Jan Frait: Monetary policy, the "Great Macrofinancial Volatility" and the response of monetary theory in the first quarter of the 21st century

Introductory remarks by Mr Jan Frait, Deputy Governor of the Czech National Bank, for the panel discussion "Europe at a crossroads – current challenges for economic and monetary developments in Europe", Discussion Forum 2024, Faculty of Economics, Technical University of Ostrava, Ostrava, 4 December 2024.

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

I am delighted to return to the faculty where I spent the first and formative years of my career. It was here that I learned and later propagated the ideas of the Ostrava school of monetary economics. Today, I will focus on certain aspects of macroeconomics, monetary policy and monetary theory in the first quarter century of the 21st century – a period marked by groundbreaking events. This period, for better or worse, will come to an end next year.

The Great Macrofinancial Volatility against a backdrop of accommodative monetary policy

I joined the Faculty of Economics here as an assistant in late 1990. A decade later, at the start of the 21st century, I joined the Bank Board of the Czech National Bank. At the time, the world was preoccupied with the bursting of the dot.com bubble. However, a much more significant event, from our perspective, was to happen a few months later. On 11 September 2001, I was attending a meeting in Ostrava with the heads of the Czech National Bank's regional branches. I remember that afternoon I visited the faculty to meet with the dean, and it was there, for the first time, that I saw the images of the attack on the World Trade Center on television. It was immediately evident that this was a historic event, but naturally I was unable to grasp its full implications for the global economy and geopolitics. Those implications, as we now know, were far-reaching.

The events of 11 September 2001 had a profound impact on the monetary policies of Western central banks. Unfortunately, they came at a time when the US economy and some European countries were heading into a recession. On its own, the recession would probably not have been particularly severe. But combined with a geopolitical shock and the aftermath of the bursting of the dot-com bubble, there were fears it would deepen and spread. Another significant factor was the appointment of Ben Bernanke to the Board of Governors of the Federal Reserve. Bernanke was one of the leading proponents of New Keynesian macroeconomics, which, after its implementation in dynamic stochastic general equilibrium models (known as NK DSGE models), became the dominant approach in academic macroeconomics and later also in central banks' analytical and modelling frameworks. Bernanke is a typical representative of the American school of macroeconomics, which, for historical reasons, has an almost paranoid fear of deflation, just as generations of German economists have had an enduring fear of inflation. Shortly after joining the Fed in 2002, Bernanke started to warn of deflationary risks and argued in favour of aggressive monetary policy measures to prevent deflation at almost any cost. This earned him the nickname "Helicopter Ben".