Archive for the ‘Central Banks / Monetary Policy’ Category

Paanch Kahani – five Ramayana stories of central banking…

October 20, 2014

Central Bank of Trinidad and Tobago has taken Ramayana really seriously. Last year this blog pointed, how the bank compared central bank to Lord Hanuman (to which this blog did not agree).

This year, the chief of the bank Jwala Rambarran looks at five more characters of Ramayana and once again points to lessons for central banking:

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Why asking Prof. Tirole for policy prescriptions is not right..

October 15, 2014

The newspapers/websites are full of Jean Tirole’s policy prescriptions. Some quote him and others pick his research to show the implications. However, if you read the research you wonder where is the prescription? Most of this scholarly research is ambivalent and laden with assumptions. It also tells you that either people who write such pieces have not read Tirole (and other past winners) or have not really understood the ideas.

David Colander writes a much needed post. He says people should not look for policy prescriptions from the prize winners. The Prize is for economic research which may have nothing much to do with policy.

He begins with the lamppost story and says we draw wrong lessons from it:

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Swiss Gold Referendum: Issues and Implications..

October 14, 2014

Swiss Gold referendum is going to be an interesting event to watch out for.

Claudio Grass of Mises Institute speaks to a Swiss expert on the topic. Points to some insights into Swiss political economy and how if voted yes it will impact central banking and gold..

We should also look at redistributive effects of financial deregulation

October 10, 2014

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How (and why) Bernanke used alias Edward Quincy during crisis..

October 10, 2014

One does not know how to react to such a post from WSJ Blog.

Bernanke used an alias Edward Quincy during the crisis:

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Should ECB copy the Fed?

October 9, 2014

Daniel Gros says no.

He says the financial system is very different in Europe and so is the debt profile of nations. This is the real issue for questioning QE and not the buying of govt debt:

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Will Swiss National Bank move to quasi gold standard?

October 9, 2014

A fascinating speech by SNB’s Jean-Pierre Danthine. The title of the speech is “Are central banks doing too much?”. To which he of course says no 9it is surprising to hear that he thinks we will be surprised to hear his answer as no).

Anyways,  what interested me in the speech was this thing called “Save our Swiss Gold” referendum. Referendums have become fashionable but I read somewhere they decide everything in Swissland via referendums. It is as close to near people’s democracy as one can get. So what is this?

The initiative is calling for three things: first, the SNB should hold at least 20% of its assets in gold; second, it should no longer be allowed to sell any gold at any time; and third, all of its gold reserves should be stored in Switzerland.

Hmmm. The voting is to happen on 30 Nov. If yes, SNB shall back to quasi gold standard…

This worries SNB:

Let me address the last point first. Today, 70% of our gold reserves are stored in Switzerland, 20% are held at the Bank of England and 10% at the Bank of Canada. As you know, a country’s gold reserves usually have the function of an asset to be used only in emergencies. For that reason, it makes sense to diversify the storage locations. In addition, it makes sense to choose locations where gold is traded, so that it can be sold faster and at lower transaction costs. The UK and Canada both meet that criterion. In addition, they both have a strong and reliable legal system and we have every assurance that our gold is safe there.

The initiative’s demand to hold at least 20% of our assets in gold would severely restrict the conduct of monetary policy. Monetary policy transactions directly change our balance sheet. Restrictions on the composition of the balance sheet therefore restrict our monetary policy options. A telling example is our decision to implement the exchange rate floor vis-à-vis the euro that I mentioned above: with the initiative’s legal limitation in place, we would have been forced during our defence of the minimum exchange rate not only to buy euros, but also to buy gold in large quantities. Our defence of the minimum exchange rate would thus have involved huge costs, which would almost certainly have caused foreign exchange markets to doubt our resolve to enforce the rate by all means.

Even worse consequences would result from the initiative’s proposal to prohibit the sale of gold at any time. An increase in gold holdings could not be reversed, even if necessary from a monetary policy perspective. In combination with the obligation to hold at least 20% of total assets in gold, this could gradually lead the SNB into a situation where its assets would mainly consist of gold: each extension of the balance sheet for monetary policy reasons would necessitate gold purchases, but whenever the balance sheet needed to be reduced again for the same reasons, we would not be able to resell our gold holdings. This would severely restrict our room for manoeuvre.

Furthermore, because gold pays no interest or dividends, the SNB’s ability to generate profits and distribute them to the Confederation and the Cantons would be impaired.

As a final point, note that currency reserves which cannot be sold are not truly reserves. It does not make sense to call for an increase in emergency reserves – gold holdings – and simultaneously prohibit the use of these reserves even in emergencies.

The SNB’s overriding objection to the gold initiative stems from the danger it poses to the conduct of a successful monetary policy. It would severely impair the SNB’s ability to fulfil its constitutional and legal mandate to ensure price stability while taking due account of economic developments, in the interests of the country as a whole.

Hmm.. Basically the points people had towards gold standard apply here as well.

Will be really interesting to see how Swiss vote on this..

Well…Philips curve is a myth…

October 8, 2014

James Forder of Oxford Univ writes this stirring paper saying much of what we know of Philips curve is a myth. He has written a series of papers questioning the idea.

He says what we know of the famous curve is just a cooked up story. First, Philips did not really point to a new relationship. Second, he did not wish it be known as a trade-off.  Third, the glorification of how Phelps and Friedman dismantled the curve is another cooked up story. The idea of expectations was always there and their contribution was questioning that we could run inflation permanently. So, we need to reconsider how this idea has become mainstream macroeconomics where as it is just stories:

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Has China’s monetary policy become more “standardized”?

October 7, 2014

The title should actually read Has China’s monetary policy become more “advance country like”? I mean whatever they do is deemed as a standard even when they are all wrong on the matter.

Anyways, this note by John Fernald, Eric Hsu, and Mark Spiegel look at how Chinese mon pol has evolved over the years. The changes in Chinese economy have led monetary policy to react just like it does in the west:

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Great news for Yellen…one in six Americans think Greenspan still runs the Fed

October 7, 2014

The survey is highly limited as it was polled across 1002 adults. That is too small really to draw results.

Nevertheless, it seems Yellen is doing a great job  as just 24% could recognise Yellen.  So much so, around 16% of Americans still think that Greenspan is running the Fed.  Bernanke did a better job of being recognised with 33% recognising him in a survey in 2009.

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Central bankers as new philosophers to fix world economy and why that is a problem..

October 6, 2014

A brilliant column by Prof Harold James bringing a lot of things under one column.

He points how Europe and US have differed on philosophy of life. The philosophy of course comes from one’s world values which are shaped by culture and history. These differences reflect in all things including economic policy. Whereas US has been much more active trying to stimulate their economies out of trouble, Europeans have dithered for a long time.

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Re-discovering the Phillips curve and it is actually back to life in Europe…

October 1, 2014

Philips Curve showed the trade-off between inflation and unemployment. If you want low unemp, you tolerate high inflation. If you want low inflation, you get higher unemployment. The idea died during 1970s when we had both high inflation and high unemployment making the Philips Curve vertical.

However, old ideas keep coming back. In these interesting times, Europe needs both. Higher inflation and lower unemployment is not really a trade-off. They need both these.

László Andor EU Commissioner for Employment, Social Affairs and Inclusion has this interesting piece revisiting the Philips Curve. There are interesting graphs which show Philips Curve has flattened out in France, Spain and Germany:

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Why is Nouriel Roubini so surprised over surging markets?

October 1, 2014

Well, this has been the story for a very long time. Economic prospects have declined (age of diminishing expectations as Prof Krugman wrote) and continue to decline but markets remain as great as ever. So why is Nouriel Roubini surprised? I mean he even saw this irrationality build-up before the crisis .  This should not be anything new to him…

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Time for helicopter drop of money?

October 1, 2014

Biagio Bossone, Thomas Fazi and Richard Wood say none of the policies are working. We need to look at Friedman (or Bernanke) idea of Helicopter drop of money.

But the traditional Friedman view of central bank directly providing money to people cannot work. We instead need a government helicopter drop:

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Reconstructing macro theory to manage maco policy

September 30, 2014

Prof Joseph Stiglitz chips into the debate over state of macro.

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Connections between NY Fed and Wall Street (read Goldman) getting exposed

September 29, 2014

Over the weekend, some really interesting and scandalous story broke out. Propublica’s Jake Bernstein wrote this long article showing how the cosy relationship between NY Fed and Wall Street. As if this was anything new really. Michael Lewis adds more to the story.

The difference is Bernstein gets this former NY Fed  regulator Carmen Segarra to speak up. Segarra was an onsite supervisor a Goldman Sachs. Onsite regulators are those who actually sit in the office of the regulated entity. She was assigned Goldman Sachs and in act of bravado she taped her conversations while being in conversation with NY Fed and Goldman officials. The tapes show how NY Fed officials were just so afraid to ask Goldman to behave.

And this was after NY Fed actually appointed someone to sort its culture right. Lewis adds:

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Thinking about the yield curve in Euroarea..

September 26, 2014

An oldish speech by Vítor Constâncio of ECB, which I missed linking.

Euroarea is both frustrating and interesting in most matters. It does not change when we think about the yield curve.

First, what is it about the yield curve?

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How China’s central bank works?

September 26, 2014

WSJ Blog explains:

Unlike the U.S. Federal Reserve and other western central banks, the People’s Bank of China isn’t independent of the government. It reports to the State Council, the Chinese government’s top decision-making body and as a result, the PBOC has no real control over China’s monetary policy.

But on inflation front, China has had low inflation for a while. So even if the central bank is not so called independent,  it has managed to keep govt at bay:

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Prof. George Akerlof or Mr. Janet Yellen?

September 26, 2014

It was kind of funny to get this post from WSJ blog. It is trivia really but is fine given it is Friday evening.

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Improving inflation statistics…

September 26, 2014

Herve Hannoun of BIS has a nice speech on the topic. The speech is given during Irving Fisher Committee Conference.

He says monetray stability can only be achieved if we know the actual  inflaiton level. For latter, we need to continue to review our stats

As monetary stability is no less important, I find it highly appropriate that the first session of this conference is devoted to “New monetary policy indicators”. No topic could be more topical, given the vigour of the current debate about the supposed threat of deflation. But no debate can be productive, especially at the policy level, unless the supporting data are sound. In this light, measures of inflation and inflation expectations are surely an appropriate focus for an intensive review by central bank statisticians – and I would like to raise the question here if the IFC might not play a catalytic role in that process. Let me start by revisiting the intricacies of inflation measurement

He points how fin markets say inflation is too low whereas households think it is high:

Has the public understanding of CPI measures improved? As you know consumer surveys reveal a large gap (6% in some cases1) between inflation as measured by the statisticians and inflation as perceived by the public. In other words, the general public may view price trends very differently from financial market participants who complain that “inflation is too low”. And, needless to say, if the central bank itself starts to express concerns that inflation is too low, it may find it difficult to convince the public of its case.

He shows how financial markets expectations of deflation in EU is misplaced given how the long term trends have been.

In the speech he also discusses ways to improve statistics on inflation..


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