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After two decades of successfully restoring price stability in much of
the world economy, central banks begin the next millennium facing a new set of challenges.
One key task is how to conduct monetary policy in an era of price stability. Clearly,
policymakers would like inflation to remain subdued. But how should monetary policy
procedures be designed to ensure that inflation does not reappear as a serious policy
problem? Another important question is whether central banks enjoy greater operational
flexibility or face new constraints in an environment of low inflation. And recent crises
in financial markets around the world pose an additional set of challenges for
policymakers. Indeed, preserving global financial stability and dealing with extreme asset
price and exchange rate movements have taken on greater urgency in many recent policy
discussions.
To explore the implications of these issues, the Federal Reserve Bank of Kansas City held
a symposium titled "New Challenges for Monetary Policy" at Jackson Hole,
Wyoming, on August 26-28, 1999. The symposium brought together a crosssection of
distinguished experts from central banks, academic institutions, and financial markets
from around the world.
Sellon and Buskas highlight the principal issues raised at the symposium and summarize the
papers presented and the commentary. The first section provides an overview of the main
issues and identifies areas of agreement and disagreement among program participants. The
remaining sections summarize the viewpoints of the participants and their policy
recommendations.
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Over the past twenty years the world's major central banks
have been largely successful at bringing inflation under control. While it is premature to
suggest that inflation is no longer an issue of great concern, it is quite conceivable
that the next battles facing central bankers will lie on a different front. One
development
that has already concentrated the minds of policymakers is an apparent increase in
financial instability, of which one important dimension is increased volatility of asset
prices.
In a presentation at the Federal Reserve Banks of Kansas City's 1999 symposium, "New
Challenges for Monetary Policy," Bernanke and Gertler examined the role that asset
prices should play in monetary policy. They concentrated on three issues: why policymakers
should care about asset price volatility, how asset price volatility affects the economy,
and how monetary policy should respond to changes in asset prices.
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In many respects, the 1980s appear to be the worst decade
in banking since the Great Depression, while the 1990s could be rated as the best. Over
1,100 commercial banks failed or needed FDIC assistance during the 1980s, and significant
parts of the thrift industry became insolvent and had to be resolved, costing taxpayers
$125 billion. In contrast, the banking industry began a dramatic recovery in the first
half of 1990s and has recently achieved record profitability, extremely low levels of loan
losses, and the highest capital ratios since the early 1940s. As a result, the number of
banks failing during the second half of the 1990s has averaged only four or five per year.
These two divergent experiences raise the question of what will happen during the next
decade. One obvious forecast would be for recent favorable trends to continue,
particularly since banks and the underlying economy have shown remarkable strength and
resiliency in their recovery from the 1980s. The current environment is not without some
concerns, however. Consumer debt has reached record levels, and a few sectors, such as
agriculture, show signs of weakness. Also, bank supervisors have recently voiced concerns
that bank credit standards are weakening. Moreover, the financial environment is changing
rapidly with innovation, bank expansion and consolidation, and competition from new
sources, thus opening the door for new problems.
Spong and Sullivan examine the outlook for the banking industry over the next few years,
focusing on whether the prosperity and tranquility of the 1990s will continue, or whether
the industry faces a return of the banking problems of the 1980s. They find that, because
banks are in much better shape now than in the 1980s, the industry is unlikely to face the
depth of problems suffered in the 1980s even if the economic environment becomes less
favorable. Still, it appears that banks will be hard pressed to match their recent record
performance.
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Business publications are filled these days with stories about the
digital or electronic economy. One routinely reads about e-commerce, e-business, and
e-banking. Terms such as e-mail and e-tickets have entered the common lexicon. Some
analysts have gone so far as to proclaim that the U.S. economy is being fundamentally
transformed and is entering a "new age" of unparalleled growth and opportunity.
While such a view is open to debate, clearly some major, potentially far-ranging, changes
are under way. The most visible and most dramatic involve e-commerce. A growing amount of
economic activity is taking place on the Internet, directly or indirectly impacting
households and businesses throughout the economy. Less visible, but also significant, are
changes involving "e-payments." Although the U.S. payments system continues to
rely heavily on paper-based methods, cash and checks, for conducting transactions,
electronic payments are steadily gaining a greater presence.
Weiner provides an overview of e-payments as they currently exist in the United States. He
shows that the U.S. payments system is becoming more electronic, principally through
traditional means. While new instruments are beginning to emerge, it is the traditional
e-payment types--credit cards, debit cards, and ACH transactions--that are driving the
U.S. payments system forward.
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