Archive for the ‘Central Banks / Monetary Policy’ Category

RBI’s Flip Flop policy and Dr. Rajan’s bogey game continues..

January 28, 2014

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.


Should Fed abandon targeting fed funds rate and move instead to reverse repo rate?

January 27, 2014

An interesting paper by Joseph E. Gagnon of PIIE and Brian Sack of D. E. Shaw Group.

They say targeting Fed funds rate will be ineffective as an when Fed decides to exit from easy policy. A better tool would be reverse repo rate which will help Fed absorb liquidity:


RBI’s other MPC problem – Minting, Printing and Counterfeiting..

January 27, 2014

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 :


Bernanke’s Monetary Mess and why he deserves zero stars on the Michelin guide

January 24, 2014

Prof Steve Hanke of Johns Hopkins University thinks experts are being kind to Bernanke by giving him grades from B to C.

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…

Cutting the Gordian Knot or splitting hairs – the debate about breaking up the banks

January 22, 2014

Superb speech by Dr Andreas Dombret, Member of the Executive Board of the Deutsche Bundesbank.

He starts with this tale of Guardian knot:


Indian economy and policy during financial crisis (2008)

January 20, 2014

Much is written and known. Still it is useful to keep revising what went on.

Deepak Mohanty of RBI summarizes how Indian policy reacted to global financial crisis. He begins showing how Adv econ central banks intervened during the crisis. Then the impact on EMEs and finally on India.

Like EMEs, India suffered two rounds of crisis – one in Sep-2008 as crisis started and two in May-2013 when the word taper buzzed. In both, the policy responses were different. In the first, India had huge cushion given the robust economic conditions. In the second, the conditions were not as great:


From Helicopter Ben to Ambassador Ben..

January 15, 2014

Arvind Subramanian pays tribute to Ben Bernanke as the latter moves put of his role as Fed chair.

He says historians will look at Fed under Bernanke in due course of time. However, that is just one aspect. He played a stellar role as an American leader in global policy amidst chaotic and ineffective political leadership:


Similarities between Eurozone’s today problems and Scotland’s tomorrow problems

January 10, 2014

Nice article by Prof. Brigitte Granville of University of London. A while back I had pointed to this really interesting article on how Scotland is contemplating breaking from UK.

She compares how Scotland is likely to face problems of whether to maintain its monetary union with England. This is sinialr to the questuons the GIIPS are asking of the EZ monetary union.

She says despite the advantages of keeping Pounds as its currency, EZ crisis shows it is best to have your own currency.


Janet Yellen’s five challenges..

January 10, 2014

As the lady has been appointed as Fed head, one should look at the issues ahead for her.

David J. Stockton of Peterson Institute for International Economics has this nice piece listing her 5 challenges:


Why Canadian banks fared well during the 2007/2008 crisis?

January 9, 2014

Econs have pondered over why Canadian banks have remained stable despite multiple crises affecting global economy. And things did not change  in 2007/08 crisis as the banking system remained stable.

This paper by BoC econs Neville Arjani and  Graydon Paulin look at the reasons for stability during recent crisis:


Is Turkey going to be the next sudden stop– A case of Financial and Political bubble..

January 7, 2014

Prof. Sebnem Kalemli-Ozcan of University of Maryland has this nice piece in voxeu.

She has this interesting thing on political bubbles which rhymes with India story:


Latvia becomes the 18th member to adopt Euro..

January 7, 2014

Well despite crises and criticism, membership of  Euro club keeps rising. Latvia is the latest member which adopted Euro on 1-Jan-14. That makes the number of Euroarea members to 18. There is a transition process happening in the country with different deadlines for different users.

This has changed the capital structure of ECB, as members share is reduced to make way for Latvia.

The club moves on unfazed really..


Economics at the Federal Reserve Banks — NY, Boston and Minneapolis

January 6, 2014

Nice speeches by the Presidents of the three Regional Feds – New York, Boston and Minneapolis. All three were invited recently to the Annual American Association meeting – 2014.

Minneapolis Fed explains how economists have different jobs in Fed vs Universities:


Central banking before and after the crisis

January 2, 2014

I must have written many posts in the past as well in different ways, on the topic. But the research keeps coming.

Frederic Mishkin of Columbia chips in with his views on the topic.


For goodness’ sake, this Italian is ruining Germany..

December 31, 2013

Says ECB chief Mario Draghi in this year end interview with Der Spiegel.

He respond to this often criticism of Germans on ECB policies:


Alan Greenspan is still trying to justify his bad decisions..

December 27, 2013

Prof. Robert Solow reviews (still active at 89!) Alan Greenspan’s recent book – Map and territory..

Prof Solow says Herr Greenspan has still not learnt from his mistakes. He starts with some +ves in Greenspan’s career. And then gets to the minuses:

On the minus side, Greenspan’s reputation has suffered from two big mistakes. The first was his failure to see the importance of the housing bubble and the dangerous vulnerability of the financial mechanism that supported it. Had he done so and punctured the bubble promptly, the economy would have been spared the prolonged weakness that it is still suffering. The second was his deep-seated conviction that the unregulated financial system was self-stabilizing, that the self-interest of all those clever and experienced participants with a lot of their wealth at stake would keep the accumulation of risk within tolerable bounds. So he promoted deregulation and financial consolidation (as did others, of course) and, when this simple faith proved wrong, allowed disaster to strike. I think that the first mistake may be partially excusable, but the second mistake was a catastrophe, and it was not an accident.

Hindsight leaves no doubt that it would have been a great idea to prick the housing bubble early. But imagine that Greenspan and the Fed had done so. Suppose they had tightened credit, pushed interest rates higher, put an end to the housing boom, and thus—very likely—created a standard recession like so many of the others. They would surely have been pilloried for destroying a nice prosperity in midstream and creating painful unemployment. And for what? To prevent a later financial crisis? But no financial crisis would be actually visible, not in this version of history. How could anyone know that one had really been averted? It was still a mistake to have let the bubble continue, blandly claiming that it would be easier to pick up the pieces later on. It stands as a bad grade in the Greenspan report card. But it was not simply a matter of foolishness and ideological fantasy.

The second mistake, the bigger one, was both. An unregulated financial system, no matter how many smart people have megabucks in the game, can easily become over-leveraged and then fatally underestimate or ignore the amount of risk that financial institutions have taken on and the depth to which their risky balance sheets contaminate each other in hidden ways. When the edifice starts to collapse, central bankers and other policymakers may be left with the choice between bailing out the very people and institutions whose behavior created the crisis and letting the edifice collapse, doing even more harm to millions of people who played no active part in the disaster. The point is that this was not just a bad hair day, or one of those cases where nature presents nothing but bad options. It was a case of bad ideas coming home to roost. Greenspan was a prominent opponent of financial regulation, and it cost him (and us).

Further, the recent book shows he has not learnt:

Greenspan’s new book is obviously intended to show that his errors were only partial and that he has found useful ways to correct them, and thus to refurbish his reputation as oracle-in-chief. It fails. His argument is thematically vague and analytically weak. In the end it sounds like the same old right-wing conviction that the unregulated or very lightly regulated market knows best.

Begin with the book’s title and subtitle. The analogy between a map and a theory is a useful device. Fathers-in-law are always pointing out that any economic theory ignores this or that obvious fact about the real-world economy. But a map on the scale of one to one is precisely useless. A map on the scale of one to 500,000 is useful for most purposes, but you cannot expect it to show every bend in the road or every dirt track leading north. Greenspan does not seriously discuss the goals and the limitations of reasoning about the economy. He talks some about his early life as a forecaster, and he is clear that economic policy has to be based on forecasts: policies undertaken now will have effects in the future, and sensible economic policy usually has long-run goals anyway. But the reader of this book will learn little or nothing about the process of forecasting other than that it is difficult and that the results are always uncertain. Duh.

The new Greenspan concedes that the decisions made by participants in the economy are not always governed by rational adaptation to given facts, and that this failure leads to unpredictability and instability. Instead the economist-forecaster-policymaker has to take account of “animal spirits.” (The phrase was introduced into economics by Keynes and was recently revived by George Akerlof and Robert Shiller.) This is a step in the right direction, but even here Greenspan does a poor job. He rattles off a long list of what he regards as “inbred” propensities of people and groups to behave irrationally, or at least non-rationally, in economic matters. They include fear, euphoria, aversion to risk, preference for early rewards over larger later ones, herd behavior, dependency on peers, a bias toward dealing with people close to home, competitiveness, reliance on a code of values, a bias toward one’s relatives, self-interest, and self-esteem. That comes to twelve propensities, some broad, some narrow, some vague, some precise, some important, some less so, and Greenspan says that there are more of them.

He questions the use of regressions in the new book and couple of other things as well..

In the end:

Students of economics are taught about the efficiency of competitive markets, and they are also taught that judgments about “social welfare” or justice have to come from some other source. Here I have to introduce a question that I am not the best person to discuss. It is sometimes claimed that Alan Greenspan is a closet follower of Ayn Rand; he certainly had an early association with her circle. I got through maybe half of one of those fat paperbacks when I was young, the one about the architect. Since then I have found it impossible to take Ayn Rand seriously as a novelist or a thinker. In the past I have gone on the assumption that Greenspan’s ideas about economic life are his own, just what is contained in his writings, and the Ayn Rand question does not arise. But now there is this book, with its particular misinterpretation of mainstream economics, which might be thought to reopen the question if anyone is interested.

Anna Rosenberg Hoffman once said to me, when I was prattling on about what “the data” said: “What are you going to believe, the data or your eyes?” A hard choice. The Alan Greenspan I admired was a pragmatic central banker who was able to believe both the data and his eyes and to ignore the people who already knew the answer without looking. The author of this book makes a show of both, but not really. His eyes are too often closed and he seems to be listening to another voice, with quite conventional opinions, coming from somewhere stage right. 

How quickly the world of Alan Greenspan crashed…The same ideas were praised by most (not Prof. Solow hopefully) before 2007  and are being questioned now. though, it is a different story that his ideas are still alive and kicking..Though no one wants to be called a la Greenspan..

What drives differences in GDP growth between US and Japan –labor markets ..

December 26, 2013

Juan M. Sánchez and Emircan Yurdagul of St Louis Fed have this interesting short article on the topic.

They start with the much known observation that US has grown faster than Japan in 1990s. What are the reasons? As per them main reason is decline in hours of work in Japan:


India’s Inflation has hit school fees the most since 2004…

December 26, 2013

An interesting piece in ToI today. They point to a CSO report which looks at how retail level prices have risen in rural areas from a historical perspective. I did check CSO’s website and could only see these reports which is for randomly selected periods from Oct 2011 onwards. So not sure where the report is.

And this report talks about school fee only in rural areas. Imagine the school fee inflation in urban areas where it is faster than the taxi meter:


Bitcoin like a currency or like a speculative investment?

December 23, 2013

David Yermack of New York University has this interesting paper on Bitcoin

He looks at various features of bitcoin and compares it to some dominant currencies. He says there is huge volatility and it resembles more like a speculative investment and not currency:

Motivated by Bitcoin’s rapid appreciation in recent weeks, I examine its historical trading behavior to see whether it behaves like a traditional sovereign currency. Bitcoin has exchange rate volatility an order of magnitude higher than the volatilities of widely used currencies, undermining Bitcoin’s usefulness as a unit of account or a store of value. Bitcoin’s daily exchange rates exhibit virtually zero correlation with bona fide currencies, making Bitcoin useless for risk management purposes and exceedingly difficult for its owners to hedge. Bitcoin also lacks access to a banking system with deposit insurance, and it is not used to denominate consumer credit or loan contracts. Bitcoin appears to behave more like a speculative investment than like a currency.

It is still early days and one would get such results as really bitcoin value has been highly volatile. Comparing it to currencies ike USD, Euro etc is just not right. I mean how can a currency match these giants in such little time that too without any political backing.

But still nice summary of the whole debate. It is these parameters on which bicoin is likely to be judged in future..

Which countries were impacted more by Fed taper talk?

December 20, 2013

Well taper has finally arrived minus the hoopla which came with when the word taper. Taper was mentioned in May-2013 by Herr Bernnake and finally not done in Sep 2013 policy.

Barry Eichengreen and Poonam Gupta have done this really useful research ( a longer version of research here)evaluating which countries were impacted the most in the period May-2013 and Sep-2013. Ever since it was released yday, this voxeu article has been mentioned in most places, much like most Prof. Eichengreen work.

The results are quite surprising actually:



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