How do central bank decisions affect everyday life? An economist from the FSV UK seeks answers
Central bank decisions often seem like a distant world of data and economic models. But according to economist Simona Malovaná, they significantly affect people’s everyday lives. The researcher from FSV UK and director of the Research and Statistics Department at the Czech National Bank focuses on how monetary policy, financial regulation and climate risks affect different groups in society. The combination of analytical thinking and creativity led her to study economics.
“If we want to understand the effects of central bank policies well, we need to monitor not only their average impact, but also how they affect individual groups in society,” she emphasizes in the interview. Her research focuses primarily on the impacts of monetary and macroprudential policies and financial regulations on income and wealth inequality. In a project supported by the Czech Science Foundation, she examines, among other things, how central bank measures, which at first glance may appear technically and neutral, affect different groups of the population.
“Macroprudential measures are intended to protect financial stability and limit excessive indebtedness, which is very important. At the same time, however, they can have significantly different impacts on different households. For some, they mean greater security of the system, for others, they can mean poorer access to credit or housing,” she explains. According to her, this is not an argument against these measures, but rather a reminder that good economic policy must also understand who it affects the most.
The project works with detailed microdata on households and monitors, for example, how credit limits in the mortgage market affect the availability of mortgages and the indebtedness of different income groups. “Simply put, we monitor which households enter the mortgage market after the introduction or tightening of these rules, which do not, and how their indebtedness changes,” she describes.
Initial results suggest that in an environment of rapidly rising property prices, these measures may be relatively more restrictive for low- and middle-income households, which have less of their own savings and therefore less room to meet the stricter credit limits. “At the same time, however, these measures help to limit excessive indebtedness and reduce risks for the financial system. It is this trade-off that is important to us: it is not just about finding out whether the measures work on average, but also who bears their costs and who benefits from them,” she adds.
Different principles of research
According to her, working in a central bank and academic research complement each other. While research at the CNB must be highly relevant, timely and applicable to specific decision-making, the academic environment allows for more in-depth work and a longer time horizon. At the faculty, she can focus on questions that may not have an immediate solution or direct use in everyday decision-making.
“In a central bank, you often address questions that do not have a simple answer. How does monetary policy translate into loans? How do banks respond to regulation? When do risks in the financial system start to accumulate? Research allows you to approach these questions systematically, work with data and models, and better distinguish between what is a robust result and what is just temporary noise. In decision-making, it then serves as one of the important inputs for debate,” she describes.
Much of her research concerns areas that are directly relevant to the central bank. In the past, she has dealt with, for example, the impacts of macroprudential measures on the banking sector, the relationship between monetary policy and financial stability, or how monetary and macroprudential policies can complement each other. “These works are used in the decision-making process, in the preparation of arguments, in discussions about the settings of instruments, and in the construction of new models. However, the impact of research is often not a simple story of one article equals one decision. It is often a gradual influence on how we think about a certain problem,” she says.
Climate change and geopolitical risks
In addition to monetary policy and financial stability, she has also been intensively studying climate and geopolitical risks in recent years. According to her, climate risks are no longer an abstract topic for the financial sector. Extreme weather fluctuations, floods or droughts can affect the ability of households and companies to repay loans and the value of the assets that serve as collateral. In addition to physical impacts, the researcher also monitors the so-called transition risks associated with the transition to a low-emission economy.
“If regulations, technologies or preferences of investors and consumers change rapidly, some companies and sectors may lose value or have problems repaying loans. What is important for the financial system is whether these risks materialize gradually and predictably, or suddenly and on a larger scale,” she explains.
Although, according to her, the preparedness of banks and regulators has improved significantly in recent years and they are taking climate risks more seriously than before, this is still an area with a high degree of uncertainty. “We do not have long time series, the impacts may only become apparent in the longer term, and a lot depends on the future development of technologies, policies and the behavior of companies and households. So I would not say that the financial system is fully prepared. Rather, we are in a phase of rapid learning and gradual integration of these risks into everyday practice,” she says.
According to her, central banks will therefore face a significantly more complex environment in the coming years than before. “Their basic role will remain the same – they will continue to ensure price and financial stability. The environment in which they will operate, however, will probably be less predictable and much more influenced by geopolitics, climate transformation, digitalization of finance or demographic changes,” she says. This will increase the demands on working with data and economic models, as well as communicating with the public. “Central banks will not be able to solve all the problems of the economy, but they will need to have a very good understanding of how new factors affect inflation, credit, financial markets and the stability of the financial system,” she adds.
Connecting economics and creativity
Connecting economic research with real-world impacts for society was important to her from the beginning of her studies. She was initially drawn to economics by a combination of analytical thinking and an interest in creativity. “In high school, I really enjoyed math and science, especially physics and chemistry. But at the same time, I was also always close to creativity, art, and creation. Economics ended up being an interesting combination of both for me,” she recalls.
The crucial moment came during her first central banking classes at university. That was when she first became interested in an environment where, according to her, high expertise, independence and responsibility for decisions that have a direct impact on the economy and people’s everyday lives come together. Even though after her studies she dedicated her professional career mainly to the Czech National Bank, she always wanted to return to academia.
“I gradually started to miss the discussions with students and the opportunity to think together about how to use theoretical knowledge in practice, for example in central banking,” she says. “In addition, at IES there is an environment where people often know each other personally, communication is open and the atmosphere is relatively informal and friendly. In my opinion, this is not a given in the academic world. For me, it is a great added value, because good research often arises from open discussion,” she adds.
She is currently most interested in the connection between financial stability, central bank policies and inequality. In addition, she also studies the impacts of geopolitical risks on the economy and the financial system. Geopolitical tensions are increasingly affecting trade, capital flows, inflation and financial markets. “Central banks will therefore need to understand these factors much better in the future than they do now,” she concludes.
