Archive for the ‘Central Banks / Monetary Policy’ Category

Distribution and management of currency and coins in US..

June 12, 2014

Louise L. Roseman of Fed gives a nice speech sharing insights on how currency and coins are distributed in US economy.

Fed plays a larger role in currency management with US mint managing the coins (much like India):


How far is the FOMC from its goals?

June 10, 2014

St Louis Fed President James Bullard has a nice ppt on the question.

He says FOMC has rarely been closer to its goals. But still the mon pol is not as per the achieved goals as uncertainty remains. The committee faces classic challenge now of exiting from its easy policy. How best it achieves these goals would be another round of test for the central bank..

Arguing for an inflation target of 4% in struggling advanced economies

June 10, 2014

Once again the talk for having a higher inflation target for troubled advanced economies has come up. Paul Krugman again raised the idea in a recent ECB symposium. Ken Rogoff discussed it further along with his idea of central banks replacing paper currency with dig currency (have to still read the main idea).

Laurence Ball now at IMF looks at the 4% idea in this detailed paper. He does not understand what is the fuss about and why central banks cannot raise the target to 4%.

First some broad theory:


What if Texas had its own central bank?

June 9, 2014

Well, interest rates would have been much higher. Actually, they do not really need a new central bank. Dallas Fed could be made into one and the action would be the same.

Dallas Fed econs in this note compare the Fed policy  with a Texas central bank policy:

Computing a Taylor rule rate for Texas offers possible insight into the interest rate path a central bank of Texas Would a Texas Central Bank Set Rates Higher? By Janet Koech and Mark A. Wynne T might set in response to regional economic conditions. The implied monetary policy rate for Texas (Chart 1) shows a very different path than that set by the Federal Reserve’s rate-setting FederalOpen Market Committee (FOMC).

While the federal funds rate has been near zero for several years, a monetary policy calibrated to  Texas’ economic conditions would have calledfor an interest rate of zero for at most one year and rates of about 2 to 3 percent in 2011 and 2012. Indeed, for the entire period since the mid-1990s, economic conditions in Texas would have called for interest rates higher than the prevailing monetary policy rates. Conversely, as Texas recovered from the 1980s recession, it would have preferred interest rates lower than those set by the FOMC through the early 1990s.

Hmm… further they show that much of this difference in int rates is because of differences in output gap. Texas has a much higher GDP growth than US econ but inflation levels are near similar.

Ever since the EZ crisis, such research has become very fashionable. Why did European members adopt ECB as their central bank? If they continued with their own central banks, the adjustments would have been easier leading to a better econ performance.

Maybe econs should now call such research as econ geography of central banking. Whether it makes sense to have a central bank for the whole nation or some states should be allowed to have their own? Clearly there are large benefits of having one central bank for the whole country but what if econ performance differs between state and nation for  a prolonged period? This is what is happening in case of US and Texas.

I mean if instead of having one RBI, what if we had different central banks for each state? The policy across states could be much different. The interest rates could be lower for laggard economies and higher for better performing economies. Or interest rates could be higher for states having higher inflation and so on..

It will be an interesting thing to study actually. How do central bank rates percolate to the state level?

What is the use of central banks? Lessons from history

June 9, 2014

As this blog keeps saying, econ history is not just back in discussions but leading to some very interesting debates and conferences. It is just that the profession somehow has to start even teaching at rigorously.

Norges Bank recently held a conference titled — Of the uses of central banks: Lessons from history.

Conf.program has papers from all who’s who of econ and monetary history.

I just read this paper by Andy Haldane (of BoE) and  Jan Qvigstad of Norges Bank. They go specifically into history of BoE and Norges Bank and then extend it to central banking in general. They show how central banks have actually evolved  overtime and roles have changed/modified with time.


Capital controls in the 21st century..

June 6, 2014

Barry Eichengreen and Andrew Rose of UCB revisit the idea of capital controls (detailed pdf here) from a defacto angle i.e. how countries actually go about implementing them.

The broad idea is countries avoid capital controls as they may send a bad signal. The first line of defence is standard macro policy:


ECB’s several measures to reshore the economy..

June 5, 2014

AS the pressure piled on, ECB doing something was on expected lines.

  • It has set the deposit rate at negative 0.1% (like India’s reverse repo rate where banks park funds with central bank). So if a bank now parks any funds with ECB, it will actually have to pay ECB. FAQs are here
  • After LTRO, we have TLTRO (Targeted LTROs). Were previous ones untargeted?
  • There are plans to buy Asset backed securities in future. (It is called as Intensification of preparatory work related to outright purchases of ABS..

The game of central banks keeps becoming bigger and messier…

Thinking about financial stability issues…

June 5, 2014

Luci Ellis, Head of Financial Stability Department at RBA summarises the several issues on fin stab in this speech.

He even uses cartoons to explain his various ideas. The cartoon on difference between mon stab and fin stab is a nice one. 

A good read..


Comparing Fed-Markets love affair to Disney movies

May 21, 2014

An interesting piece by Mohd. El Arian.

He connects this whole Fed-financial markets love affair to Disney movies. In both, the relationship so far has been to make sure the end is happily ever after. However, a recent Disney movie Frozen did not go the beaten path. He says Fed should do the same thing as well:


What makes Switzerland an international finance centre?

May 20, 2014

A nice speech by Thomas J. Jordan, Chairman of the Governing Board Swiss National Bank.

He points to historic reasons that led to formation of Swiss IFC and how it can maintain it in future.



History of Netherlands Central Bank and future outlook for central banks (which is highly confused)…

May 8, 2014

A really nice speech by Klaas Knot head of De Nederlandsche Bank, the central bank for Dutchland.

The speech is given celebrating 200 years of the bank, so there is some history to it. Knot then also looks at the future outlook for central banks in future. How DNB evolved from being a sleeping old lady to guardian of the gilder is an interesting story which I guess is common across most central banks.

He says neglect of financial stability as a goal is coming to haunt central bankers. After all the original purpose for most central banks was fin stability which then moved to price stability. With FS, there are two issues:


How has Canada managed to always exempt itself from financial crises?

May 6, 2014

Renee Haltom of Richmond Fed has a nice short note on the topic. Though much was covered by Bordo et al in this paper and the Halton summarises their idea broadly.

The main thing is that Canada’s banking system evolved very differently. The banks were large and relatively well divsrsfied which meant that if one sector went down, the banks would remain fine. In Us banks were much smaller and large in number as there was restriction on branching in other states.  Even Fed did not address this issue of unit banking and it went all the way till 1990s when this restriction was removed.

Other things in Canada were:


The last crisis before the Fed came into being..

May 2, 2014

An interesting piece of monetary history by Tim Sablik of Richmond Fed. We usually talk about the 1907 panic and great depression to question the Fed’s role, not really read on the crisis which happened just as WW-I broke out. The interesting thing is Fed was just set-up in 1913 and was not ready to fight the crisis. This led to some innovations by Treasury to intervene and stabilise the markets. The author says if this experience was learnt before, may be there would have been no need for Fed. After all Fed was formed to address financial stability amidst huge opposition for setting a centralised institution to manage money. The background:

You gentlemen are to form the bulwark against financial disaster in this nation,” Treasury Secretary William Gibbs McAdoo told the members of the first Federal Reserve Board as they took their oath of office on Aug. 10, 1914. The seven men — including McAdoo, who served as the first chairman of the board — would not have to wait long for their first test. Less than two months earlier, Austria’s Archduke Franz Ferdinand and his wife were assassinated by a Bosnian-Serb nationalist, plunging Europe into war.

The United States would also be swept up in the conflict, but its first battles were waged in financial markets. European powers needed money to finance fighting, and that meant gold. At the time, the United States was a debtor nation and a minor financial power, but the warring European nations could no longer trade with each other. They quickly began selling their holdings on the New York Stock Exchange, converting dollars to gold.

In June and July, the United States had nearly $70 million in net gold exports. The effect of several European nations calling in their debts simultaneously created a significant external drain on U.S. gold reserves, threatening to place constraints on banks’ ability to lend domestically.

It would have been a golden opportunity for the nascent Federal Reserve to save the day. According to 19th century British economic writers Henry Thornton and Walter Bagehot, a lender of last resort could counter such a threat by raising interest rates to stem the outflow of gold to foreign nations while lending freely to sound financial institutions to satisfy domestic demand for money. The Federal Reserve System had the capacity to do just that, but there was one problem: It wasn’t actually up and running yet.

Basically McAdoo changed the rules of the game which allowed banks to get liquidity and step out of crisis:

Without the Fed to provide liquidity to sound institutions, McAdoo had to turn to the Aldrich-Vreeland Act. Loans under the Act would not be bailouts, as any bank seeking emergency currency would have to put up full collateral and pay increasing interest to ensure the funds would be retired quickly after the crisis passed.

McAdoo had actually invoked the Act to offer emergency loans the previous summer, when legislation to reduce tariffs  prompted a decline in stock prices as businesses worriedabout greater foreign competition. Although no banks applied for the emergency currency, the stock market reacted favorably to the announcement. Almost exactly one year later, McAdoo made a similar announcement: “There is in the Treasury, printed and ready for issue, $500,000,000 of  currency, which the banks can get upon application under that law.”

This time, banks were keenly interested in obtaining the currency, but there were some problems. The Act allowed national banks to apply for the emergency loans only if they had already issued national bank notes equal to at least 40 percent of their capital. The restriction was intended to prevent overuse of the currency, but it meant that many major  banks could not participate at all. For example, National City Bank in New York had $4 million bank notes in circulation in 1913 — only 16 percent of its capital. Additionally, state-chartered banks and trusts could not borrow under Aldrich-Vreeland, mirroring the lack of access that hadescalated the Panic of 1907.

Recognizing the potential problem, McAdoo visitedCongress the same day he invoked the Act, asking legislators to remove the restrictions.“If depositors thought that certain institutions didn’t have the currency, there might have been a run on those institutions. So the fact that the major New York bankscould not have qualified for Aldrich-Vreeland money could have been an impediment,” says Silber. 

Once Congress amended the Act, the emergency notes flowed to banks quickly (see chart). Just one week after McAdoo’s announcement, banks had requested $100 million in Aldrich-Vreeland currency, and large trucks delivered bags full of the preprinted notes to Treasury offices around  the country. ..

It basically boils down to providing liquidity which freezes suddenly.. In the end:

Other countries mitigated panics with systems very different from the one the United States ultimately adopted (see “Why Was Canada Exempt from the Financial Crisis,” p. 23). Acentral bank fulfills many other functions in addition to panic prevention, but if panics were the only problem, the success of Aldrich-Vreeland suggests that there may have been alternatives to the Fed.

Nice bit from history..

A review of History of RBI – 1982-97

April 30, 2014

Prof TT Ram Mohan of IIM Ahmedabad has reviewed the recently released history of RBI from the period 1982-97. One just wishes that we had far more coverage and research on monetary history. India seriously needs econ historians who help understand things apart from the official history alone.

The author begins with an interesting take:


Currency management in India – issues and challenges…

April 29, 2014

One wishes central banks talked more about other issues they tackle other than mon policy.

This is a really interesting speech from RBI Dep Guv. Dr KC Chakrabarty (slightly dated) on this really interesting issue of currency management. People can choose to ignore what central banks do in mon pol but currency policy  is something  which no one can choose to ignore. Any policy change with respect to currency issues is followed and understood by all.

The speaker touches on several issues in currency management in India:

  • Demand and supply of currency notes – both process and trends are discussed
  • Demand and supply of factors that lead to currency production
  • Security and counterfeit issues

Useful stuff. May be with digital currency etc. one looks at other kinds of currency management challenges in future. 

Are active and vibrant financial markets safe too?

April 28, 2014

Atlanta Fed hosted this annual conference on financial markets.

Came across this interesting paper (ppt here) by Prof. Joseph Stiglitz. In the usual Stiglitz spirit and appraoch, he crticises this whole rise of active and vibrant markets:


A year without dividends and profit distribution – what are the reasons?

April 25, 2014

The title of the post will most likely suggest that it is about some company. Well it is, except that the company is Swiss National Bank, the central bank of the nation.


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:


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:


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.




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