Aleš Michl, CNB Governor analyses pros and cons of Euro adoption in this speech:
The pros and cons of having an independent monetary policy
Archive for June 17th, 2025
Should Czech Republic adopt Euro?
June 17, 2025This Time Must be Different: Lessons from Sri Lanka’s Recovery and Debt Restructuring
June 17, 2025Gita Gopinath on Sri Lanka’s impressive recovery after its 2022 crisis:
This conference comes not only at the mid-point of Sri Lanka’s IMF-supported economic reform program, but also at a moment when the global economy is facing powerful crosscurrents—slowing growth, rising tariffs, and a rapidly changing global economic order alongside profound uncertainty. Countries are being tested by shocks that are more frequent and more complex. The challenge for all of us is to build resilience in a world that demands it.
In this light, Sri Lanka’s experience stands out—both for the severity of the crisis the country experienced three years ago, and the remarkable progress that has been achieved in a very short time. The crisis was precipitated by years of declining tax revenues, depleted foreign exchange reserves and an explosive and unsustainable increase in public debt as growth collapsed. There were long lines for fuel, severe shortages of basic goods, record inflation, and widespread power outages. For many households, daily life became an exercise in hardship.
Today, thanks to bold reforms and the commitment of the Sri Lankan people, substantial progress has been made to restore macroeconomic stability and reduce hardships faced by people. Fuel, cooking gas, and medicines are available again. Inflation has been brought under control and economic growth has returned—expanding by 5 percent in 2024. On the fiscal front, the government has achieved an extraordinary adjustment and tax revenues have increased by more than two-thirds as a share of GDP.
The government has also put a strong emphasis on improving governance, which is fundamental for establishing trust with citizens and ensuring sustained growth. Important milestones have been achieved including central bank independence, improving public financial management, and strengthening the legal framework for anti-corruption. Our analysis shows that comprehensive fiscal governance and accountability reforms in Sri Lanka can boost GDP by more than 7 percent and reduce the debt-to-GDP ratio by more than 6 percentage points over 10 years.
Will this time be different?
Sri Lanka’s reform program has delivered strongly. But history reminds us of the risks. Of the 16 IMF programs Sri Lanka has engaged in over the years, about half ended prematurely. Often, reform fatigue sets in. Hard-earned gains were reversed. Growth faltered. The country cannot afford to repeat that cycle.
Let me therefore underscore how essential it is to sustain the reform momentum, and in a manner that is inclusive and accountable. Public dialogue matters. Transparency matters. Engaging civil society and listening to diverse voices—not just in Colombo, but across the island—will help ensure that policies are responsive and responsible. This conference is exactly the kind of platform that can foster such engagement. It is a space to reflect, to challenge assumptions, and to build consensus. The IMF will remain a steadfast partner as Sri Lanka pursues stable and inclusive growth that improves the lives of all citizens and future generations.
This time must be different! As President Dissanayake has said, let us ensure this is the last IMF program Sri Lanka will need.
We agree, and believe this is possible if Sri Lanka stays the course.
The Fed’s Mandate Trilemma & The Evolution of Central Banking in the United States
June 17, 2025Stephen B. Kaplan of George Washington University points to Fed’s trilemma: price stability, unemployment and financial stability.
Following the 2008 financial crisis, the Federal Reserve restored its historic financial stability mandate with new monetary tools to help mitigate the credit crunch and stimulate the economy. This article develops a new theory about the Fed’s mandate trilemma, suggesting the central bank’s financial stability goals have complicated its ability to meet its dual mandate of full employment and price stability. By stretching its monetary policy operations to meet three goals simultaneously, the Fed has created an impossible trilemma. To achieve financial stability and full employment, it tends to maintain easy credit conditions for longer than optimal, making eventual inflationary pressures more likely. To test these theoretical priors, this article conducts a plausibility probe of the 2023 regional banking crises, finding that political constraints reduced the feasibility of more traditional banking supervisory powers, placing the financial stability onus on monetary policy.
Swans and Financial Stability: White swan, Grey swan and Black swans
June 17, 2025Central bankers are often given labels of certain birds: hawks, doves, owls etc.
Daniel Barth and Stacey Schreft in this Fed research paper categorise financial stability events as different colours of swans:
This article refines the concept of black swans, typically described as highly unlikely and catastrophic events, by clearly distinguishing between knowable and unknowable events. By emphasizing that black swans are “unknown unknowns,” the article highlights that the realization of new black swans cannot be prevented and motivates a need for policies that build the financial system’s resilience to unforeseeable crises. The article introduces a “resilience principle” that calls for policies that are adaptable, universal, and systemic. Examples are provided of policies with these features, none of which relies on the official sector being better positioned than the private sector to anticipate the unknown.
White, Grey and Black swans?
Black swans are defined as unknown unknowns with very large and widespread effects. As unknown unknowns, black swans are fundamentally uncertain. They are outside the realm of prior experience, but once observed, they change the common wisdom of what is possible, which is the essence of the analogy to a black swan. When all swans were thought to be white because no other color of swan had been observed, even if someone had imagined swans of different colors, common wisdom was predicated on a world containing only white swans. Observing the first black swan would fundamentally change that world view and raise a host of new questions. What other colors of swans could exist? What other species might differ in color?
A black swan event reveals that the prevailing understanding of the world was fundamentally wrong. The commonly accepted “models” of causes and effects prior to a black swan, whether financial or otherwise, are shown to be wholly inadequate. A black swan may only have seemed rare given existing models of how the world works; with the benefit of hindsight, the black swan may seem to have been all but inevitable.8 Observation of a black swan leads to the construction of new models or massive reconstruction of existing models. Defining a black swan event as done here is consistent with and more precise than the original definition while avoiding the subjectivity of a black swan being in the eye of the beholder.
Grey swans in the taxonomy are known unknowns with large and widespread effects. Essentially, black swans spawn grey swans: once a black swan is realized, an entire class of large-impact events—grey swans—are known to be possible. When grey-swan events will occur and what form they will take remain unknown, but their appearance does not make existing models of cause and effect obsolete. Instead, after a grey-swan event, existing models are retained, but their parameters are updated. Understanding of a class of grey swans grows with the swan’s repeated appearance. Vulnerabilities that contributed to the grey swans come to be recognized, monitored, and mitigated.
Examples of grey swans discussed in the Appendix include the savings and loan (S&L) crisis in the 1980s, 1987 stock market crash (Black Monday), collapse of Long-Term Capital Management (LTCM), 2003 SARS outbreak, 1993 World Trade Center bombing, Chernobyl uclear disaster, and corporate governance crisis that brought the collapse of Enron and WorldCom. In contrast to the examples of black swans, many of the grey swans are near misses as they fall short of having catastrophic events.
White swans are known knowns that occur infrequently and have a sizable, large-scale impact. They are aged versions of grey swans and thus sufficiently well understood from analysis of past events that they fit within acceptable tolerances of existing models. Their likelihood can be estimated, and their effects can be dampened. For example, the creation of deposit insurance reflected recognition of coordination failures as a cause of bank runs and made the banking system more resilient. Bank failures still occur, but they are unlikely to cause runs or crises. The exception is if something has changed that results in bank runs possessing new, unknown properties, as was the case with the 2023 failure of Silicon Valley Bank. The ensuing bank runs brought the realization that the growth of online banking and uninsured deposits had altered run risk. The Appendix describes the March 2020 Treasury market disruption, 1997 Asian financial crisis, 2009 H1N1 pandemic, localized and smaller-scale acts of terrorism etc.
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