Archive for February 23rd, 2010

Using nudge to simplify banking services in Italy

February 23, 2010

Mario Draghi, Governor of the Bank of Italy in his speech says:


Old vs Young members of Central bank’s MPC

February 23, 2010

Maral Shamloo of IMF has written an interesting paper. Shamloo models how monetary policy committee delivers on its objective with older and younger generation of MPC members:

In this paper I study the effect of imperfect central bank commitment on inflationary outcomes. I present a model in which the monetary authority is a committee that consists of members who serve overlapping, finite terms.

Older and younger generations of Monetary Policy Committee (MPC) members decide on policy by engaging in a bargaining process. I show that this setup gives rise to a continuous measure of the degree of monetary authority’s commitment. The model suggests that the lower the churning rate or the longer the tenure time, the closer social welfare will be to that under optimal commitment policy.

Hmmm….very intresting idea and equally interesting findings.  It says older MPC members give better overall results. You come across many papers on monetary policy committee thanks to Alan Blinder. But they are mostly on the lines of how it is organised, how decisions are taken etc. This paper takes a step forward and looks at the age profiles in the MPC.  

Though, much of the paper is technical and based on a model. It would be interesting to put these findings with real examples – modelling young and old generation MPC members at say Fed, Bank of England, Riksbank, ECB etc.

It is amazing to see

Argentina’s Central Bank is not alone

February 23, 2010

I had pointed out to the interesting case study of Argentina’s central bank. The post shows how Argentina’s central bank has lost its credibility and received a shock on its independence. The Central bank governor was fired for not agreeing to Argentine President on an economic issue.

This crisis has led to a severe strain on the idea of central bank independence. Most central banks have ended up intervening in financial markets saving financial firms. They have done work which belongs to finance ministry etc. And now this political pressure.

Charles Plosser, Philadelphia Fed President points Central Bank of Argentina is not alone here:

Another way independence is currently threatened arises from efforts to make political appointees out of the Reserve Bank presidents or members of their boards of directors. Both the threat of “policy audits” and the political appointment of presidents or directors are not-so subtle efforts to politicize the Federal Reserve.

These changes run counter to history and the principles of sound and responsible central banking. Over the past 30 years, many countries have acted to increase the degree of independence of monetary policymaking from short-term political influences. These moves reflect empirical research that generally shows that developed countries whose central banks have greater independence tend to have lower and more stable inflation without sacrificing employment or output, thus benefiting from more stable economies and better economic performance.

The assault on central banks is not confined to the U.S. It is showing up in a number of countries and in different ways. Just since January 1, 2010, here is a sampling from recent news reports of what central bankers have faced in other countries:1

Argentina’s president fired the governor of the central bank when he refused to transfer $6.6 billion in foreign-exchange reserves to the government’s coffers to meet fiscal expenses ahead of next year’s election.

South Korea’s president, not surprisingly, has urged the Bank of Korea to go slow on its exit strategy from accommodative monetary policy. However, to underscore the point, he sent a vice minister to attend a Monetary Policy Committee meeting for the first time in a decade.

Japan’s new administration has put increasing pressure on the Bank of Japan to increase lending. This month, the new finance minister said he was looking for even more cooperation from Japan’s central bank.

Mexico’s president has appointed a new governor for the Bank of Mexico, after clashing with its former governor over the central bank’s reluctance to cut interest rates.

This is worrisome. Two of these – Mexico and South Korea are inflation targeting central banks which are deemed as more independent than other central banks.

Plosser reviews importance of central bank independence. He criticises politicians move to audit Fed’s monetary policy as it would compromise central bank independence.

Ideas also matter for catch up growth

February 23, 2010

Paul Romer in his new paper (HT: Charter cities blog) points to the importance of ideas in emerging economies’ catch up growth phase.

Economists devote too much attention to international flows of goods and services and not enough to international flows of ideas. Traditional trade flows are an imperfect substitute for flows of the underlying ideas. The simplest textbook trade model shows that a welfare-enhancing move toward freer flows of ideas should be associated with a reduction in conventional trade. The large quantitative effect from the flow of ideas is evident in the second half of the 20th century as the life expectancies in poor and rich countries began to converge.

Another example comes from China, where authorities dramatically reduced accident rates by adopting rules of civil aviation that were developed in the United States.

All economists, including trade economists, would be better equipped to talk about international flows of technologies and rules if they adopted a consistent vocabulary based on the concepts of nonrivalry and excludability. An analysis of the interaction between rules and technologies may help explain important puzzles such as why private firms have successfully diffused some technologies (mobile telephony) but not others (safe municipal water.)

A very interesting paper which partitions ideas into rules and technologies. It then shows how incentives matter in flow of both rules and technologies to developing economies. Where incentives are well-defined and known, the adaptation of rules and technologies work and vice versa. So, it not just about trade of goods, services etc but about ideas as well.

These papers take you to a different level of thinking. You are pushed to think on so many things.

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