Archive for November 9th, 2018

Pink Floyd on government-central banks frictions

November 9, 2018

It is not just India, but we are seeing rising cases of frictions between governments and central banks.

Have reworded the iconic Pink Floyd song “We don’t need no education”.  This is perhaps what central banks could/would like to sing to governments:

We don’t need no intervention
We don’t need no policy control
No dark sarcasm in the boardroom
Government, leave us central banks alone

Hey,  Government, leave us central banks alone  

All in all it’s a another crack in our wall 
(All in all you’re just) another crack in our wall.

🙂

Happy to figure what governments would sing in reaction….

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West Bengal to observe ‘Rosogolla Day’ on Nov. 14

November 9, 2018

West Bengal to observe Rosogolla day on Nov 14, the day the State got the Geographical Indication (GI) tag for the sweet…

Policy dilemmas and the role of the central bank in advising government (Lessons for India?)

November 9, 2018

Karnit Flug, the outgoing Governor of Bank of Israel gave her farewell speech.

In Israel, the Governor plays an official role as an advisor to the government. This often leads to questions over independence:

A natural question that arises in this respect is why at the Central Bank? Should the economic advisor to the government be the Governor of the Central Bank?

This question was debated within the bank of Israel, among some of the people sitting here today. While we were discussing the new Bank of Israel Law, Stan was initially of the view that the role of an economic advisor to the government puts the bank in a constantly contentious position Vis a Vis the government and may undermine the banks’ independence in its core responsibility. I was the Director of the Research Department at that time, and argued in favor of maintaining the role of economic advisor in the law, which was eventually what was decided. Several years later, when I became Governor, I met Stan (in Basel, at a BIS meeting) following one of the heated debates I had with the government, and told him that now I understand and sympathize with his initial view against having the role of the economic advisor. Stan surprised me when he said that looking from the outside, he is even more convinced of the importance of this role of the Bank of Israel.

 This question was also posed to an independent evaluation committee which was invited to evaluate the BOI’s research department back in 2012. In their report, they said, and I quote: “We came to the Bank very skeptical of any central bank having the responsibility of being an advisor, much less the advisor, to the government on economic policy”. Following a thorough discussion with many relevant stakeholders within and outside the bank, they concluded: “Absent fundamental changes in other Israeli institutions, we agree that the Bank must continue to play the critical role of advisor to the government policy”

 Indeed, the argument against the CB’s role in economic policy advice because it enhances the friction between the Bank and the government and thus may undermine the Bank’s independence in its core responsibilities is not unique to the role of economic advisor.  In fact, this debate resembles the discussion regarding the question that is debated extensively among central bankers as to how wide should our responsibilities and mandates be defined. I have heard the argument that in some issues the decisions reflect political priorities as opposed to pure economic welfare maximization decisions, and therefore should be left to the politicians, or that they may undermine the central banks’ credibility or independence. These are valid arguments, and certainly, my tenure as governor has demonstrated that providing a well-grounded position on some sensitive or publically debated policy issues does raise the level of friction with the government.

 However, when we think about designing institutions, we should not think in the abstract, and we never start from scratch. We should take the starting point into account, and asses what is the likelihood that a change will get us closer to some “ideal institutional design” (if such exists). Given that this role has been defined in the original BOI law from 1954 as one of the main responsibilities of the BOI and its Governor, the basic infrastructure of knowledge and highly professional staff, and reputation has been built at the BOI to serve this responsibility. I also believe that the credibility of the central bank is enhanced, not damaged, by the quality research and policy recommendations it provides. In that regard, it may even contribute to the public support of an independent central bank. 

And as to friction between the central bank and the political system, during my term it was in fact most intense around issues related to the core activity of the Bank of Israel in supporting financial stability. The quest for enhancing competition in the provision of financial services, which we all share, led to heated debate as to the scope, the speed and the specifics of the financial sector reform. It centered around our insistence on ensuring that the reform does not undermine financial stability that was sometimes taken for granted by our partners in the design of the reform. In the past, the friction was most intense regarding the disinflation process, and Jacob Frankel who sits here, can certainty testify to that.

So, we’ve had frictions in the past and will probably have them in the future, and we should be able to withstand them. We should provide a quiet, behind closed doors policy advice in some cases, and contribute to a better-informed public debate on key policy questions. I believe that within the current political context, where policies tend, more than in the past, to focus more on short term benefits and ignore longer term risks and costs, it is essential that an independent well regarded institution provides solid policy analysis and advice, and helps explain this to the public.  So, I believe that retaining the economic advisory role by the Central Bank in the 2010 BOI law has served the country well.

Official or non-official, central bankers are advisers to the government. Frictions between central banks and government should be celebrated as it gives different viewpoints. But these frictions are best held behind closed doors as Governor Flug says.

This is how it used to be in India/RBI as well. Reading volumes of RBI History, one goes through several of these frictions. Pity and tragic that these frictions are coming out in open and bit too regularly at that…

Implications of e-krona project on different aspects of Swedish monetary and banking system

November 9, 2018

Superb research by team of Riksbank economists.

The Riksbank is investigating the possibility and consequences of introducing a Swedish central bank digital currency, a so-called e-krona. The latest issue of our journal Economic Review is a special theme issue discussing the e-krona from different perspectives. What is the role of the central bank in the payments market? What might the demand for an e-krona be? What consequences will this have for the banks? How will rate-setting be affected, and what further effects might the e-krona have for monetary policy and economic developments in the long run?

It includes following articles:

  • Why did the Riksbank receive a banknote monopoly? 
  • What is money and what type of money would an e-krona be? 
  • Implications of an e-krona for the Riksbank’s framework for implementing monetary policy
  • The e-krona and the macroeconomy
  • How many e-kronas are needed for payments?
  • When a central bank digital currency meets private money: effects of an e-krona on banks

Must read for those interested in digital money and even money in general…


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