Jan Frait: A "new normal", or a continued "great macrofinancial volatility"?

Lecture by Mr Jan Frait, Deputy Governor of the Czech National Bank, at the International Conference on Finance and Economics (ICFE 2024), organised by the Faculty of Economics, Tomas Bata University, Zlín, 10 September 2024. 

The views expressed in this speech are those of the speaker and not the view of the BIS.

I'd like to thank the conference organisers for inviting me to a part of our country where I spent a good part of my life – my childhood and early youth. My identity documents at the time stated that I lived in the Gottwaldov district, but at home we always said "we're going to Zlín". I'm glad of this opportunity to return.

I was first appointed to the Bank Board of the Czech National Bank at the beginning of this century. The deep macroeconomic and financial crisis was still being felt in the Czech Republic, and especially in its banking sector. By then, however, the CNB was one of the central banks using the relatively new system of inflation targeting. The development of the associated analytical and forecasting toolkit to support monetary policy decision-making was well underway. Like the Anglo-Saxon central banks whose example we followed, we drew on the theoretical and empirical approaches of New Keynesian Macroeconomics, which had started to gain dominance in academia and central banks through DSGE models at the start of the century. As is often the case, these approaches were a product of their time, not the other way around. It was an era characterised by optimistic expectations about long-term economic developments. In response to the favourable trends of the 1990s, macroeconomists believed in a "Great Moderation" (Great Moderation (external link)) and predicted that we would see decades of low and stable inflation amid brisk economic growth. This optimism was further fuelled by a stabilisation of public budgets and a significant reduction in public debt in advanced economies.

The belief in an ongoing and continued "Great Moderation" was reflected very strongly in the notion of optimal monetary policy, which would enable central banks to maintain macroeconomic stability through relatively subtle measures, with no significant cyclical fluctuations. It was assumed that it would be enough for monetary policy rates to move only slightly around the nominal neutral rate (external link) (the sum of the real natural rate and the inflation target rate). There was also a belief that monetary policy tools would be targeted exclusively at macroeconomic objectives. Financial stability would be the sole responsibility of financial market regulatory and supervisory authorities. To be fair, even before the Global Financial Crisis (GFC) of 2007–2008, many economists feared that the "Great Moderation" was being driven more by "good luck" than by the "smart policies" that central bank researchers (external link) had put their faith in.