Money, Banking, and Financial Markets

Understand the principles, understand the future

Interview with Gill Marcus

Former Governor, South African Reserve Bank; former Professor, Gordon Institute of Business Science; former Deputy Minister of Finance (South Africa); and former Chair, Absa Group.

Has the experience of the crisis changed your view of the central bank policy toolkit?

Governor Marcus: Prior to the global financial crisis, central bank toolkits had become whittled down to, with a few exceptions, the policy rate. At that time there were two widely accepted propositions: first, that monetary policy would become ineffective at the zero lower bound; and second, that monetary policy should not deal with financial stability issues. The general trend was for monetary policy to focus on inflation, with bank supervision either moving out of central banks or focused on microprudential issues. Although there were debates about whether or not asset price bubbles should be dealt with by monetary policy or central banks, the general view was that central banks could not recognize bubbles, and at best they could respond to inflationary impacts of asset price developments, and clean up afterwards in the event of the bubble bursting... 

At the third plenary session of China’s 18th Central Committee (the “Third Plenum”) in November 2013, China’s leaders adopted a broad national reform strategy (see here for a scorecard of the economic plans). Included were the liberalization of the country’s government-controlled financial system and the internationalization of its currency, the renminbi (RMB). A year ago, we argued that when it comes to freeing both its domestic and its external finances, China had a long way to go. We also suggested that the pace of liberalization would remain gradual, reflecting policymakers’ gradualist strategy to manage the risks associated with greater financial flexibility.

Well, they still have a long way to go; but the pace of regulatory change has unmistakably quickened. Authorities have been poking bigger and bigger holes in China’s Great Financial Wall. So big, in fact, that it may not be long before the wall is more symbolic than real.

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... the site where you can learn about finance and economics. We provide commentary on events in the news and on questions of more lasting interest. Because the financial system is constantly evolving, our analysis is informed by a set of core principles: understand the principles, understand the future. The opening excerpts of our two most recent posts appear above. For prior posts, click on the Commentary link to the left, or on the month-by-month Archives to the right. Alternatively, if you are interested in a specific topic, use the tags.

The site also provides material related to our textbook, Money, Banking and Financial Markets, 4th edition, 2014. The Five Core Principles on which the book is based are highlighted here. In addition, Cecchetti and Schoenholtz 4e systematically integrates the use of economic and financial data from FRED, the online database provided by the Federal Reserve Bank of St. Louis. Click on FRED Lessons on the left to access help on how to use this incredible resource.

Steve Cecchetti and Kim Schoenholtz


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