Archive for July 22nd, 2019

Bretton Woods @ 75: A few surprises here, some similarities there

July 22, 2019

My new article in Moneycontrol on the 75th anniversary of Bretton Woods.


Why and how geographic differences matter in economic well-being?

July 22, 2019

Superb interview of University of California, Berkeley economist Enrico Moretti.

He explains why despite the internet people continue to work in select concentrated locations:

EF: During perhaps the first decade or so of the World Wide Web, there were numerous predictions that geography would disappear or almost disappear as an issue in knowledge work. It seemed as if white-collar workers, if one believed the predictions, would be able to work from anywhere.

Moretti: Yes.

EF: What happened?


Case for a Fiscal policy institution on the lines of a central bank/Federal Reserve

July 22, 2019

Benjamin Cohen argues that fiscal policy should be given to technocrats just like monetary policy.

Central bankers are often heard saying monetary policy is not the only game in town and time for fiscal policy to act and so on. But the problem with fiscal policy is it is politicised. But what is fiscal policy is also in the hands of independent agencies such as central banks? He calls it Fiscal Fed:

But what if fiscal policy was as depoliticized as monetary policy? An autonomous public agency with a defined range of fiscal-policymaking powers would be free to respond proactively to fluctuations in the economy. Like an independent central bank, a “fiscal Fed” could be staffed with politically disinterested professionals operating within limits established by statute. Ultimately, it would still be fully accountable to elected officials, but it would be able to make crucial budget decisions much faster than what is possible today.

To be sure, there would be little room for a new delegated authority to appropriate additional funds. After all, most of the expenditure side of the budget is nondiscretionary or relatively “sticky,” and thus difficult to start or stop on short notice. On the revenue side, however, a fiscal Fed could accomplish quite a lot through the levers of taxes and transfers. Its overarching objective would be to vary tax-withholding rates and transfer payments at the margin as needed, much as what central banks do with interest rates.

In creating such an agency, the political authorities would set basic goals and parameters, and elected officials would exercise active oversight on a continuing basis, to ensure responsible behavior. But within its statutory limits, the agency would be authorized to implement timely adjustments to the government’s revenues in response to changing economic conditions.

The scope of potential adjustments could be agreed in advance as part of the annual budget process, leaving the fiscal Fed with sole authority to determine the magnitude and timing of specific changes. Alternatively, the agency could be granted greater latitude to make such decisions on its own, provided the legislature does not issue a veto within a specified time period. At any rate, there are many ways to reconcile democratic accountability with depoliticized policymaking.

Needless to say, the same kind of objections that apply to central-bank independence would be made against a fiscal Fed. But there is nothing unusual about representative governments delegating key areas of policymaking to professionals. There are always tradeoffs between democratic prerogative and technocratic necessity, and different countries draw different lines between the two domains.

In the US, no one questions the legitimacy of independent agencies like the Securities and Exchange Commission or the Food and Drug Administration. There is no reason why an autonomous fiscal agency could not operate in a similar fashion. As long as its mandate is carefully circumscribed and its operations closely monitored, a fiscal Fed is an idea worth considering.

50 years of bank nationalisation: Linkfest

July 22, 2019

Lots of articles have been written on 50 years of bank nationalisation. Here are some of them:

The incoming payment revolution and the future of central banking: Lessons from the history of the Banque de France

July 22, 2019

Usually we read lessons of history on central banking  from England or US.

This lesson is from France by Maylis Avaro and Vincent Bignon. It shows how Banque de France opened its liquidity window to non-banks and yet did quite well:

The payment landscape is changing. Rapidly. More payment operators are non-banks who propose e-solutions to make payments both online and in real life. Some are big players, such as the ‘Big Four’ tech companies, and others are much smaller start-ups (Committee on Payments and Market Infrastructures 2015). These changes are creating a more decentralised payment landscape, qualified by some as a revolution in payments (Coeuré 2019, Mersch 2019). 

Technologies have changed, but the pattern looks strikingly familiar to the students of European monetary history. To them, there is no natural law tying the payment instruments with their operation by the banking system. From the Middle Ages to WWI, the most common payment instrument outside coins and banknotes was operated by both banks and non-banks (Van der Wee 1977). Similarly, banks and non-banks alike will operate e-payments. This makes history an interesting source of inspiration to search for institutional solutions in order to fix the impact of the payment revolution on financial instability caused by a lack of access to emergency liquidity assistance.

In recent work (Avaro and Bignon 2019), we explore the implications of this more decentralised and less banked payment landscape for the design of central banks’ interventions when fighting financial crises. We take the example of the Banque de France because Bignon and Flandreau (2018) show that it was especially successful in taming financial and banking panics. We add that this was achieved in a situation of significantly unbanked payments in which non-banks represented half of the borrowers at the Banque de France discount window.


Riksbank to rename the repo rate to policy rate. Will other central banks follow?

July 22, 2019

The world’s oldest central bank is revamping its monetary policy framework. One of the changes is renaming repo rate as policy rate.

The changes are proposed in a two step manner.

In a first step starting in October
• Ceasing to conduct daily market operations in the form of fine-tuning transactions
• Setting the deposit rate on the standing deposit facility at 0.10 percentage points below the policy rate
• Continuing to offer Riksbank Certificates with a one-week maturity at the policy rate, but limiting the volume of certificates to ensure the overnight rate is close to the policy rate.

In a second step within a maximum of two years
• Setting the lending rate on the standing lending facility at 0.10 percentage points above the policy rate
• Tightening the collateral requirements for the standing lending facility
• Maintaining the current collateral requirements for intraday credit
• Replacing the Riksbank’s “repo rate”, which is currently the interest rate at which Riksbank Certificates with a one-week maturity are issued and which the Executive Board of the Riksbank adopts, with the more appropriate term “The Riksbank’s policy rate”.

I think this is something all central banks should do. Repo rate is too wonky a term for people to understand. Policy interest rate is a much better term and communicates to people what central banks are trying to do…


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