Richard H Clarida: Perspectives on global monetary policy coordination, cooperation, and correlation

Speech (via webcast) by Mr Richard H Clarida, Vice Chair of the Board of Governors of the Federal Reserve System, at the "Macroeconomic Policy and Global Economic Recovery" 2021 Asia Economic Policy Conference, sponsored by the Federal Reserve Bank of San Francisco Center for Pacific Basin Studies, San Francisco, 19 November 2021.

The views expressed in this speech are those of the speaker and not the view of the BIS.

Central bank speech  | 
24 November 2021

In my remarks today, I would like to offer some perspectives on global monetary policy correlation and what it can-and cannot-reveal about the prevalence and value of global monetary policy coordination or, in the limit, binding global monetary cooperation. In both the Global Financial Crisis (GFC) and the Global Pandemic Collapse (GPC), major central banks around the world responded by cutting policy rates to, and then keeping them at, their effective lower bounds (ELBs); by increasing their balance sheets through ambitious and expansive large-scale asset purchase and lending programs; and by offering forward guidance-both Delphic and Odyssean-on the stance of their future monetary policies.

As these examples make clear, we certainly do observe that national monetary policies are often correlated, and such examples are not confined to recent experience. Indeed, the international monetary economics literature abounds with historical and empirical studies of correlated global monetary policy cycles, not to mention the evident secular downtrend in global monetary policy rates observed in recent decades. Moreover, global monetary policies often also do appear at least sometimes to be coordinated. There are certainly enough meetings of Group of Seven (G-7), Group of Twenty, and Bank for International Settlements (BIS) central bank governors-virtual and in person-that provide such opportunities. By contrast with evidence of central bank correlation and coordination, the historical record suggests that, since the collapse of the Bretton Woods system 50 years ago, rarely, if ever, do major sovereign central banks actually enter into, at least publicly-let alone respect-binding commitments to pursue formal cooperative policies. Here and throughout the lecture, I shall reserve the meaning of the adjective cooperative, as in "cooperative" central bank policies, to define policies that can, at least conceptually, be thought of as policies pursued by sovereign central banks that fully incorporate any spillovers from one central bank's policies to the other central bank's mandates. Cooperative policies defined this way will, in general, differ from noncooperative policies-in the sense of the Nash equilibrium concept-designed to achieve domestic mandates assigned by sovereign institutions while taking other central bank policies as given. In these remarks, I will draw on perspectives informed not only by economic analysis-including my own academic research on the theory and empirics of central banks' policymaking-but also by my observations and experiences serving as Vice Chair of the Federal Reserve Board during what has certainly been an eventful three years.