Archive for the ‘Central Banks / Monetary Policy’ Category

Is Sweden headed the Japan way?

April 23, 2014

Things are getting more and more complex. Countries which had recovered post-crisis are slipping. Sweden is the latest entrant to the list. The last reading was at -0.6% fueling debates over deflation in Sweden.

  • Krugman always on red alert to these developments started the debate – one and two .
  • Lars Svensson, former Riksbank MPC member and deflation expert added fuel to the fire. He blames the Riksbank rightaway:

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Facebook becoming a bank?

April 22, 2014

Corporates becoming a bank is not just fashionable in India but other places too.

It seems Facebook is joining the list too! For a moment I thought that this Bloomberg story would be of Apr 1 indicating April Fool. But this seems to be true.  Facebook is about to get an approval from central bank of Ireland (Facebook’s non-US HQ is registered at Ireland) to store and exchange money:

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QE in Euroarea has to deal with three kinds of interest rate differentiation..

April 17, 2014

A thoughtful speech from Benoît Cœuré, member of ECB.

He says when we say about QE in EZ, we have to look at interest rates across three spectrums:

Focusing specifically – and at the risk of over-simplifying the issue – on the interest rate channel of monetary transmission, monetary policy operates by raising or lowering the interest rate in the economy. A lower (real) interest rate lowers the cost of capital for firms, encourages investment spending and stimulates consumption. A higher real interest rate has the opposite effect.

But the point of course is that there is no such thing as one interest rate to which all economic agents respond. There are at least three ways in which interest rates are differentiated in the euro area. There is vertical differentiation – different economic agents are sensitive to interest rates with different maturities. There is spatial differentiation – different interest rate curves provide the reference rates in different jurisdictions. And there is horizontal differentiation – within jurisdictions, different markets determine firms’ and households’ cost of borrowing.

What this implies is that the levels of medium- and long-term real interest rates across jurisdictions and markets will always be relevant to the formulation of monetary policy. The difference between normal and abnormal times is therefore not what we are trying to achieve – it is how we strive to achieve it.

He further explains these three kinds of differentiation:

First, vertical differentiation – the relevant maturities at which asset purchases should take place. In practice, purchases would naturally be linked to the interest rate maturities that are most important for firms’ and households’ investment and consumption decisions. In the euro area, this tends to be the intermediate to longer part of the yield curve.

Second, spatial differentiation – the jurisdictions across which asset purchases should be spread. Here we would have to take into account the interest rates in different jurisdictions that provide the benchmarks for loan pricing. In the euro area, remember, there is no single yield curve that refers to a “commoditised” reference asset and that is equally relevant for loans to firms and households. Creating such an asset would ease the implementation of our monetary policy, but this cannot be a short term project.

Third, horizontal differentiation – the markets within jurisdictions that asset purchases should target. When financial markets are highly integrated with a high degree of substitutability between assets, purchases in one asset class, such as government bonds, are more likely to affect term premia across all asset classes. This is because the process of portfolio reallocation facilitates a relatively homogenous transmission. But given the segmentation of euro area financial markets, this effect cannot just be assumed. To achieve a homogenous reduction of term premia across relevant interest rates, segmentation would have to be taken into consideration in our strategy.

Pretty complicated as most things in EZ are. One has to decide on maturities, countries and then within countries..

He says unconv policies are not as unconv and there is a wonderful quote at the end:

Unconventional monetary policy tools are less unconventional than the word implies. They are unusual, because they respond to highly unusual circumstances. They imply risks that have to be carefully weighed and mitigated. But fundamentally, unconventional tools are only a means for central banks to continue doing what they have always done: managing aggregate demand, by influencing the level of real interest rates and other monetary transmission channels, to maintain price stability. To borrow from Giuseppe Tomasi di Lampedusa, in these unusual times “everything must change, so that everything stays the same”. It is this that will determine both the appropriateness of using targeted asset purchases in our monetary policy operations, and the design of any such purchases.

Superb..

 

Emergence of the Fed as a modern/independent central bank

April 16, 2014

Bernanke yesterday lectured at Mumbai saying the new government should ensure the autonomy of RBI continues. Owen Humpage of Cleveland Fed has this very useful paper on how Fed became a so-called modern independent central bank.

Humpage says one is not sure when Fed became a truly independent central bank. The concept of independence is a mutable and fragile one. The paper leans gives a political economy perspective of independence and show how US govt used Fed as an agency to fulfil the overall economic goals:

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History of virtual currency and whether these currencies will succeed?

April 16, 2014

Two articles. First by Financial Cryptography website. It says this bitcoin thing is nothing but a repitition of history. The second is by Daniel Thornton of St Louis Fed who discusses what makes these currencies tick. So first looks at history and second looks at the future..

First a bit of history:

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The benefits of not being so independent – a case of People’s Bank of China..

April 15, 2014

Much like anything Chinese, there is this whole mystery and aura around the way PBOC functions. There is little understanding on how it conducts monetary policy and goes around its job. The speeches from the central bank are few and frugal too making it even more difficult.

So in this rare intereview PBOC chief  Zhou Xiaochuan speaks on the independence of the central bank:

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From spillovers to spillbacks…

April 15, 2014

Just missed this over the long weekend.

IMF seems to have introduced another term called spillback.

Spillovers mean the positive/negative impact of a policy on other countries. Spillbacks is the impact of withdrawing/exiting from ultra-easy policies on other countries. I mean it is just another kind of spillover really..

The central bankers were not amused with another addition to the lexicon…

The impact of BOJ bond buying on Bond markets..

April 15, 2014

Interesting bit of news from Japan.

WSJ BLog points how the new 10 year JGB did not trade at all for a whole day:

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Why do we still use paper money?

April 11, 2014

Richard Rahn of Cato looks at this interesting question.

And in typical Cato/Hayek  spirit blames the govt for ensuring this continues…

Why Do We Still Use Paper Money?

April 11, 2014

Richard Rahn of Cato Institute asks the question:

Paper currency is dirty and is a major transmitter of disease as it goes from unwashed  and to unwashed hand. It is easily lost and stolen, and can be easily destroyed by getting wet or burned.

It physically wears out in a short time and is costly and troublesome to replace. So why do we still use the filthy stuff in the electronic age?

He says interestingly, that govt also prefers electronic money which it can monitor:

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What happens when the heart available for transplant is that of 75 year old central banker?

April 11, 2014

Usually brilliant and funny Richard Fisher if Dallas Fed has this interesting speech. He discusses QE, forward guidance, hype around central banks and so on..

He narrates a story told by Mario Draghi at a conference:

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Monetary policy post crisis…More art than science?

April 9, 2014

IMF econs released this interesting staff note ahead of its WEO release and G-20 meetings. In its blog IMF econs summed the paper as saying monetary policy as an art is alive and kicking.

The paper looks at this whole debate on monetary policy post crisis. There are hosts of agendas and this paper is a nice review. The paper seeks and provides answers to following questions:

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Draghi’s stint as ECB chief …from saviour to crisis maker…

April 7, 2014

Mean reversion is not just a statistical process.  It follows the people who talk about it the most – economists and economic policymakers. All whose fates have risen beyond comprehension have seen their graph decline beyond comprehension. Right from Chicago School to Greenspan all have faced the music.

The latest to the club is Mario Draghi. He came in and said the golden words “whatever it takes” to save Euro in 2012. It worked like magic and soon the media was all gaga over Draghi. How he managed to arrive at a consensus to push OMT (which is being opposed now in German court in 2014) and all that made headlines Europe was never really used to. Stock of Draghi rose just like the Euro.

And now in 2014, things seem to be falling apart. The mean reversion seems to eb catching up. His recent reluctance to do anything to prevent deflation in EZ is being criticised.

Desmond Lachman of AEI says Prof Draghi has forgotten three macro lessons:

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Are central banks the only game in town..a dive into their history..

April 4, 2014

nice paper on history and current practices in central banking. The link actually takes you to this paper by Athanasios Orphanides (of Bank of Cyprus) which is followed by comments from Charlie Bean (of BoE) and Niall Fergusson (Harvard). The title of this post is picked from Ferguson’s comments.

  • Orphanides speaks about the current state of affairs in central banking and finds them to be overburdened. He thinks they are doing too many things and should stick to just price stability. All else should be done away with.
  • Charlie Bean suggests that we can no more ignore financial stability as a role for c-banks. It has become a highly critical role. He invokes history saying this was the original role of central banks.
  • Fergusson takes you through this history of central banking. How central banking developed in BoE which eventually got transmitted to other countries as well.

The first two issues have nearly been beaten to death without any solution. I was more interested in what Fergusson had to say:

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What is fair trade and fair value? Myths and Reality..

April 1, 2014

DeLisle Worrell, Governor of the Central Bank of Barbados has this interesting speech. As his previous speeches this one also looks at myths around economics (one and two).

This time he targets fair trade and fair value concepts:

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Monetary policy decision-making and accountability structures: some cross-country comparisons

April 1, 2014

Tim Aldridge and Amy Wood of RBNZ have this short note on governance structures across central banks.

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Swiss National Bank’s investment policy – A preview..

April 1, 2014

There was some recent news over Swiss National Bank selling its shares in unethical companies. I was kinda amused to read this as one does not see central banks investing in equities. But it seems SNB has this whole investment policy which allows equity investments.

Fritz Zurbrügg, Member of the Governing Board of SNB has this interesting speech over its investment policy:

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The price of political uncertainty…

March 31, 2014

Bryan Kelly, Lubos Pastor and Pietro Veronesi have this interesting piece in voxeu.

The authors develop a measure of political uncertainty and see its impact on fin markets:

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RBI’s first bi-monthly policy on April Fool’s Day…

March 31, 2014

What a perfect day to begin RBI’s nth change – shift from quarterly monetary policy to bi-monthly policy. It is tomorrow on 1st April, a day popularly known as  April Fool’s Day.

A day when children are out trying to trick/fool others and then saying some rhyme of sorts. These rhymes differ from places to places. In Hindi heartland, making a fool is replaced by making someone ‘ullu’ (owl). Based on the owl stories which floated around in last policy, it is an apt day. Most central banks anyways make people fools/ullus  and the day marks a perfect beginning for the next year.

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Which countries actually suffer from deflation in Eurozone…

March 28, 2014

There is a huge press and expert coverage on rising possibility of deflation in Eurozone and what ECB should do/not do..But then as we know EZ is a union of many countries. So which countries are really suffering from deflation in EZ?

Eilert Husabø of Norges Bank in this short note suggests it is only Greece which is suffering:

Euro area inflation has fallen to a low level, which has given rise to concerns about deflation. We have constructed an indicator designed to capture whether a country is in deflation. The indicator shows that the euro area as a whole and most individual countries are now farther away from deflation than during the financial crisis, with the exception of periphery countries where the indicator is approaching or exceeds the levels prevailing during the financial crisis. Greece is the only country experiencing deflation.

Again Greece seems to be the only culprit.

Crazy stuff and just the opposite of what others seem to be saying that most EZ is under deflation..The problems of managing the EZ and one sizing monetary policy continues..


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