Archive for November 19th, 2009

Central Bank Communications – working?

November 19, 2009

FRBSF economists Puneet Chehal and Bharat Trehan have a nice short paper on Central Bank communications in this crisis.

Bank of Canada has promised to keep its interest rate low till second quarter of 2010 but Fed just says for an extended period. Hence BoC is more specific but Fed is vague. Does explicitiy help BoC? Not really.

As part of their efforts to promote economic recovery, some central banks have announced they will not raise policy rates for specified time periods. Other central banks have not been as explicit, though they have provided guidance. A comparison of the effects of the Bank of Canada’s conditional promise to hold rates steady through the second quarter of 2010 with the Federal Reserve’s less explicit guidance finds no evidence that market participants make distinctions between these statements.

However, the reasons are not that BoC is less credible but because inflation outlook has changed.

The Bank of Canada’s commitment to leave rates unchanged did affect interest rates initially, but the effect does not appear to have persisted. Market participants expect the Bank to raise rates as the economy strengthens. This doesn’t necessarily mean the Bank is not credible. It has stressed that its commitment is conditioned on the inflation outlook. At the same time, U.S. and Canadian forward rates are closely correlated on either side of the commitment’s expiration date. So we find little to suggest that the announcement of a fixed end date has significantly affected expectations of future monetary policy in Canada. It seems that market participants see little difference between the U.S. phrase “extended period” and Canada’s conditional commitment to keep rates fixed for a specified period.

Hmmm… Interesting stuff.

CDS Volumes decline in H1 2009

November 19, 2009

BIS Semi-Annual Report on OTC Derivatives for H1 2009 released last week. The detailed stats are available here. It didn’t get any real coverage in the blogosphere. The report indicates CDS volumes have declined in H1 2009. Key findings:

  • notional amounts of all types of OTC contracts rebounded somewhat to stand at $605 trillion at the end of June 2009, 10% above the level six months before,
  • gross market values decreased by 21% to $25 trillion,
  • gross credit exposures fell by 18% from an end-2008 peak of $4.5 trillion to $3.7 trillion,
  • notional amounts of CDS contracts continued to decline, albeit at a slower pace than in the second half of 2008 and
  • CDS gross market values shrank by 42%, following an increase of 60% during the previous six-month period.
  • The gross market value may have declined but is still at a staggering USD 25 trillion market. The notional amount is at USD 605 trillion. If it was not for this crisis it could have been a USD 800 trillion plus market. All this size without any regulation, without any oversight. Amazing.

    To fix poverty, fix instituions and to fix institutions fix government

    November 19, 2009

    Daron Acemoglu has a  superb article summarising the research and his vast volume of work on growth and development.

    Global Financial Crisis and India

    November 19, 2009

    Deepak Mohanty of RBI has given a useful speech on the global crisis and the impact and policies followed in India. Most of it is known but is still useful as a quick snapshot.

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