Archive for the ‘Central Banks / Monetary Policy’ Category

Why are central banks getting concerned with gold reserves/location of gold reserves?

November 21, 2014

The gold fetters are worrying central banks once again. One keeps hearing some news or the other. Swiss are anyways going to vote on Nov 3o on whether SNB should hold 20% of its reserves as gold and hold all its gold reserves in Switzerland (currently 30% gold reserves held in UK and Canada; see one, two and three on this)

Now, I read this about Dutch Central Bank. It too has adjusted its gold location policy:

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Bank of Finland’s 200 years..

November 18, 2014

Seppo Honkapohja of Bank of Finland has this interesting speech covering history of the central bank. It was established in 1811 making it the 4th oldest central bank.

The journey from being a central bank established by Russians to becoming a EMU member is all captured:

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Evolution of money…from playing cards to e-currency

November 18, 2014

Superb speech from Carolyn Wilkins of Bank of Canada.

In particular she points to this picture placed in one of BoC  halls which shows evolution of money.

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Central Bankers and bahavioral biases

November 17, 2014

Andy Haldane of BoE discusses the issue in this speech.

He first lists the behavioral biases and then suggests what central banks can do to overcome the biases:

Preference biases – where the decision maker might put “personal objectives over societal ones, such as personal power or wealth”   

Myopia biases – “people differ materially in their capacity to defer gratification” and studies suggest that people who show greater patience “outperform their impatient counterparts in everything from school examinations, to salaries, to reported life satisfaction”. 
Hubris biases – over-confident individuals are “more likely to be promoted to positions of influence” but tend to pursue “over ambitious targets” like “undertaking over-complex company takeovers. That way nemesis lies”

Groupthink biases – people tend to adapt their view to confirm to those around them and also have a “tendency to search and synthesize information in ways which confirm their prior beliefs”.     
There is little doubt that central banks have suffered from either all or some of these biases over the period with hubris bias being the biggest.
BoE (and others in their own ways) have tried to get out of these biases:
To tackle preference bias, the Bank’s does not set its own objectives.  It has three policy making committees – for monetary policy (MPC), financial policy (FPC) and prudential regulation (PRA Board). In addition, “to ensure the actions of the Bank’s policy committees are well-aligned with society’s wishes” their targets are “set ex-ante in legislation by Parliament acting on behalf of society”. 
 
To prevent myopia, the Bank of England has been made independent from government when choosing how to set monetary and financial policy to achieve their respective objectives.  These decisions have been given to an institution “whose time horizon stretches beyond the political cycle”.  Andrew suggests that central bank independence has been successful at taming “the inflation tiger” but he warns that “as some countries are finding today, the tiger is capable of biting back” in the form of low and falling inflation expectations. Andrew notes that while inflation expectations in the UK have held up pretty well, this is something he is “watching like a dove.”
 
To guard against Hubris at the Bank, “all policy decisions … are made by Committee rather than an individual” which “provides some natural safeguard against over-confidence bias”.  Andrew notes that external MPC members have contributed importantly to the diversity of opinion on the committee “on average they have been around twice as likely as internals to dissent from monetary policy decisions”. 
 
Finally to ward off groupthink, each member of the policy committees is individually accountable for their vote or view, and this should encourage “a variety of analytical perspectives”. That said Andrew notes that analysis of MPC minutes suggests that they did not devote enough time to discussing banking issues in the run up to the financial crisis, something that in hindsight, “looks like a collective analytical blind-spot”. He argues that despite all the changes to the Bank’s policy responsibilities since the crisis, “it is too soon to tell whether any remaining blind-spots remain”. Also, in his view “improvements to the Bank’s forecasting process have some considerable distance still to travel”.
Have these committees worked? I mean it just has people with very similar backgrounds trained in the same kind of economics. How can views be any different? We make a big deal of dissents. Have these dissents dissuaded the chief of the central bank from taking a different path? All we have is hype around dissents, nothing more nothing less. Groupthink continues despite committees
Much of fight against inflation was brought during highly comfortable global times. We are now seeing serious limitations on what central banks can achieve on inflation as well. Despite so much easing, deflation pressures remain in most adv economies. This is against expectations that we will have high inflation due to these policies by many experts. The  standard ideas have just failed really. But hubris continues..
 
All these biases can only be avoided if alternate schools of thought are encouraged in economics. The subject should be more interdisciplinary and humble. Just by saying we have committees and encourage diversity, it does not happen.  When most students are made to think in one standard way, diversity is just a myth and groupthink a reality..

Volcker does not understand the monetary policy of today…

November 14, 2014

Well, not many do either barring those who seem to be making the policy.

WSJ Blog has these comments by Paul Volcker over the monetary policy at today. He does not really get it:

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The rising complexity of the FOMC statement

November 12, 2014

Rubén Hernández-Murillo and Hannah Shell have this interesting graph which shows how complexity of FOMC statement has been rising.

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Influencing household inflation expectations…(comparing US with Argentina)

November 10, 2014

Alberto Cavallo, Guillermo Crucas and Ricardo Perez-Truglia have this post in voxeu on the topic.

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Implications of Swiss Gold Referendum

November 6, 2014

Nicholas Larkin and Catherine Bosley of Bloomberg add to the debate.

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Central Bankers and the celebrity bubble they create…

November 4, 2014

Ken Rogoff writes an article which is a must read for all central bankers and the media which hypes them.

He wonders what is all this hype about central bankers? Why do we care so much about each word they say, their color of tie and god knows what all. Most central bankers love the publicity and hype and don’t shy from photo-ops and enjoy their sudden new popularity. In the process they don’t realise they are becoming victims of financial markets and governments:

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How Germany started its hyperinflation and ended the same..

October 31, 2014

Two interesting articles on the topic.One by Marcia Christoff-Kurapovna and other by Thorsten Polleit.bit..

 

IMF floors its SDR rates at near zero..

October 30, 2014

A one week old news..not sure how many saw it.

IMF charges an interest rate for lending against SDR. These rates are calculated on a weekly basis. These interest rates are in turn calculated by the prevailing interest rates in developed economies, With rates even touching negative, there was a threat to SDR rates as well. So IMF has set the floor rate at 0.05%:

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Could the ‘Taylor Rule’ Have Prevented the Housing Bubble?

October 29, 2014

What was merely an academic exercise has become an applied tool for central banks. Just see whether your policy is in line with the T-rule and all shall be well.

Mateusz Machaj discusses the limitations of the rule and why we should avoid the hype around it.

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UK monetary policy and Cricket…Switching gears from frontfoot to backfoot..

October 28, 2014

Andy Haldane reviews economic conditions in UK and change of mon pol stance. Using analogy from cricket, he had earlier said that in the batting (economic) corridor of uncertainty it is better to be on frontfoot:

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How fair and effective are the fixed income, foreign exchange and commodities markets?

October 28, 2014

The International Finance Centres are now discussing questions like these which were bread and butter (or mickey mouse) before the crisis. Even asking such qs was a crime and laughed upon.

UK Govt and BoE had floated a study group in Jun-14 and they have released a interim report of sorts now:

The Fair and Effective Markets Review (FEMR) has today published a consultation document on what needs to be done to reinforce confidence in the fairness and effectiveness of the Fixed Income, Currency and Commodities (FICC) markets.

The Review was established by the Chancellor in June 2014, to conduct a comprehensive and forward looking assessment of the way wholesale financial markets operate, to help to restore trust in those markets in the wake of a number of recent high profile abuses, and to influence the international debate on trading practices.

The Chancellor, George Osborne, said:“The integrity of the City matters to the economy of Britain. Markets here set the interest rates for people’s mortgages, the exchange rates for our exports and holidays, and the commodity prices for the goods we buy.

I am determined to deal with abuses, tackle the unacceptable behaviour of the few and ensure that markets are fair for the many who depend on them. I want to make sure it is done in a way that preserves the UK’s position as the global financial centre for many of these markets, with all the jobs and investment that brings.

The consultation that the Fair and Effective Markets Review has launched today is comprehensive, balanced and rigorous, and asks all the right questions. I look forward to the Review’s final recommendations in June next year.”

Wholesale fixed income, currency and commodity markets ultimately make it possible to do business across almost every sector of the global economy. They help determine the borrowing costs of households, companies and governments, set countries’ exchange rates, influence the cost of food and raw materials, and enable companies to manage financial risks associated with investment, production and trade.

However, in recent years there have been a number of high-profile abuses in these markets. These have included the attempted manipulation of benchmarks, alleged misuse of confidential information, misleading clients about the nature of assets sold to them, and collusion.

Interesting times..Despite all this, hype over finance and financial development continue..

How central banks end crisis (and create the next ones?)

October 27, 2014

It is all about operating in secrecy. Central banks end crisis by making sure no one knows what you are doing and who are the partners (Banks and FIs) in crime.And general public is made to feel that as if there is some magic going on.

Gary Gorton and Guillermo L. Ordoñez in this paper explain the importance of secrecy in ending crisis:

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Inequality in US– Some Trends

October 22, 2014

Yellen has this useful speech to show how inequality has risen so much in US.

This is a trend which has clearly caught US econs napping. Economists is around two questions: How much to produce and how to distribute. The question of distribution was dismissed by most economists in recent years. There was a widely held belief that just like econs have resolved the problem of depression, they have  resolved for distribution as well.

And now both, depression and inequaity have hit these economies hard. And what is worse that there were clear signs of this but were ignored.

The mumbo jumbo of forward guidance..

October 22, 2014

David Miles of BoE has this article on forward guidance. FG was something which was slated to replace all mon pol tools or supersede them. With all these inflation targeting forward looking central banks came the idea of guiding markets towards the future policy decisions. So statements like what central bank is likely to do etc became fashionable. Some central banks started even giving paths over how their interest rates shall move going ahead. In other words central banks became nothing but Gods.  There is a reason why they are so hyped and celebrated after all.

This was all good till this crisis and things have become crazy since then. FG was taken more seriously as economies dived to assure markets but as things moved ahead one is not sure how to forward guide. Whatever you say, it is usually the opposite making you look mere human.

So Miles says, we should not be so precise. C-banks FG statements should be more qualitative:

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Do We Need a Lender of Last Resort? Lessons from Australian banking history..

October 21, 2014

Nicolás Cachanosky of Mises Institute argues what Austrian school argues best- There is no need for a central bank.

Why can’t banks manage the money on their own? Why do they need a LOLR?

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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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