What the ECB's Sintra Policy Forum Focused on Instead of Brexit

Views on the global monetary order's ills, and other nuggets from the hill country outside Lisbon

Never mind Brexit, there's work to be done. Work on changes to the way the global monetary system operates, that is, and before it blows up again. Policy makers from the European Central Bank and top-flight academics are meeting this week in the Portuguese resort of Sintra to cogitate on this and other questions. Here's what we learned on day one:

1. The "safe" assets that underlie the world's mostly free-floating currency system are in shorter supply than might be assumed, and not just because the U.K. lost its top credit grade at S&P Global Ratings in the aftermath of its referendum. In a paper with historical sweep, University of California at Berkeley Professor Barry Eichengreen pointed out the risk that liquidity in triple-A-rated government bonds could dry out, especially in an era when central banks like the ECB are hoovering them up. The lull in currency crises evident since the adjustments after the Bretton-Woods system ended (see chart) is no longer to be taken for granted. 

2. Mario Draghi would like central banks, governments and regulators to "align" their policies more, to mitigate the spillovers that policies have in a globalized world. In a speech that completes a trilogy expanding his views on how to create an environment for sustained and healthy economic growth, the ECB president stopped short of the kind of explicit coordination espoused by outgoing Reserve Bank of India Governor Raghuram Rajan and others. Nevertheless, now that Draghi has had his say, we can expect the topic to keep gaining prominence.

3. Low interest rates may be here to stay for a long time. Helene Rey of the London Business School and Pierre-Olivier Gourinchas of Berkeley presented one of the most lauded papers at the forum so far. Among other things, they argue that a long-running relation between wealth and consumption points to low real interest rates (that is, nominal rates adjusted for inflation) for "several more years." This means banks, pension funds and citizens should begin changing their business models, not just trying to wait it out until things go back to normal.

4. Free-floating exchange rates are so 20th century. It's been the conventional wisdom that a free-floating currency is the best response to global economic shocks, especially if it is coupled with an independent central bank that credibly targets inflation. But Columbia University's Guillermo Calvo warned that in the new world of low growth and overflowing liquidity, free-float provides the opportunity for countries to engage in thinly veiled attempts at weakening one's currency to gain competitive advantage. We're not mentioning any names here, of course.

5.  Academics are worried about central-bank independence, policy makers -- not so much. In his keynote on Monday evening, former Federal Reserve Vice Chairman Alan Blinder presented the results of a survey asking whether the crisis has hurt central bankers' prized aloofness. Turns out that while economics professors definitely feel the institutions' independence is under threat, policy makers themselves are not as concerned and some among them even feel they are now more independent. Draghi's take?   "Central bank independence could best be described as independence in interdependence."

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