Archive for August 6th, 2009

World Economic History in 16 pages

August 6, 2009

Gregory Clarkof Univ of California Davis had written a very famous & much discussed book on econ history – A farewell to Alms: A Brief Economic History of the World.

The opening chapter of the book is available for a free download and is boldly titled as a 16 page economic history of the world. Well, it isn’t bold at all and does full justice to the title. It tells you much about world economic history from economic life to 1800, Industrial revolution (1800-1900) , Great Divergence, Rise of Wealth and Decline of Economics (1900 – till now).

Highly recommended reading.

Can Central Bank make Losses?

August 6, 2009

Ideally they can, but didn’t know of any cases of the same.

Here is a nice short paper which tells you cases of central bank losses – Brazil, Chile, Czech Republic, Hungary, Korea and Thailand.

Did the list ring something? Well all of them are inflation targeting central banks as well. Here is a comparison list:

  Year of Loss Year of IT implementation
Brazil 1997 Jun-99
Chile 1997 Sep-99
Czech Republic 1996 Dec-97
Hungary 1996 Jun-01
Korea 1994 Apr-98
Thailand 1997 May-00

I have read many papers on why IT was adopted (and also why not) in a particular country and have posted them on the blog as well (see this). However, so far have not seen central bank looses mentioned as a reason for adopting ITF.

Here is a look at reasons for losses:

  Reasons for loss
Brazil Interest rate differential between domestic liabs and foreign assets
Chile Interest rate differential between domestic and foreign leading to losses in sterilization operations, recapitalise banking system losses
Czech Republic Interest rate differential between domestic and foreign leading to losses in sterilization operations,
Hungary Interest rate differential between domestic and foreign leading to losses in sterilization operations, foreign borrowing agent for Hungary
Korea Interest rate differential between domestic liabs and foreign assets
Thailand Interest rate differential between domestic liabs and foreign assets

In all the 6 cases (In Chile it was also because of banking recap losses), it is a case of Interest rate differential in domestic assets and foreign assets. The foreign assets have been acquired in turn because of sterilization operations to manage capital inflows and maintain fixed exchange rates. 

As these 6 central banks were engaged in forex stability, bank regulation etc and suffered losses. An ITF allowed the banks to focus on inflation and do away with these additional responsibilities. So, somewhere down the line I think these losses also seem to be an important lesson and reason for them to move to an ITF. Though, the losses were small in some cases, the possibility of higher losses could be an important factor.

Fixing the unsustainble global imbalances is the main lesson of this crisis

August 6, 2009

Dr Subbarao’s speeches (and mon pol statements) just get better and better. His recent speech(JRD Tata Memorial Lecture -2009) is a must read for number of purposes:

  • He provides some good anecdotes abt JRD and RBI meetings (he was a board member)
  • Reviews the global crisis and its impact on India
  • Poliy responses in India
  • He points most policy responses and discussions have missed talking about how to fix unsustainable global imbalances. We can’t eliminate imbalances as some countries deficit would be matched by surpluses in others. What is imp is to limit the growing deficits and surpluses.
  • The fiscal and mon policy have intervened but the conflicts between them have once again come to limelight (high fiscal deficits lead to more borrowing and bonds, central banks buying govt bonds to provide monetary stimulus etc)
  • Fiscal and Mon Pol coordination in India
  • Why India cannot go for Inflation targeting (see this as well)
  • Finance Sector should follow real sector and not the other way round

What was very interesting was his mention of fiscal and mon pol in India:

(more…)


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