Archive for the ‘Central Banks / Monetary Policy’ Category

How Lithuania’e entry changes the ECB’s voting system

July 25, 2014

This blog had pointed to how ECB will now change its MPC voting pattern as Lithuania becomes its 19th member. Earlier it was one person one vote and all 18 members voted. Now it will be 15  against 19 members (18+1 Lithuania).

 

Bruegel just puts all the facts on the table and tells you what is going to happen:

….Votes will not be completely independent on the size of the countries anymore. The member of the Governing Council will in fact be assigned to groups, depending on the respective weight of their countries in the euro area economy (GDP at market prices, weighted for ⅚) and financial sector (MFIs’ aggregated balance sheet, weighted ⅙). The aggregate reference measure will be adjusted either every five years or when the number of EMU member states changes. Based on this ranking and as long as the number of governors does not exceed 21, the groups will be as follows (figure 1):

Group 1: will comprise the governors of the NCBs of the 5 countries with the largest weight in the euro area. At present, members would be Germany, France, Italy, Spain and the Netherlands. This countries will  share 4 votes, so each country will miss one vote every five.

Group 2: includes the rest of the world, i.e. the governors of the NCBs of the remaining countries. These are 14 countries and will share 11 votes.

The post then figures out what will happen to the voting patterns. Say what happens when members will be 21, 22 etc. In sum, not much changes as biggies maintain their status:

First, the power of the Executive Board will potentially rise, since it will have 29% of the votes at each session and in a permanent way.

Second, in terms of voting rights balance, not much changes. The 5 biggest countries will have under this system 19% of the voting power against 20% in the non-rotating system. The small countries will instead have 52% of the votes against 56% at present.

Third, the influence of biggest countries will be maintained – the period of rotation is one month, so no one will be excluded for a long period of time –  and most importantly it will be secured in the long term, as they the voting frequency within the group of five will always be 80%. Moreover, since all governors (also those who cannot vote in a given section) are present to the discussions and since this voting is by definition a sort of repeated game, it seems unlikely that decisions will be taken “behind the back” of any big country.

Last but not least, after explaining how it works, there is another “small” issue to point out. This system of rotation is built with a monthly frequency, with rotation occurring at the beginning of the month. The ECB in its Monthly bulletin of July 2009 clarifies that “as a rule, two physical Governing Council meetings take place every month. The first is dedicated exclusively to monetary policy decisions, and the second generally deals with all other issues to be decided by the Governing Council.

The one month rotation period allows governors to exercise their voting rights in both types of meeting.” But ECB President Draghi recently communicated that from January 2015 onwards the Governing Council will make monetary policy decisions once every six weeks rather than once every month. Which means that the length of each “voting-right cycle” would be not match (will be shorter) than the “monetary policy decision cycle”. 

Unless the ECB wishes to change the rotating voting system again, of course..

Interesting changes at ECB..

How do we reform the Fed (and other central banks)?

July 24, 2014

Troubles don’t end for adv eco central banks. The trouble is acute for fed ion particular where politicians have taken special interest in the already huge and growing power of Fed.

The House financial services committee recently heard experts on what is the way ahead for Fed. The proposed rulebook suggests Fed to follow Taylor rule and stick to it. This has led to obvious reactions from Fed which believes this will undermine its independence (nearly sick of this word).  The committee also had John  Taylor of the Taylor rule speaking. So what to expect.

But what is this deal about independence? What is central bank independent of? Martin Feldstein provides some clarity:

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How will ECB’s voting right system differ from Federal Reserve?

July 18, 2014

In its last MPC meeting, ECB made three changes in its structure:

  • The MPC will now have rotating members from various member central banks.
  • ECB will also publish its minutes from the meeting
  • The number of meetings reduced from 12 to 8.

So how will this rotating system work? ECB has put up a FAQ to explain.

Why was this needed? As per EU treaties the moment EMU membership crosses 18, it will need to follow rotatory procedure. Currently it has 18 members and with Lithuania expected to join next year, it will be 19. Hence the change. Interestingly, the member will rotate each month..

What about comparisons with FOMC?

How does the voting right system compare with that of, for example, the US Federal Reserve?

The system used by the Federal Open Market Committee (FOMC) of the US Federal Reserve is very similar to the one to be used by the ECB. The FOMC has 12 voting members, 7 of whom are members of the Board of Governors and hold permanent voting rights, rather like the ECB’s Executive Board members on the Governing Council. The President of the New York Fed has a permanent voting right, the Presidents of the Federal Reserve Banks of Chicago and Cleveland vote every other year and the Presidents of the other nine Federal Reserve Districts vote every third year. Unlike the Fed’s yearly rotation, the voting rights for the members of the ECB’s Governing Council rotate every month.

ECB I think has still not fixed the number of members who will be sitting on the ECB. It will be 6+ a number. How the large member countries like Germany, France etc are rotated will also have to be seen.

Bernanke vs Friedman…Did Bernanke get Friedman’s theory wrong?

July 17, 2014

Prof. Jeffrey Rogers Hummel of San Jose State University writes this superb paper on the topic (HT: Marginal Revolution).

In the process, he dubs Fed as as the U.S. Economy’s Central Planner. Well all central banks are central planners. There is nothing more ironical than a central banker talking about free markets. Which regulator really interferes in its domain as much as central banks do? And these days they do not even need to interfere. Mere talk and face signs are enough.

Anyways, in this paper Prof Hummel suggests Bernanke got Friedman’s lessons wrong. Friedman simply suggested to flush the economy with liquidity in case of a crisis hitting agggregate demand. However, Bernanke intervened and supported some financial firms in early part of the crisis.  And surprise surprise, Prof Hummel says Greenspan did a better job in resolving crisis as Fed chair. The once maestro just flushed markets with liquidity unlike Bernanke who targeted support.

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Thomas Piketty and Ireland crisis…..

July 15, 2014

Patrick Honohan of Ireland central bank responds to a presentation by Piketty on his famed book in Ireland.

In the process he tries to connect the recent Irish crisis to Piketty’s theory:

Although much of the commentary around Piketty’s book has centred on his forward-looking analysis of the prospects for the size distribution of worldwide wealth in the decades ahead, other parts have greater immediate resonance for us here in Ireland. I am thinking specifically about the way in which many of the long data series in Capital show a pronounced decline in the mid-20th Century. Related to two world wars and the Great Depression which separated them, as well, perhaps, as to the rise of the “Welfare State”, these collapses occurred both in terms of the aggregate wealth-to-income ratio and to the concentration of wealth at the top end of the distribution.

If Capital convinces of anything, it surely establishes that looking at major historical transitions through the lens of data on wealth is very instructive. We also have had disruptive events in Ireland in the past decade somewhat comparable to the mid-century capital and wealth collapses in Europe documented by Piketty. As well as tipping the economy into a deep recession, triggering a surge in unemployment and emigration and crippling the public finances, our crisis has been associated with large losses in household capital and increases in indebtedness causing distress. These latter aspects have been the focus of a lot of work at the Central Bank in the past few years as we have used the limited powers at our disposal and sought to provide advice to Government to map the best available route to recovery.

Pikettymania continues to bit one and all..

What is good (financial/banking) regulation?

July 15, 2014

The speech title just says What is “good regulation”? but is on financial/banking regulation. Hence used brackets.

The talk is by Andreas Dombret of Bundesbank. He was a banker once upon a time. So understands both the sides – the regulator and regulated:

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Cricket’s corridor of uncertainty and monetary policymaking…case of interesting similarities..

July 14, 2014

A fascinating speech by Andy Haldance of BoE.

He connects cricket with monetary policymaking. The predicament facing today’s policymakers is similar to the batsman in cricket who face balls in corridor of uncertainty:

It is wonderful to be back in Scarborough. I say back because many of my earliest and fondest childhood memories were of summer holidays spent here. Being a cricket fan, the Scarborough Festival – the cricketing jamboree held at the end of August each year since 1876 – has always held a place in my imagination. Alas I have never been, but am hoping one day to break my duck.

I want to discuss the economy and the role of monetary policy in supporting it. And with apologies to the non-cricketers in the audience, to do so I will borrow a cricketing metaphor – the “corridor of uncertainty”. The corridor of uncertainty is every bowler’s dream and every batter’s nightmare. It refers to a ball which pitches in such a position – the corridor – that the batter does not know whether to be playing off the back foot or the front foot.

This, I will argue, is similar to the dilemma facing monetary policymakers on the Bank’s Monetary Policy Committee (MPC) today. Should monetary policy hold back until key sources of uncertainty about the economy have been resolved? Or instead push forward to prevent leaving it too late?

He reviews the econ situation across globe and UK. For both an econ and cricket follower one can easily connect the two.

He says depending on how the batter/policymaker reacts, one dubs him/her a dove or hawk:

Faced with these uncertainties, what would be a prudent course for monetary policy in the period ahead? The first thing to say is that there is consensus across the MPC on three key elements of our monetary strategy: that any rate rise need not be immediate, that when rate rises come they are intended to be gradual and that interest rates in the medium-term are likely to be somewhat lower than their historical average.

This message appears to have largely been understood by financial markets. Despite the upwards revision to growth, financial markets’ best guess of how rapidly the first percentage point of tightening will take place is essentially unchanged over the past year – around 20 basis points per quarter. So too is their best guess of where interest rates may settle in the medium run – around 2-3%. Views may in time differ across the MPC on the preferred lift-off date for interest rates, as you would expect at a difficult-to-predict turning point in the cycle. These will reflect individual members’ different reading of the runes, not their individual preferences. That is a real benefit of the MPC’s committee-based structure, with individual member accountability.

It is not difficult to see why this choice over timing is a difficult one. The policymaker in this situation faces the self-same dilemma as the batsmen facing a ball pitching in the corridor of uncertainty. In that situation, the coaching manual no longer offers a clear guide. Two strategies are equally justifiable.

The first is to stay on the back foot and play late. This has the advantage of giving the batsmen more time to get a read on the trajectory of the ball as it swings and darts around. It avoids the risk of lurching forward and then needing hurriedly to reverse course if the first movement is misjudged. This is the way, Joe Root, the Yorkshire and England batsmen, plays his cricket. If he were on the MPC, he’d be called a dove.

But this strategy is not riskless. Playing late relies on having an uncannily good eye and strong nerve. It runs the risk of having to react fast and furiously to avoid missing the ball entirely. An earlier front foot movement would avoid that risk, allowing a more gradual movement forward. This is the way Ian Bell, the Warwickshire and England batsman, plays his cricket. If he were on the MPC, he’d be called a hawk.

What about owls? Night watchmen?

Which is better? Hawk or Dove?

So which is the better strategy? Benjamin Disraeli told us there are lies, damned lies and statistics. Here my analogy between cricket and the economy breaks down. Economic statistics, as we know, do sometimes lie. Cricket statistics, typically, do not. They tell us that Joe Root averages 43 in test matches to Ian Bell’s 45. In other words, it is a close run thing with the odds at present slightly favouring the front foot. But a good run of scores from either player could easily tilt the balance. That, in a nutshell, is where the MPC finds itself today

A superb analogy.

Though, Haldane misses the other side of the cricket pitch – the bowlers. In this case the bowlers are financial markets/players. They keep putting the batters into difficulty with their persistent attack on the batters. In the swinging UK conditions, they pose even more difficulty to the batters.

And then all this happens cyclically. During tough times, the central bankers become the batters and are made to face tough batting conditions. And when the times turn good, the markets become the batters and thrash the bowlers all around…

 

How history can contribute to better economic education..

July 14, 2014

Coen Teulings of Cambridge joins the discussion on improving economics education. And takes the position most have been taking– teach more history.

He goes a bit further and says there is a need for a broad brush of history:

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How US and Germany improved their financial system post 1907 panic..

July 9, 2014

Harold James again. Yesterday there was this insightful article on BW system. And today on 1907 panic in US and WW-I. In both the pieces there are common threads.

In the BW article he said the monetary order was framed under a lot of pressure and countries just wanted to finish it. So, the crisis led to certain responses. In this piece too, he says the 1907 panic led to US and Germany building their system to war off UK hegemony. But this then played a large role in build up to WW-I. So in BW the crisis led to peace and in 1907 panic led to further crisis in form of war. Crisis is really crucial point.

And then in both these events we have parallels for today:

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What enabled Bretton Woods in 1944 and what prevents Bretton Woods II?

July 8, 2014

Terrific piece by Harold James and Domenico Lombardi.

They shows how BW was originally going to shape like UN with five permanent and major members. However, because of global political and security issues, countries just managed to have a more participative and global system. The negotiations were led by US and UK who were in a hurry as domestic issues were as pressing.

However, this time around the global economy is centered around US and China. Can we have BW-II now? Well, as per authors crisis situation does not seem to be as bad as it was in 1944.  Despite the several issues, the world is “simply not dangerous enough”.

There is also a very interesting book review of 2 recent books on history of BW. Amazing econ history..

Importance of understanding the principles of regulation by the regulated…case from India

July 3, 2014

An interesting speech by G. Padmanabhan of RBI. The speech is on corporate governance, the recent companies act etc.

In the middle of the speech he discusses regulation and narrates this interesting case:

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Inflation Is “Not” always and everywhere a monetary phenomenon..

July 3, 2014

Do see the not in the phrase.

Antonella Tutino and Carlos E.J.M. Zarazaga of Dallas Fed undo the famous Friedman quote in this short note. They say both the recent US experience and German experience in 1920s refute the Friedman quote somewhat. In US case, despite surge in money supply, there is no inflation. And in Germany, inflation was much higher than money supply:

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When civil society protesters question ECB members over latter’s monetary policy..

July 2, 2014

The elitists central bankers are getting the fury doze which is usually reserved for politicians. And rightly so, given how important central bankers have become over the years without the kind of accountability faced by politicians.

It was really interesting to read this interview of Benoît Cœuré of ECB conducted by 2 members of protest group in Europe. It was published inc Süddeutsche Zeitung (SZ), so SZ is also asking the questions.

SZ: Mr Cœuré, have you ever taken part in a demonstration?

Cœuré: Since I’ve been working at the ECB, no. I have taken to the streets in the 1990s, including to campaign against the French government’s anti-immigration laws. But that was long ago.

SZ: For you, Mr Rätz, demonstrations are part of your job description. What is your mission?

Rätz: Mission is something of an exaggeration, but standing up for your views in public is part of democratic and civic action. Demonstrating is an important tool in this respect, and it should be used.

SZ: Mr Aschmoneit, you define the right to demonstrate very broadly and propagate civil disobedience. What justifies this right in your view?

Aschmoneit: I came to this interview by train. On the way, a respectably dressed man in his early seventies came over and I moved over so that he could sit down. But he didn’t want to. He said that he wanted the deposit bottle that was in the bin in front of me. A poor, old man who has to collect bottles to get by. This reminded me once again that what we are doing is legitimate, moving from protest to resistance. We will interfere with and obstruct the opening of the ECB’s new premises because what happens at the ECB is immoral. We want it to stop.

These protesters blame the ECB for the evils surrounding European economy. Some tough talks this:

SZ: Mr Rätz, what irritates you the most about the ECB?

Rätz: For us, it is the role that the ECB is playing within the Troika. Together with the International Monetary Fund (IMF) and the European Commission, the ECB pursued a policy that had dramatic – in some cases fatal – consequences in the crisis countries. In Spain, 400,000 people have been driven out of their homes; in Greece, almost one-third of the population no longer has access to the healthcare system and 40% of its people are poor. All of this is clearly linked to the Troika’s policy. It is therefore a bit ripe to say that the ECB only wants the best. I believe you, Mr Cœuré, as a person, but the ECB is contributing to division in Europe, and not to cohesion.

Aschmoneit: The IMF, which is not known for its left-wing extremism, says that saving is wrong. There is far too little investment. The International Labour Organization (ILO) says that the unemployment rate in the euro area has shot up and that one-quarter of the population is seriously threatened by poverty. The ECB is creating winners and losers from the crisis. Last year, the wealth of the rich in western Europe rose by 5.2%. The US investor Warren Buffett has said that there is class warfare and that it is his class, the rich class, that is winning. Your policy, Mr Cœuré, is geared towards reducing large portions of the population to poverty and safeguarding the profits of a few.

Rätz: It’s not all about the citizens of Europe for the ECB – they’re not even being asked. Let’s take Greece, for example. Since 2010, its economy has shrunk by 25%. This year, it is expected to grow by 0.7%, which is extremely little. We’re not going to live to see Greece recover. The people of Greece are not being asked about the Troika’s recommendations, even though the measures have a profound impact on society: salaries and pensions have been reduced, unemployment benefits have been cut and hospital care has deteriorated. That is not a policy for the people, it is a policy for the banks.

In the middle ECB member defends ECB saying usual things…so have skipped them,,

Nice bit.

Usually such criticism is meant for the politician. We see politicians take on questions from protesters. I have never read a formal interview of a central bank by civil society protesters criticising the central bank. It seems as if central bankers have become the neo-politicians for the amount of media space they generate. Who really cared what central banks did around 15-20 years ago?People are now taking note on who is trying to call the shots in their economies.

Also interesting to see Coeure agreeing to be a part of the interview.

Rethinking economics after the crisis — Making economics more relevant for policy..

July 2, 2014

A superb speech by Benoît Cœuré of ECB. It is really important that economic policymakers also reflect on the state of the profession barring a few academicians who are often ignored. With people like Coeure talking, hopefully more it reaches more ears.

He says policymakers do not have the luxury if academicians..

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How Janet Yellen is disturbing her neighborhood (not just financial markets)..

July 1, 2014

An interesting article (HT: MR Blog) on how Janet Yellen’s high profile security is creating trouble in her neighborhood.

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Why standard macro models fail during crises?

June 18, 2014

I mean just because we think this time is different and pile on expectations. We fail to appreciate that there could be events which could just scuttle the whole thing. No model can incorporate the entire gamut of uncertainty and uncertain events.

David F. Hendry and Grayham E. Mizon say these basic ideas in a more technical way:

Many central banks rely on dynamic stochastic general equilibrium models – known as DSGEs to cognoscenti. This column – which is more technical than most Vox columns – argues that the models’ mathematical basis fails when crises shift the underlying distributions of shocks. Specifically, the linchpin ‘law of iterated expectations’ fails, so economic analyses involving conditional expectations and inter-temporal derivations also fail. Like a fire station that automatically burns down whenever a big fire starts, DSGEs become unreliable when they are most needed.

Call them whatever- DSGE. ABCD, XYZ etc…There are limitations on what they can achieve and all such models should clearly specify what they cannot do or can fail potentially. In many ways this fascination for models etc is this fascination for making economics a science and having physics envy. When the main agent here is individual who can react really unpredictably, we can never be sure the way these models will work. But despite all this, we just believe so much in these models.

This does not mean we should ignore economic modelling. Not at all. Just that we should know their limitations which could be serious at times..

China may soon have no choice but to let its currency float..

June 17, 2014

Yu Yongding of Chinese Academy of Social Sciences ( a solid China expert) predicts China could soon allow its currency to float. Not that it wants to but it will be forced to..

He begins saying China so far is managing all the three legs of Mundell Trilemma:

The Nobel laureate economist Robert Mundell showed that an economy can maintain two – but only two – of three key features: monetary-policy independence, a fixed exchange rate, and free cross-border capital flows. But China is currently juggling all three – an act that is becoming increasingly difficult to sustain.

….This raises an obvious question: How has China managed to defy the Mundell trilemma by maintaining all three policy objectives simultaneously? The answer lies in China’s sterilization policy.

China has run a capital-account surplus for most of the last 30 years, and a trade surplus every year since 1993. The PBOC keeps the exchange rate stable by intervening heavily in the foreign-exchange market, creating so much liquidity that the authorities must engage in massive sterilization to avoid overshooting the targeted increase in the monetary base.

In China, unlike in advanced countries, monetary and sterilization policy are often one in the same. The degree to which monetary policy is expansionary depends on the degree to which the liquidity created by currency-market intervention has been sterilized.  

He says costs of sterilization are higher than the benefits and are actually distorting the economy. So he hopes and predicts that China will soon allow the currency to float:

Nonetheless, though predictions that China would abandon its exchange-rate controls in order to uphold monetary autonomy have proved wrong over the last decade, this time may be different. With China’s liberalization of interest rates and short-term capital flows making it increasingly difficult for the country to juggle Mundell’s “irreconcilable trinity,” one hopes that Chinese leaders will finally allow the renminbi to float, while keeping in place existing capital controls.

The day this happens it will mark as quite a momentous day for history of macroeconomics..

RBI simplifies process of giving address details for opening bank accounts

June 13, 2014

IFMR Blog points to this development at RBI’s end.

Apparently, RBI has simplified the process of providing addresses while opening bank accounts:

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What did Bank of Japan lack in its previous policies to boost economy?

June 13, 2014

BoJ has been using Quant easing and related polices for more than 15 years now. So, why was it not as effective? Moreover, what is it new about its recent QE policy (called QQE bu BOj – Qualitative and Quantitative  Easing)?

BoJ chief  Haruhiko Kuroda reviews eco theory around QE and the QE polices of Japan :

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Distribution and management of currency and coins in US..

June 12, 2014

Louise L. Roseman of Fed gives a nice speech sharing insights on how currency and coins are distributed in US economy.

Fed plays a larger role in currency management with US mint managing the coins (much like India):

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