MNI POLICY: Global Central Banks Should Cooperate More - Paper

By Jean Yung

     WASHINGTON (MNI) - Central bankers need to cooperate more across borders

and be more sensitive to developments elsewhere as global monetary policy is

increasingly linked by low neutral rates and interconnected financial systems,

according to research to be presented to the world's top central bank officials

Friday.

     The research by two top U.S. economists pointed out that central banks set

policy in response to local cyclical macroeconomic conditions on the one hand,

but wider forces drive the natural real rate of interest, or r-star, at both

local and global levels.

     "Global forces set the course of interest rates over the medium to long

run," a fact that is "perhaps insufficiently appreciated," economists Oscar

Jorda of the San Francisco Fed and Alan Taylor of the University of California,

Davis, wrote in a research paper prepared for the annual central banking

conference in Jackson Hole, Wyoming.

     "Navigating policy through the economy's stormy waters therefore requires a

good reading of local currents as much as underlying yet powerful global

disturbances."

     The paper comes as the Federal Reserve was forced to make a U-turn on

interest rates over the past few months in the face of a dimming global outlook

and trade policy uncertainty, and in spite of still solid domestic fundamentals.

Other central banks are similarly easing policy. Jorda and Taylor's paper will

be the first presented at this year's Jackson Hole conference, which focuses on

challenges to monetary policy and global themes.

     A "strong common global component" is not only present in individual

countries' r-stars, but in their output gaps and policy stances, the paper said.

Using a model that incorporates term premiums, the paper finds that since 1985,

r-star has been declining in all countries, in line with past research.

     Over the long run, open economies also allow local economies to adjust to

shocks and reach new equilibriums.

     "In a financially integrated world where capital can move freely across

borders with increasing ease, central banks should tack in response to local

conditions while at the same time observing the drift of economic currents

implied by disturbances in the neutral rate near and far," the authors said.

     "Ignoring such trends risks provoking internal and external imbalances, as

well as unwanted dislocation in credit markets, eventually carrying the economy

off course."

--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com

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