Archive for October 3rd, 2019

How “deep” parameters of central banking of 1990s are a distant memory now

October 3, 2019

Interesting speech by Mary Daly, President of San Francisco Fed. She gives the speech on 30 years of inflation targeting in NZ.

She joined the Fed in 1990s and there were three main parameters around mon policy. All those have changed now:

To understand the new environment we face, we first have to look back to the past. And here I will use the United States as an example.

When I started working at the Federal Reserve in 1996, I learned three important facts—the “deep” parameters of central banking. First, the potential growth rate of the U.S. economy averages around 3.5%. Second, the real neutral rate of interest—or r-star—changes over time but is well-bounded away from zero, mostly in the range of 2% to 3% or higher (Congressional Budget Office 2019, Laubach and Williams 2003, FRB New York 2019, Christensen and Rudebusch 2019). Third, unemployment and inflation are strongly linked through the Phillips curve.

Fast forward to 2019. These facts—these deep parameters—feel like a distant memory. As of June, participants of the Federal Open Market Committee put longer-run potential growth in the United States at about 1.9%. Estimates of the long-run neutral rate of interest were penciled in at just 0.5% (Board of Governors 2019b). As for the Phillips curve, most arguments today center around whether it’s dead or just gravely ill. Either way, the relationship between unemployment and inflation has become very difficult to spot.

Although the numbers may be a little different, the changes I’ve described are not unique to the United States. Global demographic shifts and lower productivity gains are tempering growth and reducing long-run interest rates in many countries (Holston, Laubach, and Williams 2017). And a number of central banks are finding that inflation is less responsive to labor market improvements than in the past.

These trends have important implications for monetary policy. Lower r-star and the zero lower bound mean we’ll have less room to maneuver when the next downturn occurs. One of the lessons learned from the financial crisis and its aftermath is that alternative tools like forward guidance and the balance sheet can be effective at stimulating economies. However, they’re still imperfect substitutes for the most effective tool at our disposal: traditional interest rate adjustments. And the fainter signal coming from the Phillips curve means we have less direct, real-time feedback about how monetary policy is playing out in the economy.

In other words, the jobs of central banks have gotten harder.

Hmm..

Advertisements

Early French and German central bank charters: Central Banking before Riskbank and Bank of England

October 3, 2019

Superb ECB paper by Ulrich Bindseil.

We usually say central banking started with Swedes and British. There were earlier attempts too but their charters were not accessible and available in English. Bindseil translates the charters of six French and German banks starting with Nurnberg exchange and lending bank of 1498. They suggest central bamks arrived much earlier:

In some recent studies, the question of the origins of central banking has been revisited, suggesting that beyond Swedish and British central banking, a number of earlier European continental institutions would also have played an important role. However, it has often been difficult to access the charters and regulations of these early central banks – in particular in English.

This paper contributes to closing this gap by introducing and providing translations of some charters and regulations of six pre-1800 central banks in France and Germany. The six early public banks displayed varying levels of success and duration, and qualify to a different degree as central banks. An overview table maps the articles of the early central banks’ charters and regulations into key central banking topics.

The texts also provide evidence of the role of central banking legislation, and of the distinction between, on the one side, the statutes and charters of the banks, and on the other side the operational aspects which tend to be framed by separate rules and regulations.

Finally, the texts provide evidence of the policy objectives of early central banks, including in particular those of a monetary nature. To put these documents into context, the objectives, balance sheet structure, achievements and closure of each central bank are briefly summarised.

 


%d bloggers like this: