less credit. 6

Financial Markets

Wholesale money markets are often at the center of questions of financial stability, providing an important but runnable source of funding for banks and commercial firms. Connecting banks, mutual funds and firms, they are central to the implementation and transmission of monetary policy. The academic papers in this session take a closer look at the dynamics and competition in this market.

In “How Abundant Are Reserves? Evidence from the Wholesale Payment System,” Gara Afonso and coauthors Darrell Duffie, Lorenzo Rigon, and Hyun Song Shin note that before the era of large central bank balance sheets (roughly before 2008), banks relied on incoming payments to fund outgoing payments to conserve scarce liquidity. The paper goes on to show that even in the era of large central bank balance sheets, outgoing payments remain highly sensitive to incoming payments, even though banks might have funded outgoing payments with abundant reserve balances. These results shed light on the adequacy of reserve balances by providing a window on liquidity constraints revealed by payment behavior. Given the ongoing shrinking of central bank balance sheets in response to inflation, establishing the thresholds for reserves to be abundant is quite timely.

Amy Wang Huber, in “Market Power in Wholesale Funding: A Structural Perspective from the Triparty Repo Market,” models and estimates the equilibrium rates and volume in the triparty repurchase agreement (repo) market, searching for evidence of imperfect competition in this systemically important wholesale funding market. Despite trading seemingly identical repos in the triparty market, dealers pay persistently different rates. In the triparty market, Huber models the market equilibrium as cash lenders allocating their portfolios among various differentiated dealers who offer repo rates and finds that cash lenders’ aversion to portfolio concentration and preference for stable lending give dealers substantial market power. Between 2011 and 2017, dealers borrowed at rates that were 21 basis points (bps) lower than their marginal value of intermediating borrowed funds. Dealers’ market power makes the observed wholesale repo rate understate the financing rate available to market participants who rely on repo funding and offers a novel explanation for funding spreads such as the Treasury cash-futures basis and the Treasury swap spread. 7

Keynote Address

During the keynote address, Tobias Adrian of the International Monetary Fund (IMF) spoke about highlights from the IMF’s fall 2022 Global Financial Stability Report . He noted that since the previous IMF report was released, four challenges have stood out. Many countries expect to tighten monetary policy, as persistent inflation has prompted central banks to act more aggressively. Globally, stagflation threatens, as investors expect inflation to remain elevated even as earnings downgrades and higher rates reduced equity prices. Further exacerbating stagflation chances is that the energy crisis intensified in Europe, with rising energy prices possibly pushing countries into a recession. Among emerging markets and developing economies (EMDEs), vulnerable economies face defaults and difficult restructurings even as policy confronts global uncertainty. Finally, global housing risks have been intensifying as stretched valuations meant consumers increasingly relied on low interest rates to maintain affordability. In China, in particular, a stalled housing market has distressed developers, potentially threatening home completions while extensive defaults could lead to large losses at banks.

Having emphasized the problems, Adrian then presented the Global Financial Stability Report’s recommendations for preserving financial stability. In the area of monetary and macroprudential policy, central banks should act to restore price stability and avoid any de-anchoring of inflation expectations that would damage their credibility. Communication, he noted, is crucial to avoid unwarranted market volatility, and so policymakers should clearly communicate their policy function, their commitment to their objectives, and the desire to further normalize policy.

To contain any further buildup of financial vulnerabilities, policymakers should adjust macroprudential tools to the specific challenges and circumstances of the country. While normalizing monetary policy in the face of heightened uncertainty, policymakers must avoid procyclicalities and contain the growth of vulnerabilities without creating disorderly financial conditions. Beyond monetary policy, he emphasized the increasing importance of nonbank financial institutions (NBFIs) and called for counterparties to carefully monitor intraday activity and leverage exposures, strengthen liquidity risk management practices, and enhance transparency and data availability. Adrian argued that policymakers should provide guidance on liquidity management tools such as swing pricing, tighter monitoring of funds’ risk management practices, and perhaps requiring additional disclosures.

The conference papers explored a wide range of risks facing the financial system, as befits a conference seeking to find policy responses to the frontier risks of the financial system. Whether the challenge was as obvious as a bank run or a cyberattack, as subtle as a shift in underlying reference rates or a change in narrative, or as hidden in the details as bank reserves and money markets, policymakers must confront a new normal of diverse risks.

The views authors express in Economic Commentary are theirs and not necessarily those of the Federal Reserve Bank of Cleveland or the Board of Governors of the Federal Reserve System. The series editor is Tasia Hane. This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License. This paper and its data are subject to revision; please visit clevelandfed.org  for updates.

• Acharya, Sushant, Keshav Dogra, and Sanjay R. Singh. 2021. “The Financial Origins of Non-Fundamental Risk.” 2022 Financial Stability Conference. Federal Reserve Bank of Cleveland. https://www.clevelandfed.org/-/media/project/clevelandfedtenant/clevelandfedsite/events/financial-stability-conferences/papers/sanjay-singh-paper.pdf .
• Afonso, Gara, Darrell Duffie, Lorenzo Rigon, and Hyun Song Shin. 2022. “How Abundant Are Reserves? Evidence from the Wholesale Payment System.” 2022 Financial Stability Conference. Federal Reserve Bank of Cleveland. https://www.clevelandfed.org/-/media/project/clevelandfedtenant/clevelandfedsite/events/financial-stability-conferences/papers/gara-afonso-paper.pdf .
• Amador, Manuel, and Javier Bianchi. 2022. “Bank Runs, Fragility, and Credit Easing.” 2022 Financial Stability Conference. Federal Reserve Bank of Cleveland. https://www.clevelandfed.org/-/media/project/clevelandfedtenant/clevelandfedsite/events/financial-stability-conferences/papers/javier-bianchi-paper.pdf .
• Cooperman, Harry, Darrell Duffie, Stephan Luck, Zachry Wang, and Yilin (David) Yang. 2022. “Bank Funding Risk, Reference Rates, and Credit Supply.” 2022 Financial Stability Conference. Federal Reserve Bank of Cleveland. https://www.clevelandfed.org/-/media/project/clevelandfedtenant/clevelandfedsite/events/financial-stability-conferences/papers/stephan-luck.pdf .
• Crouzet, Nicolas, Apoorv Gupta, and Filippo Mezzanotti. 2022. “Shocks and Technology Adoption: Evidence from Electronic Payment Systems.” 2022 Financial Stability Conference. Federal Reserve Bank of Cleveland. https://www.clevelandfed.org/-/media/project/clevelandfedtenant/clevelandfedsite/events/financial-stability-conferences/papers/apoorv-gupta-paper.pdf .
• Czech, Robert, Shiyang Huang, Dong Lou, and Tianyu Wang. 2022. “Unintended Consequences of Holding Dollar Assets.” 2022 Financial Stability Conference. Federal Reserve Bank of Cleveland. https://www.clevelandfed.org/-/media/project/clevelandfedtenant/clevelandfedsite/events/financial-stability-conferences/papers/robert-czech-paper.pdf .
• Du, Wenxin, Benjamin Hébert, and Wenhao Li. 2022. “Intermediary Balance Sheets and the Treasury Yield Curve.” 2022 Financial Stability Conference. Federal Reserve Bank of Cleveland. https://www.clevelandfed.org/-/media/project/clevelandfedtenant/clevelandfedsite/events/financial-stability-conferences/papers/wenxin-du-paper.pdf .
• Faccini, Renato, Rastin Matin, and George S. Skiadopoulos. 2022. “Dissecting Climate Risks: Are They Reflected in Stock Prices?” 2022 Financial Stability Conference. Federal Reserve Bank of Cleveland. https://www.clevelandfed.org/-/media/project/clevelandfedtenant/clevelandfedsite/events/financial-stability-conferences/papers/george-skiadopoulos-paper.pdf .
• Goetzmann, William N., Dasol Kim, and Robert J. Shiller. 2022. “Crash Narratives.” 2022 Financial Stability Conference. Federal Reserve Bank of Cleveland. https://www.clevelandfed.org/-/media/project/clevelandfedtenant/clevelandfedsite/events/financial-stability-conferences/papers/dasol-kim-paper.pdf .
• He, Zhiguo, Jing Huang, and Jidong Zhou. 2022. “Open Banking: Credit Market Competition When Borrowers Own the Data.” 2022 Financial Stability Conference. Federal Reserve Bank of Cleveland. https://www.clevelandfed.org/-/media/project/clevelandfedtenant/clevelandfedsite/events/financial-stability-conferences/papers/jing-huang-paper.pdf .
• Huber, Amy Wang. 2022. “Market Power in Wholesale Funding: A Structural Perspective from the Triparty Repo Market.” 2022 Financial Stability Conference. Federal Reserve Bank of Cleveland. https://www.clevelandfed.org/-/media/project/clevelandfedtenant/clevelandfedsite/events/financial-stability-conferences/papers/amy-huber-paper.pdf .
• Iyer, Rajkamal, Sotirios Kokas, Alexander Michaelides, and José-Luis Peydró. 2022. “Shock Absorbers and Transmitters: The Dual Facets of Bank Specialization.” 2022 Financial Stability Conference. Federal Reserve Bank of Cleveland. https://www.clevelandfed.org/-/media/project/clevelandfedtenant/clevelandfedsite/events/financial-stability-conferences/papers/sotirios-kokas-paper.pdf .
• Keys, Benjamin J., and Philip Mulder. 2022. “Neglected No More: Housing Markets, Mortgage Lending, and Sea Level Rise.” 2022 Financial Stability Conference. Federal Reserve Bank of Cleveland. https://www.clevelandfed.org/-/media/project/clevelandfedtenant/clevelandfedsite/events/financial-stability-conferences/papers/philip-mulder-paper.pdf .
• Kotidis, Antonis, and Stacey L. Schreft. 2022. “Cyberattacks and Financial Stability: Evidence from a Natural Experiment.” 2022 Financial Stability Conference. Federal Reserve Bank of Cleveland. https://www.clevelandfed.org/-/media/project/clevelandfedtenant/clevelandfedsite/events/financial-stability-conferences/papers/antonis-kotidis-paper.pdf .
• Ma, Yiming, Kairong Xiao, and Yao Zeng. 2022. “Bank Debt versus Mutual Fund Equity in Liquidity Provision.” 2022 Financial Stability Conference. Federal Reserve Bank of Cleveland. https://www.clevelandfed.org/-/media/project/clevelandfedtenant/clevelandfedsite/events/financial-stability-conferences/papers/yao-zeng-paper.pdf .
• Special thanks go to the discussants of the academic paper sessions: Greg Phelan of the Office of Financial Research for the macroprudential and monetary policy session, Peter Zimmerman of the Cleveland Fed for the financial institutions session, and Yi Li of the Board of Governors of the Federal Reserve System for the financial markets session. Return to 1
• The panel on macroprudential and monetary policy was moderated by Narayana Kocherlakota, University of Rochester, with panelists Sujit Kapadia, European Central Bank; Bill Nelson, Bank Policy Institute; and Steve Williamson, Western University. The panel on financial institutions was moderated by Beverly Hirtle, Federal Reserve Bank of New York, with panelists Andrew Felton, Federal Deposit Insurance Corporation; Marc Saidenberg, Ernst & Young; and Anjan Thakor, Olin Business School at Washington University in St. Louis. The panel on financial markets was moderated by Mark Carey, Federal Reserve Bank of Cleveland, with panelists Richard Berner, New York University Leonard N. Stern School of Business; Klaus Loeber, European Securities and Markets Authority; and James Sweeney, Blackrock. Return to 2
• Particular thanks go to the Scientific Committee, which helped choose and organize the papers: Jennie Bai, Georgetown University; Christa Bouwman, Texas A&M University; Wenxin Du, University of Chicago Booth School of Business; Kinda Hachem, University of Virginia Darden School of Business; Kathleen Hanley, Lehigh University; Luc Laeven, Tilburg University; Elena Loutskina, University of Virginia Darden School of Business; Andreea Minca, Cornell University; and Alan Taylor, University of California, Davis. Return to 3
• For example, central banks involved in the supervision and regulation of banks include the European Central Bank (ECB), the Bank of England, the Reserve Bank of India, and the Deutsche Bundesbank, though Germany also has a separate Federal Financial Supervisory Authority (BaFin). In Canada, bank supervision is the responsibility of the Office of the Superintendent of Financial Institutions, and in France it is the Autorité de contrôle prudentiel et de résolution (ACPR). Return to 4
• The papers in the lightning round for this session were “Unintended Consequences of Holding Dollar Assets” presented by Robert Czech, Bank of England; “Open Banking: Credit Market Competition When Borrowers Own the Data” presented by Jing Huang, Texas A&M University; and “The Financial Origins of Non-Fundamental Risk” presented by Sanjay R. Singh, Federal Reserve Bank of San Francisco. Return to 5
• The papers in this lightning round were “Shock Absorbers and Transmitters: The Dual Facets of Bank Specialization” presented by Sotirios Kokas, University of Essex; “Neglected No More: Housing Markets, Mortgage Lending, and Sea Level Rise” presented by Philip Mulder, US Treasury Office of Financial Research; and “Dissecting Climate Risks: Are They Reflected in Stock Prices?” presented by George Skiadopoulos, Queen Mary University of London and University of Piraeus. Return to 6
• The papers in this lightning round were “Bank Debt versus Mutual Fund Equity in Liquidity Provision” presented by Kairong Xiao, Columbia University; “Shocks and Technology Adoption: Evidence from Electronic Payment Systems,” presented by Apoorv Gupta, Dartmouth College; and “Intermediary Balance Sheets and the Treasury Yield Curve” presented by Wenxin Du, University of Chicago Booth School of Business. Return to 7

Suggested Citation

Haubrich, Joseph G. 2023. “Financial Stability: Frontier Risks, a New Normal, and Policy Challenges.” Federal Reserve Bank of Cleveland,  Economic Commentary  2023-14. https://doi.org/10.26509/frbc-ec-202314

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