Putting the ‘System’ in the International Monetary System

A super paper by super econ historians - Michael D. Bordo and Angela Redish.

They track how this so called international monetary system became a system involving very complex ideas and coordination:

Why Japanese recent Monetary Policy is a regime shift…

A brilliant speech from Great Depression expert Christina Romer (HT: Mankiw’s Blog).

She says BoJ’s recent speech is a regime shift something like what US did in 1930s:

How Fiscal Policy helps in liquidity traps: Lessons from the UK’s 1930s escape..

Nicholas Crafts adds fuel to the fire on debate over fiscal policy working during Liquidity Trap or not. He says UK solved its liq trap situation in 1930s using aggressive fiscal policy. What Shintzo Abe is trying with Japan today was done by Neville Chamberlain (UK’s PM) in 1930s.

Chamberlain followed a three pronged approach: getting off gold standard, announcing a price level target and devaluation of GBP:

Central Banks worldwide have eased policy rates 511 times since crisis

A nice fact-giving article by Bloomberg journos - Simon Kennedy & Jennifer Ryan.

South Korea’s rate cut yesterday was the 511th reduction worldwide since June 2007, according to Bank of America Corp.’s tally. While the tide of liquidity has sent stock markets surging, it has yet to prove as effective in generating economic growth.

511 times!

Crises Before and After the Creation of the Fed

Early Elias and Òscar Jordà of FRBSF write this nice short paper on the topic. A more detailed paper on similar lines was given by Micahel Bordo.

Mostly we compare the current recession to the Great Depression. This paper compares it to the Panic of 1907:

This year marks the 100th anniversary of the Federal Reserve System. Two of the Fed’s main duties are acting as lender of last resort in times of crisis, and promoting stable prices and full employment through monetary policy. Few would challenge the Fed’s recent record at controlling inflation. But many question the effectiveness of the Fed’s emergency response to the 2007–08 financial crisis and the recession associated with it. The Federal Reserve was itself born out of the Panic of 1907, a financial crisis that bears a striking resemblance to the one that occurred almost exactly 100 years later. This Economic Letter examines the Fed’s crisis management response in this historical context.

How history repeats/rhymes:

Can you identify when the following events took place? Early in the year, the stock of a nonbank financial institution widely used as collateral in certain transactions drops by more than half. At first, financial markets shrug it off. But, during the summer, with market distress apparently in check, two new financial challenges arise. Shortly after that, a nonbank financial institution fails and panic strikes financial markets. Meanwhile, a giant financial company is also in trouble, but considered salvageable. A deal is struck. Market participants bet that the rescue will keep other financial dominoes from falling. Disaster is avoided, but not without major damage to the real economy in the form of a protracted recession.

If you thought this scenario describes the 2008 financial crisis, you would be right. You would have identified Bear Stearns as the company whose stock took a hit early in the year, Fannie Mae and Freddie Mac as the two challenges that surfaced in the summer, Lehman Brothers as the nonbank financial institution that collapsed shortly after that, and AIG as the financial giant that was rescued. However, the scenario also describes events that took place a century earlier. Replace Bear Stearns with Union Pacific, Fannie Mae and Freddie Mac’s failures with the crash of copper prices and New York City bonds, Lehman Brothers with the Knickerbocker Trust Company, and AIG with the Trust Company of America, and you would precisely identify the panic of 1907.

The events surrounding both crises were remarkably similar. But the institutional responses to these events were vastly different. The lack of a central bank in 1907 meant there was no public lender of last resort. Instead, J. Pierpont Morgan, a private investor and founder of J.P. Morgan & Co., orchestrated the rescue effort in 1907. In 2008, it was federal government agencies, especially the Federal Reserve and the Treasury Department, that responded to the crisis.

Interesting…

There is a nice chart which shows number of countries in crisis in the decades since 1870s:

Recessions originating from a financial event were common in the late 19th and early 20th centuries. Many stemmed from banking panics. Figure 1 provides a global historical perspective. We calculate by decade the number of countries that experienced financial crises among a sample of 17 industrialized economies representing more than half of global GDP during the past 140 years (for details, see Jordà, Schularick, and Taylor 2012).

Figure 1 shows a notable downward global trend in the incidence of these highly disruptive events, with the conspicuous exceptions of the Great Depression and the Great Recession of 2007–09. In the United States, the rate of banking crises declined markedly after the 1913 creation of the Federal Reserve System. Other than the Great Depression and Great Recession, the only significant banking crisis of the past century was the savings and loan crisis. By contrast, ten significant banking crises occurred in the 19th century.

Overall having a Fed would have helped in 1907..Though many would diasgree

Dollarize Argentina Now!

A nice post by Steve Hanke of Cato Insti.

Argentina is once again wrestling with its long-time enemy – inflation. Now, it appears history may soon repeat itself, as Argentina teeters on the verge of another currency crisis. As of Tuesday morning, the black-market ARD/USD exchange rate hit 9.87,  meaning the peso’s value now sits 47.3% below the official exchange rate.

This yields an implied annual inflation rate of 98.3%. For now, the effects of this elevated inflation rate are being subdued somewhat by Argentina’s massive price control regime. But, these price controls are not sustainable in the long term. Indeed, the short-term “lying prices” they create only distort the economic reality, ultimately leading to scarcity.

There is, however, a simple solution to Argentina’s monetary problems –dollarization. I have advocated dollarization in Argentina for over two decades – well before the blow up of their so-called “currency board”. To put the record straight, Argentina did not have a true currency board from 1991-2002.  Rather, as I anticipated in 1991, the “convertibility system” acted more like a central bank than a currency board. This pegged exchange rate system was bound to fail… and fail, it did.

 His solution is to dollarize Argentina:

If you note, he is also proposing a free banking system in Argentina with no central bank! Most Cato Insti guys are against central banks and propose free banking where banks figure things by themselves..

Nice bit..

Does Money Still Matter for Monetary Policy?

A nice crisp review by Renee Haltom of Richmond Fed on monetarism.

Economists agree that infl ation is a monetary phenomenon, but since 1982,  monetary policymakers have demoted measures of the money supply from  prime targets to key indicators to incidental byproducts. With excess bank  reserves at all-time highs, however, measures of money may have a renewed  purpose as red flags for inflation.

She starts nicely saying what c-banks really do:

Design of an optimal monetary-policy committee..

I pointed to a column earlier which criticized FSLRC’s proposal to set up an MPC in RBI. The criticism was based on the fact that MPC would become a politicised body and lead to excessive govt interference.

Keeping this criticism aside for a moment, say govt goes ahead with MPC for RBI. What should the design be? More of RBI people? More of Academicians? More of Industry People?

This column by Sylvester Eijffinger, Ronald Mahieu and Louis Raes looks at design of MPC:

Confessions of a Policy Analyst: Ethical Dilemmas Facing Economic Professionals in Government

A brilliant piece by Robert Nelson of University of Maryland – School of Public Policy.

Post his PhD at Princeton, he worked as an econ with Secretary of Interior.

Lessons for South Africa from Germany in a challenging global environment

Nice speech by Gill Marcus, Governor of the South African Reserve Bank.

He points how SA can learn from Germany. The lessons actually apply to most econs:

Why We Still Need to Read Hayek?

John Taylor in the Hayek Lecture 2012 organised by Manhattan Institute looks at this question.

Most figure Hayek with liberty and anti-planning. Taylor says we need to read Hayek for a different cause.

He says we need to still read Hayek as latter believed in rules:

Rethinking Macro Policy – II…

IMF hosted a conference recently titled - ”Rethinking Macro Policy II: First Steps and Early Lessons”.

IMF econs have released a note giving us some ideas on what lessons have been learnt and what to expect:

Understanding Coinage decisions of the monetary authorities …a historical perspective..

A very interesting paper by Angela Redish (of UBC) and Warren Weber (Minneapolis Fed).Though highly technical, the findings are pretty interesting.

The paper talks about coinage decisions of monetary authorities and looks at it from two angles. First they build a model and suggest predictions of the model. They then compare the model on historical experience of Venice and England and show the model is indeed true:

Why the paper? Most papers on monetary history look at from Quantity theory of money. So the usual research looks at flow of money and its impact on inflation. But this misses other aspects:

Solow on Bernanke and his policies during the crisis..

Robert Solow writes this masterful piece explaining basics about monetary policy and Bernanke’s policy during the crisis (HT: Greg Mankiw). Solow reviews Bernanke’e four lectures at Georgetown Univ.

Overall, he agrees to Bernanke’s policies during the crisis:

Designing an optimal RBI…

I missed talking about this interesting column by Dr. Gangadhar Darbha of Nomura Securities. It came a few days ago. The column is based on the FSLRC commission repor’s suggestion of forming a Monetary Policy Committee at RBI.

Darbha says forming a MPC will erode RBI’s independence:

Monetary policy and wealth management in a small petroleum economy: Case of Norway

I have always been curious to know about Norway’s economy because of its sovereign wealth fund.

This speech by Øystein Olsen, Governor of the Norges Bank  provides a start. In a few pages it tells you how Norway manages its oil reserve and tries to ensure that fiscal policy does not get carried away with this windfall as is common in other countries.

Should Full Employment Be a Mandate for Central Banks?

Boston fed hosted a conference on Fulfiling the Full Employment Mandate.

Eric Rosengren, chief of Boston Fed gives an interesting speech on the topic -Should Full Employment Be a Mandate for Central Banks? He defends Fed’s dual mandate saying Fed did a decent job compared to other central banks. Even inflation targeters like BoE, Riksbank could not focus on inflation as Fed did despite having a dual mandate. Hence, he supports Fed’s dual mandate and suggests other central banks to look at the same as well:

Measuring the clarity of central-bank communication..

A nice discussion by Aleš Bulíř, Martin Cihák, David-Jan Jansen in voxeu. The long paper is here.

There is a measure for measuring simplicity in language called – Flesch-Kincaid readability test. They use this to see which of the selected central banks communicate better and simpler.

Quality, clear communication is a very powerful tool for central banks because it influences expectations. This column presents new research on central-bank communications, using a formal measure of clarity – the ‘Flesch-Kincaid grade level’. The picture is varied: there are significant and persistent differences in clarity over time and across countries. However – and worryingly – the financial crisis is associated with unclear communication for some central banks.

We ask whether the clarity of central-bank communication depends on the context; if clarity is sensitive to the inflation outlook or uncertainty, or both; and how the global financial crisis has affected central-bank communication.

Under our null hypothesis, communication clarity is impaired when the bank is unsure about future developments or when it needs to explain larger deviations from the inflation target. Suppose that current inflation runs above the target, but the official inflation projection is close to the target, and the bank identified numerous mutually offsetting demand and supply inflation factors. It is going to be harder to present these developments in an accessible manner, presumably leading to less clarity. Nonetheless, the central bank may be aware of the need to present a clear message to the public and it may devote more resources to communication. If it succeeds, communication clarity may remain unchanged, or it may even improve. 

The seven central banks are: Chile, Sweden, UK, ECB, Czech and Poland. Findings:

We find statistically significant variation in the Flesch-Kincaid over time for each of the seven central banks, partly reflecting idiosyncratic trends. The inflation reports have become clearer over time in Chile, Sweden, and the UK (although the UK’s reports became less clear after 2007), improving by almost one fifth of a year of schooling per year. In contrast, the Eurozone Monthly Bulletins and in particular Thai inflation reports have become less clear during the sample period, by about one tenth and two fifths of a year of schooling per year, respectively. For the Czech Republic and Poland there are no statistically significant trends. Turning to our main question of the relationship between the clarity of communications and the broader economic environment, only a handful of factors structurally appear to affect readability..

Nice bit…

There is another such readability index I came to know of -  Gunning-Fog index. Econolog.net which ranks econ blogs uses this to see which blogs are simple to read and so on. Proud and humbled to say Mostly Economics ranks really nicely on this. One just needs 9 years of schooling and is much better placed compared to other blogs..

Fed and ECB’s different approaches stem from their societies’ respective historical experiences..

A nice article by Barry Eichengreen at Proj Synd today.

He says Fed and ECB have adopted different approaches for their interventions. Reason – historical experience. Fed looks at mistakes made during Great Depression when growth dived and not really 1970s when inflation shot north. ECB on the other hand does the opposite and looks more at 1920s when inflation rose and not 1930s when it suffered from Great Depression:

How to identify poor? Three ways..

Prof. Abhijit Banerjee (AB) of MIT was invited for the first Suresh Tendulkar lecture recently. This annual lecture is to be organised by RBI’s College Of Agri banking.

The lecture was uploaded recently on RBI’s website. It was an interesting read. Though, it could have been organised a bit better.

AB says there are three ways to identify poor – direct targeting, community based targeting and self-targeting: