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:

Differences between Lender of Last Resort, market maker of last resort and global lender of last resort

An important speech by Mr Hiroshi Nakaso, Deputy Governor of the Bank of Japan. Apart from the topics listed in the title of the post, the speech discusses things like financial trilemma, role of monetary and financial stability policy of central banks etc.

He distinguishes the various LLRs:

The purpose of the LLR function is to prevent the manifestation of systemic risk, that is, the risk that a problem in one part of the financial system spreads to the whole system in a  domino-like fashion. The classic description of systemic risk focuses on contagion, where a  bank run could affect other domestic banks in the system through a decline in funding liquidity.

In contrast, the recent financial crisis revealed that, in the light of deepening financial markets and globalization, systemic risk can (a) be magnified through mutually reinforcing declines in funding and market liquidity; and (b) spill over across national borders and have a global dimension. Central banks’ LLR function has evolved in response, encompassing the roles of “market maker of last resort” (MMLR hereafter) and “global lender of last resort” (GLLR hereafter).

Hmm…MLLR was done via unconventional monetary policy and GLLR by swap lines:

He points to new issues regarding LLR:

The transmutation of the LLR function of central banks raises a set of new issues. In the following, focusing on MMLR and GLLR, I will discuss (a) the relationship between monetary and financial stability policies, (b) the limits to liquidity provision and support by governments, (c) the financial trilemma and cooperation among central banks, and (d) the relationship between foreign reserves policy and the GLLR function.

In financial trilemma, he points to this financial trilemma (Schoenmaker’s trilemma):

With regard to the stability of the financial system under deepening globalization, an important perspective is provided by Schoenmaker: the “financial trilemma” (Chart 5).2 That view holds that it is impossible to simultaneously achieve financial stability, financial integration (capital mobility), and national financial policy. Let me apply this framework to the LLR function.

If, against the background of deepening global financial integration, the LLR function of the central bank is confined to providing liquidity in the domestic currency – that is, its role is limited to national financial policy – stability of the global financial system cannot be achieved. Under a different combination, if financial stability is to be pursued with national financial policy (i.e., domestic currency LLR), financial integration – globalization – must be curbed through the regulation of capital flows. Alternatively, in order to attain financial stability under global financial integration, some sort of supra-national financial policy is necessary, including an international framework for financial regulation and supervision. 

GLLR realized through central bank cooperation might be regarded as an element of the safety net in the broad context of the third combination. There are many proposals for an international safety net other than central banks acting as GLLR. For example, one suggestion calls for the establishment by national central banks of credit lines in domestic currencies to the IMF – the IMF will then manage the money and provide liquidity to, and monitor the policies of, central banks in need of liquidity. Another scheme attempts to make use of SDRs. There is also a plan to collectively manage a pool of national foreign exchange reserves. All of these will require an agreement on cost allocation before they can become a reality.

He says central banks need to figure both  - Mundell’s trilemma and Schoenmaker’s trilemma. In both capital mobility/financial integration is the common leg of the trilemma:

We must also pay attention to the fallacy of composition in the global financial system. In the context of ever-growing global financial integration with free capital flows, individual central banks, in their pursuit of maintaining the stability of their domestic economies, have the choice of either conducting an independent monetary policy or focusing on the exchange rate (i.e., maintaining a fixed exchange rate). Whatever choice individual central banks make for themselves, the effects of their policies do not necessarily add up globally to guarantee the stability of the global economy (Chart 9).

For example, if there are externalities to stabilization policies, such policies are likely to be synchronized across countries, which may amplify fluctuations in the world economy and destabilize the global financial system. The policy issues confronting central banks in this problem of “fallacy of composition” are probably more intractable than the trilemma described by Robert Mundell. Monetary policy in a globalized economy may also be affected by feedback loops in unexpected ways, since nationally granular foreign reserves policies (accumulation of precautionary reserves against capital flight) or national financial policies could amplify international capital flows or concentrate capital flows into economies with the laxest regulations. Such interactions between Mundell’s and Schoenmaker’s trilemmas would complicate the policy conundrum.

He says we shouldn’t say this time isn’t different and feel helpless:

“This time is different” has become synonymous with our follies. Nevertheless, we should not fall into the trap of defeatism. There are many things we can do to reduce the chances of another crisis. Although the bar is high for central banks in building up ideal and foolproof arrangements, we know that “even the longest journey begins with a single step” – a Japanese proverb equivalent to “Rome was not built in one day.” It is important to enhance coordination and cooperation among central banks and governments wherever possible, and such steps taken, however small, will enable us to eventually reach a goal that seems to be far away.

Hmm..

This trilemma thing is really interesting. Before crisis:

• Mundell side: most econs adopted indep. mon pol and allowed free capital. This meant exchange rate was left to markets..
• Schoenmaker side: most econs adopted indep. national financial pol and allowed free capital. This meant financial stability was left to markets or was assumed all would be well as long as capital was free…

This choice was tested post-crisis.

• On Mundell, central banks were seen as defending currencies (openly or selectively) and trying to keep foreign capital volatility away.
• On Schoenmaker, we had problems of plenty as far as financial stability was concerned..

Now if we include Rodrik’s political trilemma or Europe’s trilemma, capital mobility plays a central role. It will be an interesting exercise to have a more comprehensive understanding of capital flows and its role in both national and global economies..

Efficacy of Monetary Policy Rules in India…

A nice speech by Deepak Mohanty on the topic.

I am coming directly to his analysis of using Taylor rule for Indian economy:

On the Ethics and Economics of Finance (Amartya Sen Edition)..

Thanks to this super speech from BoI Governor Iganzio Visco, I came across this lecture from Amartya Sen. It was the inaugural Paolo Baffi lecture  organised by Bank of Italy. It is a classic and should be made part of economics/finance reading list in college.

Prof Sen discuses what he does best – Philosophy. What is an absorbing read is linking it to ethics in finance. With much of finance in mess, this one helps connect critical on may ideas.

As PDF text cannot be extracted. Here are the key ideas:

If not for price stability, Central banking is nothing but mythology….

Gerald O’Driscoll of Cato writes this really strongly worded article. Like most Cato Institute econs, he  does not really believe in central banks.

Infact, most other Cato scholars do not even believe central banks can help deliver price stability. O’Driscoll atleast thinks they can but crticises them for failing to deliver price stability. The rest of the other functions/ideas on C-banks like  lender of last resort, central banks must for market economies, central bank independence etc are just myths:

IMF, social networks and return of political economy…

Social networks is quickly becoming an area of focus. The thinking and research on this has just begun.

Nemat Shafik, Deputy MD of IMF in this super speech  discusses impact of social networks on policy in general and IMF thinking.

I would like to start by looking at the forces that shape the way we communicate today, before turning to what this means for institutions that are involved in shaping economic policy. I will end with a few examples that illustrate what these sweeping changes have meant in practice for the way we at the International Monetary Fund engage with our member countries to support economic reform.

She points how today’s hyper-connected world is shaking the way we communicated:

How many Germans do you need to change a light-bulb?

Not always you see a German policymaker cracking jokes. Well that is the general perception over Germans as well- serious and technocrats.

Here is an interesting speech by Bundesbank chief Jens Weidmann with couple  of jokes:

Why should President of India talk like Prime Minister/Finance Minister?

It was a bitter disappointment to read President’s opening speech ahead of crucial Budget session. I was amused to read some newspapers calling it a signal in

Firstly, the speech was just like any speech from PM/FM etc. It is like reading an Economic Survey of sorts with My Government thrown in between.  My last count showed he used the word My Government 52 times! I mean we know he heads the government. But why mention it so many times?

The speech hardly had any vision or anything beyond praising his govt and lauding its efforts for doing so much for India’s public. Really? What about the several negatives like rampant corruption and several policy errors.  Corruption being mentioned just once speaks volumes.

It is high time that Presidents use such forums to tell what its Government is not doing and should aspire to do. But how can they when they owe their Presidency to the ruling party and its politics. It is a pity that all offices in India are just boiling down to politics and strength of political parties. So you get elected just because of your affiliation with the ruling party.

And we have a President who has actually been a political leader of the ruling party for many decades. One does not expect much from him and that is a serious pity.

We hardly have anyone to hear for inspiration these days…Sad times..

 

Difference between California and Texas…(Funny Story)

Missed this Oct-12 speech by Dallas Fed chief Richard Fisher. His speeches are real good full of anecdotes and fire.

The speech is about how US economy has recovered post-2008 crisis. It seems to be the lone running horse (albeit slowly) in derby race of advance economies. After US economy he looks at Texas. I am skipping all this and  getting to the topic.

Texas has emerged strong from the crisis but California continues to bleed. Why? Here is a story comparing governments in two states:

Economics know-how about financial regulation/stability before the crisis..

Richmond Fed chief Jeffrey M. Lacker gives a useful speech.

He covers what econs knew before the crisis in financial regulation space.

The thoughts could be divided into two schools:As policymakers entered 2007, the economics literature offered them two broad but fundamentally different views of the world — two theories of financial instability. One tends to view market institutions and contracts as relatively fixed and the resulting financial system as inherently prone to the type of instability depicted by the simple model of bank runs. Under this theory, an expectation of government support may be necessary to make crises less likely, although that support necessitates regulatory oversight and constraints on banks to replace the market discipline that is lost when counterparties feel protected by government guarantees.

]In the alternative view, private financial arrangements are themselves adaptable and endogenous. Much of the vulnerability observed in financial markets is itself the induced response of market institutions and behaviors to the expectation of government backstop support in the event of distress. In the absence of that expectation, there would be stronger incentives to seek more robust arrangements.

So on the eve of 2007, policymakers were faced with two broad, competing views on the origins of financial market fragility — either it was inherent in the structure of financial arrangements, or it was induced by expectations of government support.

The US policymakers entered the crisis mainly schooled in the first thought. This led to perverse incentives and too big to fail problem. He of course believed in the second school.

He even discusses the broad research which led to development of these two theories starting from Douglas Diamond and Philip Dybvig theories, mechanism design etc.

He hopes we limit these government interventions and let markets function on their own:

There’s no doubt that the crisis will stimulate research for decades to come. Given the magnitude of the interventions we’ve seen, research that improves financial policy could yield enormous social benefits. In this connection I would note that our most recent estimates at the Richmond Fed are that, as of December 31, 2011, 57 percent of financial sector liabilities benefit from perceived government support. This is up from 45 percent over a decade ago and reflects in part an expansion of implied commitments based on new precedents set during this crisis. In my view, this growth in government support for the financial sector is not sustainable. As economic policy challenges go, I would rate this as second only to the looming federal fiscal imbalance. I sincerely hope we can make progress in the years ahead. 

Nice coverage on financial sector policy research..

 

Interview of Steven Landsburg – The Armchair Economist..

Nice interview of the Armchair economist.

Why did he write the book?

Strong Swiss franc and large current account surplus: a contradiction?

Thomas Jordan, chief of SNB in a speech clarifies this issue. However, as the full-speech is in German we only have to do with the summary in English:

The criticism is that Swiss economy records Current Account Surplus. hence, its currency should appreciate and SNB should stop pegging it at 1.2 per EUR.

Should banking be a Fundamental Right of people?

A nice thought provoking speech from  Dr. K.C. Chakrabarty of RBI.

He says banking is not a fundamental right so far. As banks are expected to provide basic banking services to all. More importantly, they cannot deny the banking services to anyone who asks for it (barring for frauds, crimes etc.):

Linking security to economic growth…

Well a useful speech by the FM. Though, it also suggests whatever is wrong with the current administration. The seeds for current fiscal mess were sowed way back in UPA-I (2004-09).

Being the home minister in first 3.5 years in UPA-II, he knows a bit about security. And as he has mostly handled the finance portfolio as a Minister (whenever his party is in power), he ofcourse knows finance. Infact, I dont think anyone understands finance better than him. Though, most of the time it is about tricks like off-balance sheet bonds in 2004-09 regime which led to lower fiscal deficit. This time it is keeping plan expenditure low and using the cash surpluses generated from lower exp to keep fiscal deficit lower. And then most people forget that the recent fiscal mess which was mainly started due to fiscal stimulus in 2008-09 was allowed under his previous tenure as FM..

First some bit on India’s security:

Why India’s inflation did not dip despite decline in GDP..

Deepak Mohanty tries to unravel this  puzzle.

I take this opportunity to share my thoughts on the topic of inflation which affects one and all. Over the last three years the persistence of inflation in an environment of falling economic growth has come out as a “puzzle”. In my presentation I propose to address the following questions: What do I mean by a “puzzle”? Why do we need to worry about inflation? What is the nature of the current inflation process? How did monetary policy respond to the recent bout of inflation? I conclude with some thoughts on the way forward to achieve price stability.

He cites several factors for inflation persistence despite growth slipping:

How Mauritius changed its sugar industry following Schumpeterian creative destruction..

A nice speech from Rundheersing Bheenick, Governor of the Bank of Mauritius. He speaks on the occasion of Omnicane raising Medium term notes with StanC as its financial partner. It is a big event as Mauritius is looking at developing its orporate bond market. Omnicane is a sugar company in Mauritius.

In the speech, he speaks how Mauritian sugar industry responded to challenges imposed as Mauritius joined WTO:

How Iceland’s recovery from crisis was different…

A super analysis from Már Guðmundsson, Governor  Central bank of Iceland.

He shows how Iceland had a very different experience with respect to policy responses to the crisis and recovery from the same.

First Iceland did not bail out its banks. It could not as banks were nearly 10 times larger than its GDP. What they did instead was to save the depositors and conducted swap facility to provide foreign exchange. So, in the end Iceland averted a sovereign debt crisis which the developed world is facing:

Central Banking and mathematics

A superb speech by Dr KC Chakrabarty of RBI.

He speaks at  The Vivekananda Education Society:

Promoting Retail Investor Participation in India’s Government Bonds ..

Nice speech by RBI Dep Gov. HR Khan on the topic.

Explains why retail participation in G-sec, how G-sec is a decent asset class for retail investors and what RBI is doing to promote retail participation..

Adam Posen’s interesting views on BoJ Independence and Japanese economy…

Adam Posen (earlier at BoE MPC and now back in PIIE) shares his views on the topic (Part – I and Part-II).

Interestingly he says, new Japanese PM Shinzo Abe asking BoJ to stimulate economy is justified: