Archive for October 27th, 2009

Central Banking and Vitamin D connection

October 27, 2009

I just came across this interesting press release from Bank of Finland. It says:

On 27 October 2009, the Bank of Finland Museum will launch its most recent seasonal exhibition, entitled ‘Vitamin D! The Devaluations of 1957 and 1967’. The exhibition will be on display until the end of 2010.

The purpose of the seasonal exhibition is to explain the background to the devaluations in Finland of 1957 and 1967, how the devaluations were brought about and their effect. The exhibitions at to enable the visitor of today to understand the monetary policy environment of a time when parliamentary turnover was so frequent that the average age of a government was only a year.

In the post-war years the Bank of Finland found it had to adjust the external value of the markka countless times. By joining the Exchange Rate Mechanism (ERM) in 1996, stability was brought to the Finnish currency’s value. The euro was adopted, initially as scriptural money in 1999, and subsequently the cash changeover was made at the beginning of 2002. 

Hmm. What I dont understand is this:

The title of the exhibition, with its reference to ‘Vitamin D’, does not seem to have been used to refer to the devaluations of the 1950s and 60s, but by the 1980s it had become a firm part of the economic jargon of the time. 

Now why was it named Vitamin D? Was it because as Vitamin D is crucial for our health so was Vitamin Devaluation necessary for Finnish economy? Or does it stand for something else? I tried doing google search but it was all over the place. Any ideas readers?

Anyways, all this may just sound trivia but it has a lesson for economic history as well. There have been many episodes where central banks have just failed to manage currency levels. Currency failed as a nominal anchor and then central banks moved to price stability/inflation. This includes Finland as well. It could be useful to study Finland’s experience with targeting currency levels.

Also, RBI could plan something like this as part of its Platinum Jubilee Celebrations. It has a museum and it could host such events to educate us more on Indian economic history.


Economic Stability and Peace

October 27, 2009

Nobel committee gave the Peace Prize in 2006 to Mohammed Yunus and Grameen Bank.

The Norwegian Nobel Committee has decided to award the Nobel Peace Prize for 2006, divided into two equal parts, to Muhammad Yunus and Grameen Bank for their efforts to create economic and social development from below. Lasting peace can not be achieved unless large population groups find ways in which to break out of poverty. Micro-credit is one such means. Development from below also serves to advance democracy and human rights. 

The linkage between economic prosperity and peace was always there but Nobel Committee made it more pronounced.

IMF chief Dominique Strauss-Kahn revisits the issue in his recent speech. He says economic instability leads to poverty which then leads to worsening of peace prospects

Let me stress that the crisis is by no means over, and many risks remain. Economic activity is still dependent on policy support, and a premature withdrawal of this support could kill the recovery. And even as growth recovers, it will take some time for jobs to follow suit. This economic instability will continue to threaten social stability.

The stakes are particularly high in the low-income countries. Our colleagues at the United Nations and World Bank think that up to 90 million people might be pushed into extreme poverty as a result of this crisis. In many areas of the world, what is at stake is not only higher unemployment or lower purchasing power, but life and death itself. Economic marginalization and destitution could lead to social unrest, political instability, a breakdown of democracy, or war. In a sense, our collective efforts to fight the crisis cannot be separated from our efforts guard social stability and to secure peace. This is particularly important in low-income countries.

He points just as Wars devastate economy, the reverse also follows. A declining economy could lead to wars, civil conflicts etc.

The causality also runs the other way. Just as wars devastate the economy, a weak economy makes a country more prone to war. The evidence is quite clear on this point—low income or slow economic growth increases the risk of a country falling into civil conflict. Poverty and economic stagnation lead people to become marginalized, without a stake in the productive economy. With little hope of employment or a decent standard of living, they might turn instead to violent activities. Dependence on natural resources is also a risk factor—competition for control over these resources can trigger conflict and income from natural resources can finance war.

And so we can see a vicious circle—war makes economic conditions and prospects worse, and weakens institutions, and this in turn increases the likelihood of war. Once a war has started, it’s hard to stop. And even if it stops, it’s easy to slip back into conflict. During the first decade after a war, there is a 50 percent chance of returning to violence, partly because of weakened institutions.

So what can IMF/policymakers do? Maintain economic stability at all costs.

Just a different perspective on the crisis.

Bank Capital regulation can learn from Inflation targeting

October 27, 2009

Hans Gersbach and Volker Hahn have an interesting article in voxeu. They say there are parallels between equity capital regulation and inflation targeting frameworks (ITF) of central banks. As we need to rethink about capital rule regulation, ITF could be of help.

What are the parallels?


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