UNDERSTANDING THE CURRENT GLOBAL REGIME SHIFT AND THE STANDING OF THE MACRO-FINANCIAL SYSTEM RESILIENCE

Year 2023, , 196 - 197, 01.02.2023

Thorsten Hens Vahit Ferhan Benli Sema Yilmaz Genc

https://doi.org/10.17261/Pressacademia.2023.1687

Abstract

Purpose- Governments and Central Banks are critical actors in avoiding big swings like recessions, destabilizing inflations, or stagflations. On top of that, they might interact with different tools and resources to realize their own macro-financial purposes and interests. They engage in concrete macro-financial processes to reshape monetary regimes. Indeed, in the aftermath of the Global Financial Crisis (GFC) of 2008, major central banks held interest rates at zero or in a negative zone, yet global inflation remained low anyway. Though, as stated by Bernanke, this instrumental flexibility prevented a total meltdown in the world (Bernanke 2013, 87), where the experience of the post-GFC period until the post-COVID era (2021) has shown, how rigid implementation of this “meta-power” solely for the sake of “inflation or not” objective may result in “outside-the-box surprises”. Therefore, we must understand within which the internal actors (central banks) of an econofinancial system and the contours of “outsiders” who influences central bank policies on the non-technocratic political fronts. Now, a moment of awakening is on the way as global inflation has surged out of this box to a 9.8% level pushing the strongest economies in the world to the limits of a deflationary spiral, if not to stagflation. Our paper will argue that great regime changes and policy reversals on the monetary and fiscal policy fronts are on the way at the post-COVID era. In this regard, “Tight Fiscal and Loose Monetary Policies” are replaced with “Loose Fiscal and Tight Monetary Policies” at the new regime.
Methodology- The macro-financial analysis of regime change processes will rely on the current trend to combine historical Classical and Keynesian approaches. This synthesis depends on the assumption of stationary equilibrium in the Keynesian approach. The switch from the Keynesian regime to the Classical one would be depicted within the IS-LM models, resulting in Inflation and Stagnation. This result is in line with our predictive findings, as explained below. Didactically, this macro theoretical approach will be strengthened by relying on the Actor Systems Dynamics Theory. It should be stressed from the outset that the Keynesian or Classical framework took certain institutional power dynamics and games for granted. In this regard, part II will explore a new paradigm that is needed to provide an adequate model to understand the “fiscal dominance versus independence” phenomena, whereby governments as “recession fighters” put political pressure on their central banks to keep interest or borrowing costs low and the will of central bankers for institutional independence to exercise their other missions. Understanding the macro-financial problems today requires a transdisciplinary paradigm and the reconceptualization of “independence” (Conti-Brown, 6). The interaction of the new regime of “Stagflation” with the financial system on the “Financial System Resilience” front will be elaborated within the models related to systemic risk modelling approaches such as RAMSI-style structural models of systemic risk and DSGE models for financial stability policy, which are summoned under the heading of “Network Model of Financial System Resilience”.
Findings- Within the context and framework of ASD theory, the collision between the Governments and Central Banks will result in the new games that were once characterized by expansionary monetary and fiscal policy, resulting in record low-interest rates and Inflation (Asset Price and Consumer Products) will change to less expansionary monetary policy combined with a still expansionary fiscal policy.
Conclusion- One of the major macro conclusions is the fact that the FED and the other central banks cannot fight against inflation while massive amounts of cash are burned by the fiscal policy implementors within the macro-financial system. This is the point where monetary policy-based solutions cannot be taken for granted. In infected money and capital markets in the post-COVID era, we observe an “Illusion of Control” and strive for more recognition by the governments. The Central Bank authorities and governmental fiscal agencies would think that everything would be under “control” even though the markets were showing higher volatilities and governments were pressing for more asset values.

Keywords

Behavioral finance, financial crisis, criteria for decision-making under risk and uncertainty, regime switching

References

• Bachmann, K., De Giorgi, E., Hens, T. (2018). Behavioral Finance for Private Banking, From the Art of Advice to the Science of Advice, 2nd ed., Wiley.
• Baumgartner, Th., Burns, T.R., Deville, Ph. (1986). The Shaping of Socio-Economic Systems, the Application of the Theory of Actor-System Dynamics to Conflict, Social Power, and Institutional Innovation in Economic Life, Gordon and Breach Science Publishers.
• Bernanke, S. (2013). The Federal Reserve and the Financial Crisis, Princeton University Press.
• Blancard, O., Romer, D., Spence, M., Stiglitz J. (2012). In the Wake of the Crisis, Leading Economists Reassess Economic Policy, IMF-MIT Press.
• Conti-Brown, P. (2016). The Power and Independence of the Federal Reserve, Princeton University Press.
• Braude, J., Eckstein, Z., Fischer, S., Flug, K. (2013). The Great Recession, Lessons for Central Bankers, The MIT Press.
• Curr, H.T. (October 8th-14th 2022). Special Report “the world economy”, Regime change, the Economist, 3-12.
• Gai, P. (2013). Systemic Risk, The Dynamics of Modern Financial Systems, Oxford University Press.
• Hadjimichalakis, M.G., (1982). Modern Macroeconomics, Prentice Hall.
• Hens, T., Strub C. (29 Mærz 2008). Grundzüge der analytischen Makroökonomie, 2. Auflage, Springer.
• Rickards, J. (2014). The Death of Money, The Coming Collapse of the International Monetary System.
• Ramelli, S., Wagner, A.F. (November 2020). Feverish Stock Price Reactions to COVID-19. The Review of Corporate Finance Studies, 9(3), 622–655.
• Subramaniam, S., Chakraborty, M. (2021). COVID-19 fear index: does it matter for stock market returns? Review of Behavioral Finance, Emerald Publishing, 13(1), 40-50.
• Rogof, K.S. (2016). The Curse of Cash, Princeton University Press.
• Thomas, D.G. (2018). A New Monetary Theory, The Creators of Inside Money, Palgrave Macmillan.