The paper is written by Neil Fligstein, Jonah Stuart Brundage and Michael Schultz, sociologists at UCB.
Archive for the ‘Central Banks / Monetary Policy’ Category
Imagine coming for a meeting not knowing that in the next you are likely to get fired for no real fault of yours.
RBI’s recent TAC was one such meeting. The minutes were released recently which said the meeting happened on 20th Jan. The policy was held on 28th Jan. It is ironical that on 21st Jan 2014, Patel Committee submitted its mon pol framework report. And as we know the PC recommends scrapping TAC and instead make a MPC much like BoE etc.
The gap between TAC and monetary policy struck me as have been tracking this for a while. The gap between the two looked a bit wide. So just looked at the dates of the two events. As TAC minutes were published from Jan-11 policy onwards, So here it goes:
|TAC date||MP date||Gap|
I was kind of right. Mostly the gap has been 6 days (9 out of 13 times). It was 7 days in 2 cases and 8 days in 2 cases, including the recent one.
It can’t be just a matter of coincidence that the report was submitted on 21st. The head of the committee was part of TAC being the DG of RBI. So surely, things were known. Either the TAC could be held on 22 or the report submitted a little earlier. some might say this was because of travel issues. Not sure as during policy time most of the seniors are present. And you could ask them to be present..
This could have led to some debates within TAC members on their comments on the new framework. This is no small policy change as the whole framework is expected to undergo change. RBI top brass could have sought suggestions/comments on the proposed policy change. Fed I know calls experts to comment and share their views apart from mon pol decision. Something similar could be done for this so called change as well.
As this blog has said earlier as well, one does not know why RBI has been following such an adhoc approach with respect to this report. It looks like a pet project of RBI top brass. I mean the committee did not even invite comments from public/experts and in 7 days flat has adopted some suggestions from the committee. No one knows what is the status of the report and how it just gives the Parliament a miss on critical decisions related to RBI Governance..
I am wondering what RBI top brass was thinking when the TAC members were giving their suggestions. Perhaps laughing and thinking that this is your last meeting and lecturing us. In that case why did RBI really waste their time and resources to bring them to RBI and give their policy suggestions. The policy decision on 28 Jul was anyways beyond logic and one did not need TAC suggestions which largely argued to pause.
Perhaps RBI did not want any comments on this seeing some resistance. So just kept it secretive just like the debt swap deal..So much so for transparency in mon policy..
As RBI evades Government/Parliament to adopt the fancied inflation targeting regime, things are changing in the inflation targeting world. They still say they are inflation targeters but are looking at all kinds of things. Call it flexible inflation targeting which is nothing but RBI’s now discarded multiple indicator approach.
One such case is Bank of England which is even more interesting as RBI is going to try and become like BoE over the years. The RBI committee report borrows heavily from Bank of England framework.
There has been lot of discussion on forward guidance of these central banks and more in case of BoE. The inflation targeting central banks have all kinds of targets (in the name of flexibility) like BoE has for unemployment. So it had this target that it will keep stimulating till unemployment touched 7%. As it touched 7.1% there were debates over whether BoE will stop its easy policy.
There were two solutions. One to lower the unemp threshold to say 6.5% like Fed did (though US unemp has touched tantalising close to 6.6%) or to revamp its fwd guidance statement. BoE chose the second option.
In its recent inflation report (which is also going to be taken out by RBI), BoE explained its changed stance. And interestingly, BoE will look at many indicators for its future policy just like RBI policy.
You can never really leave EZ out of action….It had been quiet for sometime and then comes this interesting verdict by German constitutional court. It says that ECB’s Outright Monetary Transactions are against the EU law. The EU law states that monetary financing of Eurozone governments is not allowed and OMT just does that.
Now not a penny has been spent on OMT since it was announced in 2012 but worked as a magic pill to stabilise the markets. But it took so long to produce the verdict which makes things look really crazy. If it was produced in 2012 itself, may be EZ would have struggled to stabilise.
Given the central bank activism, we need to have faster court verdicts in such cases. If a policy is against a certain law etc and court sits on it for months, it does not help. For instance, if money was spent on OMTs, what would ECB have done?
It is far better to do things transparently esp. while dealing with markets. You play with fire if you hide info from them. Things are figured out eventually and all hell breaks loose. However, it has been a tradition in recent years to come out with some or the other policy to manage some aspect of the budget. The PSUs have been pushed to buy help govt sail its disinvestment program. And now this debt switch thing.
RBI announced two things y’day which pleased bond markets:
Just a while back, we were discussing how the government is interfering in RBI’s affairs. There were talks of government threatening RBI’s independence by trying to meddle in functions of the central bank. So much so it forced the usually quiet RBI former governor to be quite vocal towards the end of his tenure.
Now post regime change in Sep-13, we are looking at a different problem. The issue now is how RBI is trying to undermine the Parliament by doing things as it pleases. It is even more surprising how there is no noise from either people in the Parliament (who understand what is going on and some do), media and experts. The same media which disliked the other institutions from getting into Parliament’s affairs (like courts, CAG etc) has been really quiet on this matter. Why should this be?
The usually good Haseeb Drabu nails the issue:
On Sep-18-2014 Scots are going to vote on their independence from UK. In case they do, what choice the country has on its economic framework? Should it continue the monetary union? If it does, what else will authorities have to do? Well, because of the EZ crisis, we know much of what needs to be done..
Some basics first. UK comprises Great Britain, Scotland. Northern Ireland and Wales. It has an interesting monetary framework. Though B0E is responsible for currency in the area, some private banks manage the currency it as well. Wikipedia as always does a good job of explaining the concept.
Mike Carney of BoE in this nice speech explains the economics if UK and Scotland agree to remain in a mon union:
The Scottish government has stated that in the event of independence it would seek to retain sterling as part of a formal currency union. All aspects of any such arrangement would be a matter for the Scottish and UK Parliaments. If such deliberations ever were to happen, they would need to consider carefully what the economics of currency unions suggest are the necessary foundations for a durable union, particularly given the clear risks if these foundations are not in place.
Those risks have been demonstrated clearly in the euro area over recent years, with sovereign debt crises, financial fragmentation and large divergences in economic performance. The euro area is now beginning to rectify its institutional shortcomings, but further, very significant steps must be taken to expand the sharing of risks and pooling of fiscal resources. In short, a durable, successful currency union requires some ceding of national sovereignty.
It is likely that similar institutional arrangements would be necessary to support a monetary union between an
independent Scotland and the rest of the UK. I suspect you have reached your limits of endurance of the dismal science, so you’ll be relieved to know that economics can take us no further. Decisions that cede sovereignty and limit autonomy are rightly choices for elected governments and involve considerations beyond mere economics. For those considerations, others are better placed to comment.
He covers some interesting stats on how the union looks like compared to other unions..
Well jokes have started ever since RBI chiefs have mentioned that they are neither hawks, doves but owls..
Those of you who follow my speeches—probably a very small number of you with way too much time on your hands—will recall that I like neither the term “hawk” nor “dove.” I like to think that all FOMC members are best metaphorically described in ornithological terms as “owls”—wise women and men seeking to achieve the right balance in carrying out our dual mandate. To be owlish, and to avoid the imbalance of emphasis that gave rise to needed harsh discipline imposed by the Volcker FOMC, one has to bear in mind that the seeds of inflation, once planted, can lie fallow for some time, then suddenly burst through the economic topsoil like kudzu, requiring a near-toxic dose of countermeasures to overcome.
I am not sure of anyone who referred to it earlier..In case people know, do let this blog know..
Not sure what is going on at RBI. It should perhaps change its name to Random Bank of India (this will keep the acronym to RBI) given its recent nature of policy. Or a more suitable and perhaps preferrable Surprise Bank of India (this will require a change in both the name and acronym with latter clashing with the largest bank in the country). May be another committee can be floated to work on this..
Once again, against market expectations, RBI hiked policy rates. The bogey game continues but perhaps it is likely to be over as the statement suggested that no more rate hikes will be needed. But then the same was said in October review as well. Who knows? Just that markets have not really played a bogey so far…
Another thing is this confusion between RBI statement and Governor’s Press statement. Earlier, first version was longer and second was a shorter version for the press. Now both are nearly same. Why duplicate?
The blog supports revisiting the inflation stance but does not understand this idea of hiking rates for the sake of it. It has been way too random. Also read this piece for the confused policy at RBI which printed before the policy.
RBI has been in news for two things. One for its mon pol framework and other for its decision to take back currency notes issued before 2005. Interestingly both the news have a common acronym – MPC – which is central to the issue. For first news, MPC stands for Monetary Policy Committee and for second it stands for Minting, Printing and Counterfeiting..
In an interesting article, Prof Vivek Moorthy of IIMB helps understands this second MPC problem of RBI. Needless to say lot less is written about this second MPC which is far more important than the first MPC which is just a reorganisation exercise :
He says the outgoing Chair has created a huge monetary mess:
Most who have graded Prof. Ben Bernanke’s twelve years at the Federal Reserve have issued marks which range from A to a gentleman’s C. I think those marks are much too generous. Indeed, I think a failing mark would be more appropriate.
In the ramp up to Britain’s Northern Rock bank run in 2007 and the Lehman Brothers’ bankruptcy in September 2008, Bernanke and the Fed created a classic aggregate demand bubble: when final sales to domestic purchasers — a good proxy for aggregate demand — surge well above the trend rate of growth consistent with modest inflation. The Fed also facilitated the spawning of many market-specific bubbles in the housing, equity, and commodity markets. True to form, Fed officials have steadfastly denied any culpability for creating the bubbles that so spectacularly burst during the Panic of 2008-09.
The pre-2008 crisis bubble was set off by the Fed’s liquidity injections which were initially designed to fend off a false deflation scare in late 2002. That’s when then-Fed Governor Bernanke sounded a deflation alarm in a dense and noteworthy speech before the National Economists Club. Bernanke convinced his Fed colleagues that a deflation danger was lurking. As then-Chairman Alan Greenspan put it, “We face new challenges in maintaining price stability, specifically to prevent inflation from falling too low”.
This was followed by an ultra easy mon pol:
To fight the alleged deflation threat, the Fed pushed interest rates down sharply. By July 2003, the Fed funds rate was at a then-record low of 1 percent, where it stayed for a year. This artificially low interest rate — compared to the natural or neutral rate at that time, in the 3-4 percent range — induced investors to aggressively speculate by chasing yield in “risky” venues and to ramp up their returns by increasing the amount of leverage they applied. These activities generated asset bubbles and created hot-money flows to developing countries.
However, as the accompanying chart shows, the Fed’s favorite inflation target—the consumer price index, absent food and energy prices—increased by only 12.4 percent over the entire 2003–08 (Q3) period. The Fed’s inflation metric signaled “no problems”.
But, as the late Prof. Gottfried Haberler emphasized in 1928, “the relative position and change of different groups of prices are not revealed, but are hidden and submerged in a general [price] index”. Unbeknownst to the Fed, abrupt shifts in major relative prices were underfoot. For any economist worth his salt, these relative price changes should have set off alarm bells. Indeed, sharp changes in relative prices are a signal that, under the deceptively smooth surface of a general price index of stable prices, basic maladjustments are probably occurring. And it is these maladjustments that, according to Haberler, hold the key to Austrian business cycle theory — and, I would add, a key to understanding the current crisis.
Just which sectors realized big swings in relative prices during the last U.S. aggregate demand bubble? Housing prices, measured by the Case-Shiller home price index, were surging, increasing by 45 percent from the first quarter in 2003 until their peak in the first quarter of 2006. Share prices were also on a tear, increasing by 66 percent from the first quarter of 2003 until they peaked in the last quarter of 2007. The most dramatic price increases were in commodities, however. Measured by the Commodity Research Bureau’s spot index, commodity prices increased by 92 percent from the first quarter of 2003 to their pre-Lehman Brothers peak in the second quarter of 2008.
Hmm.. He goes onto criticise inflation targeting which ignored exchange rate risks:
While operating under a regime of inflation targeting and a floating U.S. dollar exchange rate, Chairman Bernanke also saw fit to ignore fluctuations in the value of the dollar. Indeed, changes in the dollar’s exchange value did not appear as one of the six metrics on “Bernanke’s Dashboard”—the one the chairman used to gauge the appropriateness of monetary policy. Perhaps this explains why Bernanke has been so dismissive of valid questions suggesting that changes in the dollar’s exchange value influence either commodity prices or more broad-based gauges of inflation.
As Nobelist Prof. Robert Mundell — one of the founding fathers of modern supply-side economics — has convincingly argued, changes in exchange rates transmit inflation (or deflation) into economies, and they can do so rapidly. This was the case during the financial crisis.
Another thing he says is that though Fed has infused large amounts of base money but has not done enough to increase money supply:
The problem is that central banks only produce what Lord John Maynard Keynes referred to in 1930 as “state money”. And state money (also known as base or high-powered money) is a rather small portion of the total “money” in an economy. The commercial banking system produces most of the money in the economy by creating bank deposits, or what Keynes called “bank money”.
Since August 2008, the month before Lehman Brothers collapsed, the supply of state money has more than quadrupled, while bank money has shrunk by 12.1 percent — resulting in an anemic increase of only 4.5 percent in the total money supply (M4) (see the accompanying chart). The public is confused — as it should be. After all, the Fed has embraced contradictory monetary policies. On the one hand, when it comes to state money, the Fed has been ultra-loose. But, on the other hand, when it comes to the largest component of the money supply, bank money, a tight monetary stance has been embraced.
Prof. Bernanke’s days at the Fed have been marked by monetary misjudgments and malfeasance. Since the proof of the pudding should be in the eating, zero stars in the Michelin Guide.
Not sure what Prof means by did not do enough to create so called bank money. That should be the role of banks..
What a tenure Bernanke had. Some say he staved off a certain second great depression and others who say he failed to resurrect the economy. Then there are others like Prof Hanke who say his policies in 2003 started it all…