Archive for September 23rd, 2009

Monetary Policy and Financial Stability: An Emerging Markets Perspective

September 23, 2009

Brookings hosted a panel discussion on the topic which has some interesting thoughts. The panel was started by  a speech from José de Gregorio, Governor , Central Bank of Chile. It was followed by a discussion by the panel members.

The other members were – Guillermo Calvo, Marvin Goodfriend, Eswar Prasad/ Calvo and Prasad are emerging market eco experts and Goodfriend on mon and fiscal policy issues. There are some interesting points and dicussions. Read the transcript here.


IMF WEO and GFSR chapters

September 23, 2009

IMF has released the chapters of October WEO and GFSR. The main chapters (as in Economic Outlook and Financial Conditions assessment) would be released in first week of October.

These are not the main chapters of the report  but is an analysis of topical issues. They decide these chapetr topics 6 months in advance and are actually quite good at it, as when they are finally released it really is topical. IMF may not be able to forecast outlook (which is the main part of the report) etc but is quite good at thinking on these topical issues.

WEO has 2 chapters:

  • Chap 3: Lessons for Monetary Policy from Asset Price Fluctuations
  • Chap 4: What’s the Damage? Medium-Term Output Dynamics after Financial Crises

GFSR also has 2 chapters:

  • Chap 2: Restarting Securitization Markets: Policy Proposals and Pitfalls
  • Chap 3: Market Interventions during the Financial Crisis: How Effective and How to Disengage?

Here is summary of WEO chapters: Chap 3, Chap 4. Here is a summary of GFSR Chap 3.

IMF also had press conferences to discuss the main findings of WEO and GFSR chapters. The transcript of WEO is here and video of GFSR is here ( the transcript has not been uploaded yet).

I just finished reading the transcript of WEO chapters. So what do they say? Chap 3: Lessons for Monetary Policy from Asset Price Fluctuations says:


  • The first part of the chapter takes a look back at history, takes a look at asset price busts in advanced economies over the last four decades, and what we find is that there are some clear macroeconomic patterns leading up to these busts, including the most recent crisis. For example, rapidly expanding credit is often associated with a bust one to three years followed, and, to that, we can also add the phenomenon of deteriorating current account balances and rapid shifts of expenditures into residential investment.
  • At the same time, we also find that output and inflation are not actually very good leading indicators of ensuing busts. So they’re not good indicators of that kind of overheating, and this also holds for the current crisis.
  • we also take a look at the role of monetary policy in the lead-up to asset price busts, including the current crisis. Now, we find that monetary policy was not the smoking gun in the sense that monetary policy does not provide an encompassing, systematic explanation of the differences in asset price experiences across countries. There are too many exceptions in countries’ experiences with asset prices for this to be a totally convincing explanation as a cause of the crisis. However, we do find that many of the same macroeconomic patterns of the lead-ups to asset price busts apply to the lead-up to the current crisis.


  • what lessons can we draw from this about how monetary policymakers should act going forward?….. We look at whether monetary policy could and should be responsible for more than just targeting goods price inflation, in particular, whether there’s a role for leaning against some of these phenomena like the expansion in credit and whether that can produce more stable outcomes.
  • And, we say that on the assumption that policymakers can correctly understand the drivers of the shocks going on, in the case where, for example, there are financial shocks, there is a good case for reacting more strongly than would otherwise be usual to those underlying phenomena.

The 4th chapter Market Interventions during the Financial Crisis: How Effective and How to Disengage? says:

The second study, the one that we’ve been working on, looks at output dynamics following 88 banking crises that took place over the past four decades in a very wide range of countries — advanced, emerging, developing. Our focus was on the medium run, which here we define as seven years after the crisis. Since the first glance at the data told us that there was a wide range of experiences after a banking crisis, we also sought to try to link the various outcomes with initial conditions and policies after the crisis.


  • The first one was that banking crises tend to have a long-lasting impact on the level of output. And, for the average country, about 7 years after the crisis, the level of output was still around 10 percent below its pre-crisis trend although there was a very large variation across crisis episodes. It’s interesting that this result holds for both advanced and emerging economies.
  • The second finding was that this depressed path of output was mainly due to reductions in all factors of production, which, the employment rate, capital and productivity.
  • Now the third result which we have in our study was that initial conditions have a strong impact on the size of the ultimate output losses, and also policy efforts, post-crisis, can tend to be associated with lower output losses.
  • we find that economies that apply macroeconomic stimulus in the short run following the crisis tend to have smaller output losses over the medium run, and there’s also some evidence that structural reform efforts are associated with better medium-run outcomes.


in some ways, the analysis has sobering implications for the medium-run output prospects in economies that have suffered recent banking crises. However, the very forceful macroeconomic policy response so far, in the form of substantial fiscal and monetary stimulus, should help mitigate the impact of the crisis on output this time around. Still, to the extent that there are remaining concerns about losses, they underscore the importance of implementing reforms that help raise medium-term output prospects and facilitate the reallocation of resources across sectors.

Both these issues are being discussed quite a bit already. Central Banks to have an expanded role and banking crises lead to loss in potential output for a long period of time.

Why US has so many banks?

September 23, 2009

US financial system is popularly known as a market based system. There are two main reasons for it- One , US banks are large in number and as a result banking industry is a lot less concentrated than say in European economies. Though the second point has changed with concentration picking up, it still is lesser than other developed economies. Two, because of first reason, US relies more on capital markets to channelise financial resources.

The question is why did US come to acquire such a system. Why it has so many number of banks? For instance, if we see this FDIC statistics, it says there are around 7000 commercial banks as of June 2009 (In this crisis, 122 banks have closed so far). If we see 1990, it had around 12,343 banks and all this does not include savings and thrift institutions.

 I was reading this speech from Marc Olson, Fed Governor where he shed some light on this issue.  Though the speech is much like the Larry Meyer speech on explaining FOMC, still gives some idea:

The Federal Reserve System is generically described as the central bank of the United States. In the late eighteenth and early nineteenth centuries there were two attempts to establish a central bank of the United States, and neither endured for more than twenty years–in contrast to most European nations, where central banks were well established by the nineteenth century.

Though you may not be familiar with the history of our central bank, you may well remember learning about the debates on the concept of federalism by our nation’s founders, when the forces favoring decentralization, led by Thomas Jefferson, fought the proponents of a more centralized government, led by Alexander Hamilton. The Jeffersonian forces largely prevailed. As a result, the United States lacked a strong central bank presence but had no authority even to grant national charters to commercial banks until the Abraham Lincoln Administration. All bank charters were originally granted by the states and, as a consequence, the United States at one time had more than 25,000 bank charters. Today, we have about 8,000 separate bank charters. By contrast, most other developed nations have fewer than 100 separately chartered banks. 

Hmmm… this is very interesting. As is always the case, knowing history is very important. As US did not have a central banks it led to development of so many chartered banks in the various states.

How certain economies acquire certain type of financial systems is a very very interesting area, especially if explored from the political economy angle. Most economic studies ignore the political reasons and focus on economic reasons. But it is always politics which leads to the long term structure in anything.

Conference on 10 years of Euro

September 23, 2009

ECB hosted a conference on 13 – 14 November 2008 to celebrate and discuss 10 years of Euro. Now it has just complied all the papers in a conference volume  (heavy pdf file) which also has a summary of all the papers and discussions in the beginning.

Happy reading.

%d bloggers like this: