Bryane Michael, University of Oxford and Viktoria Dalko, Hult International Business School
For decades, scholars and policymakers have looked at the central bank as the passive night watch-person of the economy. The US Federal Reserve, Bank of England and the European Central Bank (among others) should provide a stable amount of money for the economy – and thereby stable price levels. They could influence the amount of bills in circulation or interest rates when needed to heat or cool inflation. Yet, trying to bolster economic growth – much less corporate productivity – could only lead to problems.
Since the financial crisis, big name economists have started to question the monetarist orthodoxy of the past 30 years. Robert Hall (a former president of the American Economics Association) and Greg Mankiw (an economic advisor to George Bush Jr.) floated the idea as early as 1994 of nominal targeting. Such targeting would give institutions like the Fed the requirement to balance price stability with output growth. Such an approach targets the nominal, or value on the shelves, of goods and services. By 2017, the former head of the Fed himself recommended such targeting (albeit temporarily). In a world with near zero interest rates, central banks clearly need to do something more than just buying government debt and managing below zero interest rates.
New evidence points to a new role for central banks. In that new role,our new research has found, central banks might influence real economic productivity. By buying local companies’ stocks, bonds, securitized instruments and other securities, central banks could channel funds to companies. Such purchases…