Archive for January 27th, 2010

ECB’s relation with EU institutions and bodies

January 27, 2010

ECB monthly bulletin has this piece  on ECB relations with various EU institutions.

It starts off well, but becomes too confused towards the end. There are just too many EU institutions. Here is a sample:

  • European Parliament
  • Ecofin Council
  • Eurogroup
  • Econ0mic and Financial Committee
  • Economic Policy Committee
  • European Commission
  • European Council and EU council

Phew… Managing ECB is such a task.

Anyways, a nice look into various EU based institutions.

Primer on Interest on Bank Reserves

January 27, 2010

While talking on measures to exit from Fed’s easy policies, Bernanke suggests (followed by others) interest on reserves as one of the ways.

Even if our balance sheet stays large for a while, we have two broad means of tightening monetary policy at the appropriate time: paying interest on reserve balances and taking various actions that reduce the stock of reserves. We could use either of these approaches alone; however, to ensure effectiveness, we likely would use both in combination.

Congress granted us authority last fall to pay interest on balances held by banks at the Fed. Currently, we pay banks an interest rate of 0.25%. When the time comes to tighten policy, we can raise the rate paid on reserve balances as we increase our target for the federal funds rate.

Banks generally will not lend funds in the money market at an interest rate lower than the rate they can earn risk-free at the Federal Reserve. Moreover, they should compete to borrow any funds that are offered in private markets at rates below the interest rate on reserve balances because, by so doing, they can earn a spread without risk.

Thus the interest rate that the Fed pays should tend to put a floor under short-term market rates, including our policy target, the federal-funds rate. Raising the rate paid on reserve balances also discourages excessive growth in money or credit, because banks will not want to lend out their reserves at rates below what they can earn at the Fed.

Considerable international experience suggests that paying interest on reserves effectively manages short-term market rates. For example, the European Central Bank allows banks to place excess reserves in an interest-paying deposit facility. Even as that central bank’s liquidity-operations substantially increased its balance sheet, the overnight interbank rate remained at or above its deposit rate. In addition, the Bank of Japan and the Bank of Canada have also used their ability to pay interest on reserves to maintain a floor under short-term market rates.

For those who wonder what this is, here is a nice primer by Richmond Fed economist John Walter on the concept. Explains nicely.

Evolution of central banking in India

January 27, 2010

An insightful speech by Rakesh Mohan on the topic. He begins looking at evolution of central banking from a global perspective:

Evolution of central banking is essentially a twentieth century phenomenon as there were only about a dozen central banks in the world at the turn of the twentieth century. In contrast, at present, there are nearly 160 central banks. This is not surprising since the need for central banks obviously emerged as banking became more complex, while becoming an increasingly important part of the economy over time. The many vicissitudes experienced by banks and their depositors inevitably led to cries for their regulation. Second, central banks are essentially a nation state phenomenon, and hence proliferated as nation states themselves emerged and multiplied: again a twentieth century phenomenon. Third, it is useful to recall some of the reasons for the origin of central banks: to issue currency; to be a banker and lender to the government: to regulate and supervise the banks and financial entities: and to serve as a lender of- last-resort.

This is ironic since much of the current professional thinking is that a central bank should be independent of government, should no longer be a debt manager of the government, and should not regulate or supervise commercial banks. The new objective function assigned to the central bank is to focus on This is perhaps not surprising since price stability was historically achieved, along with preservation of currency value, through the gold standard, and  later through the dollar anchor and its relation to gold. The world lost its monetary anchor on August 15, 1971 when the US decided to delink the dollar from gold, and has been floundering ever since in search of a new anchor.

After the convulsions of the 1960s and 1970s, mainly related to the financing of the Vietnam war, the expansion of world liquidity, and the ensuing somewhat enduring inflation, along with Latin American fiscal and monetary expansion, the new holy grail is independence of the central bank, a concept that is becoming almost synonymous with inflation targeting. And here, though I am too new to central banking to really offer a definitive view, I have to admit to a certain skepticism related to the current fashion among central bankers.

Two pertinent questions are natural to be asked. First, why is it so obvious that central banks should abandon their ‘parents’, the sovereign government? One quick explanation could be that the central banks have ‘come-of-age’ in recent years. But then, some instances like the case of two currencies in Iraq in the 1990s and that of the Bank of Japan in recent years provide a contrary view to the ‘come-of-age’ hypothesis (King, 2004). Second, is it really the case that supervision and regulation of banks by the central bank leads to conflict of interest? In consideration of this conflict, the Financial Services Authority was established in the UK in 2000, and a number of countries have followed suit. What I would like to do today is to explore some of these issues as they relate to India at the present time.

He then looks at how RBI came into being. The central point he makes is though RBI is a central bank responsible for monetary policy, RBI has played a much wider role in development of Indian economy. This is because of both, Indian economic situation (high poverty, large rural population, high poverty etc) and lack of proper institutional framework which made RBI do bulk of economic development.

Read the whole thing.

WTO establishes chairs at 14 developing country universities

January 27, 2010

WTO had established Chairs Program in 2009:

The main objectives of the Programme, which was launched in March 2009, are to:

  • build lasting relationships with institutions from developing and developed countries by according financial support to beneficiary institutions for four years
  • support trade-related teaching by providing WTO support for the development and delivery of courses on trade policy and WTO-related matters in academic institutions.
  • foster further research in trade-related matters and highlight the policy relevance of existing research — universities awarded the Chairs are expected to cooperate with other institutions in the Programme, through joint research, shared lecturing arrangements and student/academic exchanges  
  • encourage and extend outreach/communication — universities awarded the WTO Chairs are expected to organize public activities aimed at disseminating research and promoting discussion regarding international trade and trade cooperation.

The program would be awarded to 14 universities.

WTO released the list of 14 universities which have been selected for the program. I don’t know whether any Indian University applied, but there is no Indian univ name in the list.

WTO recently awarded 2 young researchers for research work.  Nice initiatives from WTO to bring more research work on trade. 

Blaming Chicago Economists for the crisis?

January 27, 2010

There has been a lot of criticism of Chicago University and its free market ideas. John Cassidy does interviews of quite a few Chicago Economists and gets diverse views.

John Taylor turns the blame on its head in his new blogpost. He says all these views are subjective. Is there a more objective way to blame Chicago econs?

Consider, for example, measuring influence by the representation of members of a school in top economic positions in government where there is an opportunity to influence policy. And consider as a measure of an economist’s school, the university where he or she received the PhD. The data in the chart follows this approach. It shows the university PhD percentages of appointees to the President’s Council of Economics Advisers (CEA).

The blue line shows the percentage of presidential appointees to the CEA who have a PhD from Chicago. The red line shows the same for MIT or Harvard (Cambridge), one possible definition of an alternative to the Chicago school. The years from the creation of the CEA in 1946 until 1980 are shown along with each presidential term thereafter. Observe that the peak of the Chicago school influence was in the Reagan administration; it then dropped off markedly. In contrast Cambridge reached a low point of zero appointees to the CEA during the Reagan administration and then rose slightly to 20 percent in Bush 41, to 82 percent in Clinton, and to 100 percent in both Bush 43 and in Obama.

Blaming the financial crisis on the free-market influence of the Chicago school is certainly not consistent with these data. There were no Chicago PhDs on the President’s CEA leading up to or during the financial crisis. In contrast there was a great influx and then dominance of PhDs from Cambridge. And also notice that there were plenty of Chicago PhDs on the CEA at the time of the start of the Great Moderation—20 plus years of excellent economic performance. These data are more consistent with the view that the waning of the free-market Chicago school and the rise of interventionist alternatives was largely responsible for the crisis. But the main point is that there is no evidence here for blaming the influence of Chicago.

Of course, such measures are imperfect. Neither Milton Friedman nor Paul Samuelson served on the CEA, but their students did. And while PhDs from any insitution certainly do not fit in any one mold, the people who learned about rules versus discretion with Friedman likely had a different policy approach than people who learned about rules versus discretion with Samuelson. The data are robust when you look beyond the CEA to other top posts normally held by PhD economists. All assistant secretaries of Treasury for Economic Policy appointed during the Bush 43 and Obama Administrations had PhDs from Harvard. During the same period, all chief economists appointed to the IMF had PhDs from MIT, and, except for Don Kohn, who was promoted from within and Susan Bies who was appointed as a banker, all PhD economists appointed to the Federal Reserve Board were from Cambridge MA.

The war is far from over!!

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