Archive for July 14th, 2009

Why long term rates rose?

July 14, 2009

In my recent paper I have wondered why long term interest rates have risen? Is it becuase of high fiscal deficit? Better economic prospects (as Krugman points)? Or is it because of high inflation ahead?

In a new short note, Daniel Thornton of St Louis Fed says:

Together these figures suggest that the recent rise in long-term yields is due to heightened expectations for inflation and a rise in real rates. For example, the nominal yield on 10-year coupon bonds increased nearly 115 basis points between March 18 and June 17. Over this same period, estimates of the real rate (see Figure 3) indicate that the real 10-year yield has increased about 50 basis points and 10-year inflation expectations (see Figure 2) have increased by about 60 basis points. The rise in real rates likely reflects improved expectations about the real economy. The rise in inflation expectations likely reflects (i) the fact that several inflation measures have risen recently and (ii) concerns that the recent marked increase and expected future increases in the monetary base will ultimately lead to higher inflation.

So it is because of a bit of everything. Though, he does not discuss any role of high deficit/public debt in rise of yields.

Political economy of Bank Boards

July 14, 2009

World Bank economists Matias Braun and Claudio E. Raddatz  have written this wonderful paper on relationship between politicians/regulators and bank boards. The abstract says it all:

This paper presents new data from 150 countries showing that former cabinet members, central bank governors, and financial regulators are many orders of magnitude more likely than other citizens to become board members of banks. Countries where the politician-banker phenomenon is more prevalent have higher corruption and more powerful yet less accountable governments, but not better functioning financial systems. Regulation becomes more pro-banker where this happens more often.

Furthermore, a higher fraction of the rents that are created accrue to bankers, former politicians are not more likely to be directors when their side is in power, and banks are more profitable without being more leveraged. Rather than supporting a public interest view, the evidence is consistent with a capture-type private interest story where, in exchange for a non-executive position at a bank in the future, politicians provide for beneficial regulation.

All it deserves is a :-)

Princeton economists rule the world

July 14, 2009

Scott Sumner’s Blog is becoming a big favorite. His recent post reviews work of 4 leading Princeton economists- Paul Krugman (no intro needed), Ben Bernanke (again no intro needed), Lars Svensson (famous for flexible inflation targeting frameworks) and Michael Woodford (famous for money does not matter in mon policy). What I liked about the post post is that it goives a snapshot and criticism (off course from Sumner’s view) on the various research done by these 4 scholars.  

His FAQs on monetary policy are also pretty interesting and a must read. Though am not sure whether most would agree.

RBI’s management of crisis in its various roles

July 14, 2009

As I mentioned about RBI’s multiple roles, RBI’s Dep Gov Usha Thorat gives a speech on how RBI managed this crisis in its multiple roles. She says:

The RBI is entrusted with several functions, one of the most important one being the monetary authority of the country. As monetary authority, the RBI has as its objectives price stability, growth and financial stability.  The weight and emphasis accorded to each of these objectives would vary depending on the overall macro economic conditions. In addition to its role as monetary authority, the RBI has responsibilities for forex management and government domestic debt management – both national and sub national. It is also the banking regulator – it regulates commercial banks, cooperative banks (both rural and urban), financial institutions and non banking financial companies.  It has a developmental role to ensure inclusive growth – thus, policies on rural credit, SME and financial inclusion are an integral part of its functions.

She then lists the  measures, RBI took in each of its roles:

  • RBI’s response as monetary authority
  • Financial Stability Objective – RBI’s response
  • RBI’s response as forex manager
  • Regulator of Banks and NBFCs – RBI’s response 
  • Employment intensive sectors – RBI’s response 
  • RBI’s response as debt manager

Good quick read. Unlike previous attempts to explains RBI’s response, this speech helps you understand various measures from a functional perspective.

A free book on Fed History

July 14, 2009

Kansas City Fed economist and historian Tim Todd has written a new book on Fed history – The Balance of Power: The Political Fight for an Independent Central Bank, 1790 – present. It is also pretty short and we have just about 52 pages with photos etc.

I have not read it but a quick scan shows it is a great read.

PS.

I don’t know how many know but RBI also has prepared a detailed report on its history. The report is in 3 volumes and all the materials are online here . The summary is here. The report on currency and finance 2004-05 was also on central banking. It also has very useful research on evolution of RBI here.

However, I think the main history document is just too detailed. It will be great if RBI just makes the study more concise and updates it to reflect on today’s times. What are the lessons etc from RBI’s history….. It is the right time as well as RBI is celebrating its 75th anniversary.


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