Archive for the ‘Central Banks / Monetary Policy’ Category

Liquidity: Meaning, Measurement and Management

September 23, 2014

Title of Robert Lucas speech at St Louis Fed. A rare readable paper from Prof Lucas :-)

He starts visiting the objective of Canada central bank:


T.L.T.R.O. is Too Low To Resuscitate Optimism

September 22, 2014

Silvia Meiser of Bruegel reflects on the low bidding for TLTRO funds.

Out of the expected EUR 180 bn of funds, banks only bid for EUR 83 bn:


Making sense of dissents: a history of FOMC dissents..

September 22, 2014

Dissent is part of human life. People assenting or dissenting to other’s views is quite common. However, when it comes to central banking it becomes quite abnormal and generates significant hype.

Daniel  Thornton and David Wheelock of St. Louis Fed have this superb paper tracking history of FOMC dissents.

This article presents a record of dissents on Federal Open Market Committee (FOMC) monetary policy votes from the Committee’s inception in its modern form in 1936 through 2013. Dissents were rare during the Committee’s first 20 years but began to increase in the late 1950s. The number of dissents increased sharply during the late 1970s and early 1980s, when both inflation and unemploy- ment were unusually high. However, at other times, the number of dissents was not correlated with either inflation or the unemployment rate. A review of FOMC records and published statements indicates that dissents often reflect fundamental disagreement about (i) how to achieve the Committee’s macroeconomic objectives and (ii) the current stance of policy. The number of dissents also appears to have been influenced by the language used by the FOMC to communicate instructions to the manager of the System Open Market Account.

There is a lot of trivia and interesting stuff in the paper:


ECB has a FOMC now…

September 19, 2014

ECB had announced the shift earlier. The details came y’day.

There will be 3 groups:

  • Executive members – All  6 will have voting rights in all 12 months
  • Big members -there are 5 members. 4 out of 5 shall maintain recording rights every month. one will drop out. IN Jan 15, Spain shall drop out.
  • Small economy members – Post Lithuania joining we shall have 14 members in this group. Out of this 3 shall drop out every month.

So basically, there will be 21 members voting each month (6+4+11). The difference is members shall rotate every month. Unlike FOMC where members rotate every year, here it shall be every month.

But still 21 is pretty large..

From Taylor rule to Hayek rule…

September 17, 2014

Mateusz Machaj of Mises Institute says shift to Taylor rule will not help Fed. One should instead follow a Hayek rule and abolish Fed. The banks should be free to do their own thing without any Fed intervention.


Do Regional Fed members have a regional bias?

September 16, 2014

The question is kind of tautological. I mean what good are regional Fed members if they do not bring regional angle to the table. After all that is their role.

The issue is whether their voting pattern for interest rates is based on regional understanding or not. Ideally, one would think that monetary policy should be based on the national economy and not on regional basis.

This paper by ECB econs Alexander Jung and Sophia Latsos look at the issue:

In a federal central banking system there is an undisputed need for a regional dimension to monetary policy decision-making. In fact, the literature suggests that monetary policy-makers, who are part of such a system, should use a wide range of indicators when assessing economic and financial conditions. Therefore, it appears warranted if these policy-makers choose to monitor regional data in order to enhance their understanding of national economic dynamics. At the same time, monetary theory cautions that policy-makers should avoid voting in a manner that would favour their region of origin. Such voting behaviour may reflect a regional bias in the interest rate preferences of policymakers and could lead to suboptimal monetary policy outcom econometric strategies, these studies mostly find evidence in favour of the existence of some form of regional bias in policy-makers’ deliberations on interest rates. However, two important questions remain unresolved: do previous findings represent robust evidence that policy-makers’ preferences are subject to a regional bias, and, if so, to what extent does the possible presence of a bias influence monetary policy decisions?

They estimate Taylor rules for each of the regions and check that with interest rate preferences to figure the regional bias. Some Regional Feds did have regional bias but that did not overall affect the mon pol decision:

In order to detect a regional bias in policy-makers’ interest rate preferences, it is necessary to apply specific empirical methods. In this sense, the evidence detecting such biased preferences has to be twofold. First, it has to show that a policy-maker’s interest rate preference responds to regional data stemming from the respective home district. Second, the preference also has to be such that a policymaker would favour the regional economy in his or her decision on the (national) interest rate. For example, a Federal Reserve Bank President with a regional bias would opt for lower (higher) interest rates when his or her region’s unemployment rate was higher (lower) than the national average. The empirical approach to the hypothesis of a regional bias thus requires estimating policy-makers’ reaction functions and augmenting them with a regional variable. The evidence obtained from this has to show that the regional variables of the policy-makers’ respective home districts explain why their interest rate preference deviates from the FOMC’s federal funds rate.

By estimating individual Taylor rules for FOMC members, we examine the interest rate preferences of the Federal Reserve Bank Presidents during the Greenspan era (sample 1989 to 2006). In order to evaluate the regional bias hypothesis, we augment individual Taylor rules for the Federal Reserve Bank Presidents with regional variables and test for their influence on the Presidents’ preferences. Information on individual interest rate preferences stems from FOMC transcripts. Estimates based on these augmented Taylor rules reveal that the preferences of some Federal Reserve Bank Presidents were not free of a regional bias, a result that applies particularly to the smaller districts. 

However, Taylor rules with inertia show that this finding could also be due to the presence of an interest rate smoothing motive. Moreover, further tests confirm previous results by Chappell et al. (2008) who found that compared to the nationwide unemployment rate the district unemployment rate only has a small (negative) impact on FOMC members’ interest rate preferences. Overall, our findings support the view that the presence of a regional bias in the interest rate preferences of some Federal Reserve Bank Presidents is unlikely to have impeded on the Fed’s capacity to set interest rates with a nationwide focus.

Interesting stuff. We shall have some research on ECB as well when the minutes etc are published from next year onwards.

Astonishing Story of how Federal Reserve reacted on 9-11…

September 16, 2014

The US just celebrated its anniversary of the terrorist attacks.

Arliss Bunny writes this stirring account of how Fed reacted during the attacks:


Central bankers as almighty..

September 15, 2014

Interesting interview of Mr. Vítor Constâncio, Vice-President of the ECB.

He is asked whether ECB feels like an almighty:


Building an economic indicator using social network…

September 12, 2014

Piet Daas and Marco Puts of Netherlands Stats Bureau have this interesting paper as part of ECB series (HT: WSJ Blog).

They propose an econ sentiment indicator which tracks social network messages. It is a technical paper and not easy to read:


Is the ECB going to do/doing QE?

September 12, 2014
Prof. Charles Wyplosz, European monetary affairs expert  analyses the recent moves by ECB President Super Mario. 
He says it is not really going to be QE as we understand it today:


Should central bank print the currency notes by itself or outsource it?

September 8, 2014

I had written blogpost on this outsourcing of currency function earlier. But am unable to locate it.

Nevertheless, Bank of England issued this press release informing that BoE has outsourced its currency function to a private firm. BOE has been outsourcing its currency printing function since 2003. This got me thinking of the earlier post.


Namonia reaches Texas and Dallas Fed…

September 8, 2014

Wow this is some publicity and hype.

How many times do we see central bankers of praise politicians and that too of of other nations? In this case it is actually a Regional Fed chair – Richard Fischer of Dallas Fed praising the not so new Indian PM. I just casually read Fischer praising Indian PM on some website. I thought it must have been just some comment. But no it is a speech titled Texas Jagannath (With Reference to Indian Prime Minister Modi, a Hindu Goddess and Wodehouse’s Big Money) .

The speech is given at US – India Chamber of Commerce:

I am so honored to have been invited to join Ambassador (S.) Jaishankar this evening to celebrate the U.S.–India Chamber of Commerce and its many distinguished awardees.

Mr. Ambassador, I am delighted you are here in Texas tonight. I am going to give you a few statistics in a moment that I think will make readily apparent the reason for this large audience and why so many Indian entrepreneurs and professionals come to Texas. Then I am going to give you a snapshot of where the U.S. economy is at present and what we are grappling with at the Fed. But first, with your indulgence, I want to briefly speak of the relationship between our two great countries, India and the United States.

The logic of an enhanced strategic relationship between my country and yours is crystal clear, beginning with a harsh geopolitical reality: You live in a tough neighborhood and need us; we, in turn, need all the friends we can muster in your geographic sphere. It seems very timely that we overcome the history that has separated us and begin working more closely together.

During the Cold War, it was the view of many in the United States that India was too closely allied with the Soviet Union. American businesses that looked at India found it afflicted with the legacy of the worst of British bureaucratic administration. (The old joke was that you could never get morning tee times at any Indian golf course because the bureaucrats had locked them up at least until noon).

From an Indian perspective, America seemed too hegemonic. Attempts by U.S. companies to invest and do business in your homeland revived memories of the East India Company.

We viewed each other through the lens of the time and against a background of our own histories, with suspicion.

But the (Berlin) Wall came down, the economy has been globalized and cyberized, and new threats to security have arisen, many of them from nonstate actors or forces who operate from within failed states to inflict damage elsewhere. This is a time for like-minded people to unite and work together.

We are like-minded in that we are democracies. But tonight we celebrate something even more fundamental. My reading of India is that, like in the U.S., your country men and women are more pragmatic and business-oriented than they are ideological or inherently bureaucratic.

The recent election of Prime Minister (Narendra) Modi offers the promise of making this abundantly clear. He was, after all, the chief minister for over a decade of the Gujarat, the most probusiness state in India. And almost every U.S. business leader I know has heard of Ratan Tata’s experience when he looked to Gujarat for an alternative to the frustration of his attempt to build a new car factory in West Bengal. As I understand it, Mr. Tata went to see Minister Modi, had a handshake deal in 30 minutes, and in 14 months the new factory was up and running. That almost makes Texas look like California by comparison!

So Mr. Ambassador, we are all watching for this first prime minister born since Independence to work his probusiness, nonbureaucratic, can-do spirit upon the whole of India. It is in America’s interest for India to thrive. We wish Prime Minister Modi, the government you represent with such distinction, and the Indian nation the very best of luck.

That is some marketing. One would expect such a speech from Texas Governor not Dallas Fed President.

How Yellen has become like a Hindu Goddess:

As you can see from this graphic, unemployment has declined to 6.2 percent, and the dynamics of the labor market are improving. At the Federal Open Market Committee, where we set monetary policy for the nation, we have been working to better understand these employment dynamics. This is no easy task. Bill Gross, one of our country’s preeminent bond managers, made a rather pungent comment about our efforts. He noted that President Harry Truman “wanted a one-armed economist, not the usual sort that analyzes every problem with ‘on the one hand, this, and on the other, that.’” Gross claimed that Fed Chair (Janet) Yellen, in her speech given recently at the Fed’s Jackson Hole, Wyo., conference, introduced so many qualifications about the status of the labor market that “instead of the proverbial two-handed economist, she more resembled a Hindu goddess with a half-dozen or more appendages.”[2]

Whether you analyze the labor markets with one arm or two, or six or 19, the issue is how quickly we are approaching capacity utilization, so as to gauge price pressures. After all, a central bank is first and foremost charged with maintaining the purchasing power of its country’s currency. Like most central banks around the world, we view a 2 percent inflation rate as a decent intermediate-term target. Of late, the various inflation indexes have been beating around this mark. Just this last Friday, the personal consumption expenditure (PCE) index for July was released, and it clocked in at a 1 percent annualized rate, a pace less than the run rate of April through June.

Does this mean we are experiencing an inflation rate that is less than acceptable? I wonder. At the Dallas Fed, we calculate a trimmed mean inflation rate for personal consumption expenditures to get what we think is the best sense of the underlying inflation rate for the normal consumer. This means we trim out the most volatile price movements in the consumer basket to achieve the best sense we can of underlying price stability. In the July statistics, we saw some of the fastest rates of increases in a while for the largest, least-volatile components of core services, such as rent and purchased meals.[3] So the jury is out as to whether we have seen a reversal in the recent upward ascent of prices toward our 2 percent target.

Interesting comparisons..

However, Hindu Goddesses with multiple hands are seen destroying some evil. In this case the evil is really unemployment and weak economy. Can Fed chair really do anything about destroying the evil?

As yields of Spanish and Greek Bonds equal US Treasury yields…

September 2, 2014

Christopher J. Neely of St Louis Fed says that despite the yields in two regions converging, risks remain in Europe. This is because bonds are paid in different currencies.


From Abe’s three arrows to Draghi’s three arrows…

September 1, 2014

Nouriel Roubini monikered as Dr Doom suggests that like Japan’s three arrows, Europe also needs its three arrows.

There is one crucial difference though which Dr Roubuini misses. In Japan this was done by PM Abe who could ask both his govt and central bank to participate in the bow and arrow strategy. However, in Europe’s case Roubini credits this shooting to Draghi who can hardly do anything to improve structural growth, take productivity reforms etc. It is the role of govt and not central bank. Moreoever, how does Draghi shoot all these three arrows across its 18 members?

Draghi can just shoot one arrow of more monetary stimulus. Rest it has no say.

It is also interesting to note how little criticism Draghi (% ECB) is getting vs how much criticism Bernanke (& Fed) got for all this QE business.

NGDP targeting is more suited to developing economies..

August 26, 2014

Pranjul Bhandari and Jeffrey Frankel make a case for NGDP targeting in developing economies.

They say NGDP is more suited to developing world:


Forever recession in Europe and how to jumpstart the Eurozone economy

August 22, 2014

Two articles on Europe. One saying how the economy is in a kind of a forever recession. Two, how to jumpstart it.

As the recovery takes hold in the US, Europe appears stuck in a never-ending slump. With the ECB systematically undershooting its inflation target and recent signs that inflation expectations could become de-anchored, the bulk of commentators in the blogosphere are again calling for more monetary actions. Noticeably, some have completely lost hope in the ability of the European institutions to turn this situation around and are now calling for countries to simply break away from the EMU trap. 

The stagnating Eurozone economy requires policy action. This column argues that EZ leaders should agree a coordinated 5% tax cut, extension of budget deficit targets by 3 or 4 years, and issuance of long-term public debt to be purchased by the ECB without sterilisation.

Europe is going through debates which US was going through in 2008/09…


The role of capital controls in Great Depression…

August 22, 2014

Kris James Mitchener and Kirsten Wandschneider  look at the role of cap controls in crises. There have been suggestions that to dampen fin cycle one could also use capital controls.

The authors see how authorities used these controls in Great Depression. The find that these controls were just used for trade purposes:

Capital controls appear not to have been successfully used as tools for rescuing banking systems, stimulating domestic output, or for raising prices. Rather they appear to have been maintained as a means for restricting trade (working alongside or in lieu of restrictions on imports) and repayment of foreign debts. While our analysis suggests capital controls provided little macroeconomic benefit relative to other policies that were implemented in the 1930s, it would be difficult to conclude that they would have no ameliorative effects in other crises if employed with that purpose in mind. On the other hand, the experience of the 1930s suggests capital controls are often implemented with very short-run objectives in mind – to prevent capital flight. If kept in place, however, macroeconomic objectives can end up sharing the stage with other goals of policymakers.

Research on depression and related events continues to be engrossing…

How money is made?

August 21, 2014

Not money as in earnings but money as in money supply.

 and Richard A. Werner say it is mainly created by banks. We usually think it is central banks who create money but that is a fraction of the overall money supply.

Last month, the BRICS countries (Brazil, Russia, India, China, and South Africa) announced the establishment of their own development bank, which would reduce their dependence on the Western-dominated, dollar-focused World Bank and International Monetary Fund. These economies will benefit from increased monetary-policy agency and flexibility. But they should not discount the valuable lessons offered by advanced-country central banks’ recent monetary-policy innovation.

In June, the European Central Bank, following the example set by the Bank of England in 2012, identified “bank credit for the real economy” as a new policy goal. A couple of weeks later, the Bank of England announced the introduction of a form of credit guidance to limit the amount of credit being used for property-asset transactions.

Before the financial crisis hit in 2008, all of these policies would have been disparaged as unwarranted interventions in financial markets. Indeed, in 2005, when one of us (Werner) recommended such policies to prevent “recurring banking crises,” he faced vehement criticism.

This March, however, the Bank of England acknowledged the observation that he and others had made – that, by extending credit, banks actually create 97% of the money supply. Given that a dollar in new bank loans increases the money supply by a dollar, banks are not financial intermediaries; they are money creators.

They should have looked at India’s monetary policy. We always had credit playing an important role in mon pol.

Further, govt should stop issuing bonds and instead borrow from banks:

In general, economic growth depends on an increasing number of transactions and an increasing amount of money to finance them. Banks provide that finance by extending more credit, the impact of which depends on who receives it. Bank credit for GDP transactions affects nominal GDP, while bank credit for investment in the production of goods and services delivers non-inflationary growth.

The problem lies in bank credit-for-asset transactions, which often generate boom-bust cycles. By extending too much of this type of credit, banks pump up asset prices to unsustainable levels. When credit inevitably slows, prices collapse. As the late-coming speculators go bankrupt, the share of non-performing loans on banks’ balance sheets rises, forcing banks to reduce credit further. It takes only a 10% decline in banks’ asset values to bankrupt the banking system.

With an understanding of this process, policymakers can take steps to avert future banking crises and resolve post-crisis recessions more effectively. For starters, they should restrict bank credit for transactions that do not contribute to GDP.

Moreover, in the event of a crisis, central banks should purchase non-performing assets from banks at face value, completely restoring banks’ balance sheets, in exchange for an obligation to submit to credit monitoring. Given that no new money would be injected into the rest of the economy, this process – which the US Federal Reserve undertook in 2008 – would not generate inflation.

In order to stimulate productive bank credit – and boost the effectiveness of fiscal policy – governments should stop issuing bonds, and instead borrow from banks through loan contracts, often available at lower rates than bond yields. This would bolster bank credit and stimulate demand, employment, GDP, and tax revenues.

Some lessons from history:

During the Great Depression of the 1930s, Michael Unterguggenberger, the mayor of the Tyrolean town of Wörgl, performed an experiment. In order to reduce unemployment and complete much-needed public-works projects, he hired workers and paid them with “work receipts” that could be used to pay local taxes. With the local authority effectively issuing money for work performed, the local economy boomed.

The central bank, however, was not pleased, and decided to assert its monopoly over currency issuance, forcing Unterguggenberger to scrap the local public money and causing Wörgl to fall back into depression. Some 80 years later, the English city of Hull has begun to implement a similar scheme, using a digital crypto-currency that is, so far, not prohibited by law.

The unfettered creation of money by large private banks has generated overwhelming instability, undermining the fundamental principle that money creation should serve the public good. This does not have to be the case. By implementing safeguards that ensure that credit serves productive and public purposes, policymakers can achieve debt-free, stable, and sustainable economic growth.

Broadly the idea is the same. Throw the money at the economy. Just that agency throwing it can differ. It can be govt., central banks or in this case as authors suggest banks can do the job better..

Central banks and the “Salvador Dali Effect”

August 20, 2014

Dante Bayona of Mises Institute has this interesting analogy comparing central banks to a Spanish artist Salvador Dali.

Both are signing checks assuming they are not going to be presented to the bank for payment:


Global Economy’s Groundhog Day..

August 8, 2014

Ashoka Mody takes a stab at current economic thinking and asking why IMF keeps getting its economic forecasts wrong.



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